Editor’s note: This article is part of a monthly series of Q&A articles from lenders who provide capital to the hotel industry. Hotel News Now provides the questions each month.
Will the Fed raise rates in 2016, and how will that decision affect the hotel industry?
We believe that the Fed will raise short-term rates at least one more time during 2016. This will cause the cost of borrowing to increase for hotel owners. Many hotel owners finance acquisitions, repositionings and construction with short-term floating rate debt. When the cost of this debt increases, it will eliminate the viability of marginal transactions. It will likely also cause long-term rates to increase from their historic lows, raising the cost of fixed rate debt.
As an advisor to hotel owners across the country, we anticipate a greater desire to lock in today’s low rates before they increase, which will cause the demand for capital to once again exceed the supply. This will also have the effect of increasing borrowing costs.
How would you des
cribe the current sweet spot(s) in lending for construction in the hotel industry?
Construction financing is one area that is past the peak of capital availability. The sweet spot for lender continues to be a relationship business. They are most interested in lending to borrowers that are existing clients with a strong track record.
Branded hotels located in markets with strong barriers to entry and multiple demand generators are most favored. We’ve been focusing on projects that require loans of $20 million to $30 million and are seeking 60% to 65% loan to cost with terms of up to five years.
What are the general terms you’re seeing for acquisition loans?
Acquisitions are financed by many types of loans. Typical loans range from 60% to 80% of cost with coupons of 5% to 7%. Non-recourse financing is readily available for experienced owners with strong track records. Typically, acquisitions have been financed with floating rate debt to allow recapitalization upon completion of the business plan. However, with today’s historically low fixed rates at about 5%, a significant number of owners are taking advantage and locking in long-term fixed rate deals. If they need to recapitalize their equity during the loan term, there are presently subordinated lenders/investors who will make loans. The blended cost of this capital is still less than the cost of refinancing higher rated floating rate debt.
What’s the biggest obstacle borrowers are facing in the current point of the cycle?
The biggest obstacle to refinancing today is the new competition that has sprung up in almost all markets across the country. Lenders are increasingly focused on new competition in the market when analyzing the quality and predictability of the underwritten cash flow. Instead of simply using the trailing 12-month results when sizing loans, they are taking the new competition into account and utilizing cash flows from several years ago. This has resulted in more conservative financing, increasing the need for borrowers to obtain professional assistance to arrange their debt.
What’s the most important thing a borrower must have when it comes time to refinancing an expiring loan?
The most important item for a borrower to possess when refinancing an expiring loan is realistic expectations. As experienced advisors that have completed more than $10 billion of hotel loans, we are able to advise our clients up front what the likely loan terms will look like. Too many borrowers fail to recognize the nuances of hotel financing and waste time and money chasing deals that are not likely to close. The major impact of this is not being able to pay off loans on a timely basis. This results in needless fees for default interest, extensions and servicer fees.
Michael Sonnabend is managing partner of PMZ Realty Capital’s Hotel Finance Group.
PMZ Realty Capital - Hotel Finance Group is one of the leading providers of capital to the lodging community. In the past few years the New York City-based firm has financed in excess of $3 billion of hotels representing over 30,000 hotel rooms for every major hotel chain, as well as many independent hotels. The firm provides all types of capital, including: permanent loans, construction loans, acquisition loans, interim loans, mezzanine, equity and joint venture capital.