Hotel Debt Service Coverage Ratios Hold Steady

REPORT FROM THE U.S.—Required debt service coverage ratios are holding steady despite fluctuations in the broader U.S. economy.

The key lending metric has he remained solid with a median ratio of 1.3 since the first quarter of 2011, according to the Hotel Investors Gauge, a quarterly survey from STR Analytics and HotelNewsNow.com. STR Analytics is a sister company to the Hotel Investment Barometer and HotelNewsNow.com is a sister publication.

Debt service coverage ratio

Source: Hotel Investors Gauge

Debt service coverage ratio, also known as “debt coverage ratio,” is the ratio of cash available for debt servicing to interest, principal and lease payments.

Joe Epstein, First American Realty Associates

“If I can have a 1.4, I’m pretty comfortable and I’m going to satisfy most types of lenders,” said Joe Epstein, founder and president of First American Realty Associates, a mortgage lending source focused on conventional loans.

He doesn’t expect the metric to change any time soon, provided there’s not a wild shift in supply and demand fundamentals.

“I’ve always been a supply-demand guy. As long as we’re not in an overbuilt environment in the hotel industry and we don’t have to worry about outside other terrible things happening—I’m comfortable at the moment that the way lenders are doing things that they’re not going to let it get overbuilt,” he said.

Epstein uses 1.4 as a “starting point,” he said, comparing it to the 4% number that’s often used to account for management fees in underwriting.

When asked what borrowers could do to persuade lenders to accept a lower debt service ratio, Epstein said the attempt would be a fool’s errand.

“To me the numbers are the number are the numbers.”