INTERNATIONAL REPORT—Despite a slowdown in capital markets across the globe, the spigot for hotel lending has not dried up completely. The right deals are still getting done, though the parameters in which they’re completed have become considerably more conservative.
That “choosy” standpoint reflects a shift in the lender mentality, he added. Whereas lenders used to proactively look for good deals, they’ve now taken a more reactive stance and let the deals come to them.
So what are banks looking for when a deal comes knocking at the door?
A sense of familiarity, Taylor said.
“We’re going back to good, relationship banking where you really did understand the people and the transaction,” he said.
“The French banks are tending to retrench towards looking to support French clients with French assets, and similarly, the U.K. banks are going to be much more comfortable with U.K. assets, because people are going back to their home territories where they felt they have a greater degree of knowledge.”
Size matters
While lenders shift focus toward projects in their own backyards, they’ve also starting demanding more equity.
“The name of the game is to loan as little money as possible and to get as much equity in the deal as you can,” said Joe Epstein, president and founder of First American Realty Associates, a mortgage lending firm for the U.S. hotel industry.
Whereas banks used to loan 75 percent to 80 percent in value, they’ve now cut back loan-to-value to 65 percent, he added.
Lenders in Europe are even more conservative, offering loan-to-value of 60 percent to 65 percent, Taylor said.
But it’s not just the amount of equity that’s changed in the current market. Lenders are also looking for projects of a different—typically smaller—size.
“Pick smaller, under (US)$15 and (US)$20 million. Those deals are still getting done,” Epstein said.
The type of lending options available in large part dictates the size of deals being closed. Teague Hunter, president of Atlanta, Georgia-based Hunter Hotels pointed to three possible outlets: existing commercial mortgage-backed securities, local banks and government-backed Small Business Administration financing.
“A property already has a CMBS loan in place. Therefore, the property’s already approved, you get a new sponsor approved, and you get the transaction done.
“The middle (option) is local banks. The problem is local banks are either a) running out of money, b) getting very nervous, or c) going out of business.
“The final one that nobody wants to talk about is SBA,” he said, adding that the amount of paperwork required for a maximum of US$7 million to US$8 million makes this option the least attractive.
Attractive or not, by using each of these three options in a by-any-means-necessary approach, Hunter Hotels has successfully closed a number of deals in the current market, including three in one week in December.
The right deal
Because lenders have become more conservative and choosy, borrowers must exercise due diligence before requesting a loan, Epstein said.
“You have to be like a Boy Scout today,” he said. “You have to get (lenders) an up-to-date, complete package with all of the information. That means résumés on the principals, up-to-date, signed financial statements. Eventually they’re going to want tax returns. They’re going to want to see operating numbers on the hotels if they’re existing, including occupancy, (average daily rate) and (revenue per available room), year-end financial statements for at least two years, and latest 12-month operating statements. If you don’t have all that, you’re going to go to the bottom of the pile.”
Taylor said the location and brand of the project are just as crucial.
“The location of the hotel is absolutely critical,” he said. “And the brand. If you were trying to put together a transaction now on an unbranded hotel, I think that is difficult. But if it’s a prime site with a good borrower and an excellent brand, then these are the ones the banks are really trying to concentrate on.”
And perhaps more than anything else, borrowers must approach a project with realistic expectations, said Jason M. Gordon, VP, manager and counsel for Fidelity National Global Solutions, a division of Fidelity National Title Group.
“Assess the project as if it would lose 20 percent of its value over the next two years,” he said. “If the numbers still make sense, you are far more likely to obtain financing at reasonable terms.”