PHOENIX—Hoteliers looking for a fundamental reason for the severe lack of funding for hotel loans in the United States should look no further than 2010 federal legislation that changed the way hotel real estate is classified.
Executives of Premier Capital Associates said during the recent Lodging Conference that the reclassification is having a major affect on lending—or the lack thereof—as the hotel industry attempts to ramp up its economic recovery.
“That’s a huge problem that’s not being addressed,” said Greg Morris, managing director for Bellevue, Washington-based Premier Capital, a national hotel advisory mortgage brokerage company.
The Dodd-Frank Wall Street Reform and Consumer Protection Action of 2010 implemented changes that, among other things, affect the oversight and supervision of financial institutions. It created a Financial Stability Oversight Council, and one of the major changes was that hotels were reclassified as investor real estate instead of owner-occupied real estate. Morris and Jeff McKee, managing director for Premier, said few lenders want to even look at investor real estate options but continue to be active in owner-occupied real estate.
“It’s going to be slow forward momentum,” McKee said. “There’s a real lack of confidence in the lending community when it comes to hotels—in large part because of that reclassification.”
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While the executives said there is little hope the reclassification will change any time soon, there is a belief that as hotel-industry fundamentals continue to remain stable, lenders will regain confidence in lending to the sector.
McKee said Premier has been able to get some transactions funded using commercial mortgage-backed securities, but that action has slowed since the early-August stock-market meltdown. Much of that activity was structured finance with shorter terms and higher rates, and all of the deals require positive existing cash flow for properties, he said.
Deals are coming
However, the company sees activity starting sooner than later, which is why it added Michael Dolan as executive VP of business development. Dolan, formerly a senior VP in charge of the hotel lending practice at GE Capital, is ready for plenty of lending activity for the hotel industry.
“The industry is poised for a long, hard run,” Dolan said. “It’s exciting to be part of the wave after the recession.”
McKee said he is beginning to see more lenders interested in lending to hotel developers.
“Now is when people hear things are going on, but they don’t know where to go,” McKee said.
“There are certainly deals that are financeable,” Morris said.
There also will be more opportunities for companies looking to add quality hotel assets to their portfolios, according to Morris.
“As things continue to get better, you will still see some more distress,” he said. “But there’s a lot of capital to be put to use, too. So there eventually will be a sizable number of transactions conducted.”
McKee expects interest rates to rise at some point. “It would show the economy’s getting better, and that could produce confidence among lenders,” McKee said.
Morris, however, said if it wasn’t for the incredibly low interest rates during the past three years, the industry would be in chaos.
“The low variable rates have kept a lot of borrowers from going into default,” he said.
Dolan said the borrowers have come to terms with the notion that the crazy 100% loan-to-value lending that could be had prior to the recession is over.
“Borrowers are starting to realize they want some downside protection,” Dolan said. “They know they need to guard against a future soft patch in the economy.”