Financing is easier to obtain than a few years ago but is still difficult to obtain relatively pain free. Commercial-mortgaged-back-securities loans, historically an important hotel financing source, have shown a remarkable resilience since 2011 but remain difficult to get a handle on.
Several years ago, most hoteliers assumed CMBS loans were dead. But like a cat with nine lives, new CMBS hotel loans came back in play during 2011-2012 and looked like a runaway in the first half of 2013.
Predicting long-range CMBS trends, however, is like accurately predicting the weather. The only confident assessment about the new CMBS loans is that they have and will continue to change—rapidly.
What makes CMBS so interesting is there still is massive legacy hotel debt to be refinanced. Since the CMBS market rose from the dead in 2011, it has rapidly evolved into what appeared to be a financing explosion earlier this year. In round numbers: CMBS 2011 loan volume was $33 billion, and in 2012 it was $50 billion, according to Commercial Mortgage Alert.
This year has been a rollercoaster. The original 2013 estimate was $60 billion and by mid-summer was revised upward to $100 billion. An interest rate spike hit in late July causing uncertainty in the CMBS and bond markets, resulting in projections revised downward to $80 billion, according to Commercial Mortgage Alert.
But that prediction hasn’t lasted very long and is on the move again. In the past month, CMBS professionals (traders and investors) have become more optimistic that mortgage-backed-securities values will rise again by year end. In July, AAA-rated spreads were 128 basis points, up from 72 basis points in January and now have recently eased back to the low 100 range. A recent survey by Commercial Mortgage Alert found that respondents expect the average AAA swaps to be back down to 95 basis points and the 10-Year U.S. Treasury to reach 2.7% by year end.
Almost as soon as the article was published, the 10-Year hit 3% but has since receded slightly. The take-away is that interest rates are up but in a constant state of flux. However, the long-term trend is up.
To help cloud CMBS’ future, Dodd-Frank enters stage left. The fear is that the Federal Reserve might include provisions that could at least temporarily damage the MBS market and potentially impact banks’ willingness to purchase bonds below the super-senior, top tranche level, requiring banks to hold more capital in reserve. Implementation of new regulations could hamper MBS issuance and make it more difficult for securitization shops to compete against portfolio lenders. The jury remains out on what and when new guidelines may become reality.
The true reality is that hotel loans historically comprise approximately 10% of the CMBS market. Hoteliers seeking to refinance existing loans are finding that community and regional banks, which in the past were a primary financing source, now have limited desire to refinance hotels. The obvious alternative is the CMBS market, where loans are especially attractive to hoteliers who want to avoid personal guarantees and obtain attractive fixed-rate financing with longer terms.
Typical terms
Until recently, rumors abounded about all sorts of amazing debt yields, loan-to-value ratios and rates for hotel CMBS loans. Comparing a current 2013 CMBS loan to a conventional bank loan or a CMBS loan combined with mezzanine is far more complex than just looking at a few numbers. To get to the real rates, hoteliers have to look much more carefully at the fine print.
The new CMBS loans have a substantial number of new twists and turns and are more complex and difficult to navigate and understand. It arguably is easier to navigate blindfolded without a GPS than accurately nail down the actual debt yield, LTV and pricing for a specific bank loan, or a CMBS/mezzanine loan versus the typical hotel CMBS loan.
Asset class and loan structure determine loan pricing and sizing. Below are some critical guidelines to dispel some of the myths in the marketplace and to provide you with some key basics in today’s CMBS hotel financing. All of these factors are changing rapidly, sometimes hourly, daily or weekly.
For good assets in relatively good markets these trends prevail:
- LTV in the 65% range;
- debt yields for a senior loan range from 10.5% to 12%, with the majority between 10.75% to 11%;
- typical pricing from approximately mid-5% to upper 5% range; (Recently, rates on hotels have widened by approximately 50 to 100 basis points.)
- favored hotel types: major brands; luxury; upper upscale; upscale; upper midscale;
- major markets (top 25-50 MSAs);
- loan term typically five to 10 years;
- amortization typically 25 years and for some hotels 30-year may be available; (Recently, some CMBS lenders are allowing some interest only periods.)
- non-recourse; and
- cash-management accounts, of which there are various versions.
CMBS loans can be an attractive way to refinance hotels. The recent success of the CMBS market, to a large extent, is being driven by historically low interest rates and a search for yield by investors. CMBS loan rates remain historically low, but getting to the “real” rate/cost to compare to other loan alternatives requires a thorough understanding of the new financial order and fine print.
As in any loan negotiation, if it is too good to be true, it probably is. Borrowers need to be prepared to respoñd to a rapidly changing market to take advantage of the emerging available opportunities.
Chris Clark co-founded db Capital Ventures in 2009. Previously, Mr. Clark was a VP of the Hospitality Lending Group of Capmark Finance and its predecessor companies (GMAC Commercial Mortgage and Lexington Mortgage Companies). Mr. Clark has 35+ years of experience in the real estate industry, including lending, brokerage, development, appraisal, analyzing management practices, asset management, due diligence and market analysis. As a hospitality lender over the last 20 years, he has analyzed in excess of $9 billion in hospitality loans throughout the United States. Mr. Clark currently holds a Virginia Real Estate Broker’s License, previously held a Virginia Certified General Appraisal License and was active in providing commercial real estate appraisals for the RTC in the early 1990s. Mr. Clark is a graduate of Oklahoma State University and holds a Bachelor of Science degree.
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