ATLANTA—Banks still are iffy on construction financing and international lending, but panelists at the 2012 Hunter Hotel Investment Conference said there is money in the market for the right borrowers with the right business plans.
It’s just a matter of whether borrowers are willing to accept recourse, said Raphael Fishbach, principal at Mesa West Capital.
At Wells Fargo, Jennifer Dakin, senior VP and team leader of the company’s hospitality finance group, is doing recourse and non-recourse deals and pricing deals differently for both.
Developments, renovations and conversions typically are requiring 40% to50% recourse, Dakin said. Non-recourse deals are priced at Libor plus 400 basis points.
Lenders at Wells Fargo generally are looking to finance deals priced at more than $20 million but will go less than that for the right sponsor, Dakin said.
And to size those loans, cash flow is the first factor the company is taking into account. “We generally are looking at a 10%, 11% going in debt yield and looking for 12%, 13%, 14%-plus at stabilization,” Dakin said.
During the past 18 months or so, lenders have started to discuss the concept of debt yield, which has always been present in lender statements and credit memos but never spoken about with the borrowers, said Peter Berk, president of PMZ Hotel Finance Group.
“(Debt yield is) something you can calculate and size your loan yourself,” Berk said. Before speaking to a lender, borrowers can do much of the math upfront and talk the same language of the lender once they meet. To calculate debt yield using net operating income, divide the NOI by the loan amount. A property with NOI of $2 million that is seeking a loan of $20 million, for example, would have a debt yield of 10%.
Fishbach’s group at Mesa West is taking on a little more risk when it comes to financing than Dakin’s team at Wells Fargo. “We’re financing more of the story transactions.”
The company is looking at loans that are probably a little lower yield at the beginning of the deal. “We’re looking at the story as it relates to the transaction and the business plan, not so much as how it relates to the cash flow,” Fishbach said.
As a smaller group with approximately 30 people in the company, Fishbach said the company’s method of growth is by maintaining strong relationships with borrowers and doing more than one deal with each sponsor.
“We seek out the really strong borrowers and tend to follow them,” Fishbach said. For Mesa West, there are not many markets out of play as long as the sponsors have strong experience in their particular markets.
Fishbach’s team is pricing deals at 6% to 8% and looking to finance in the $15-million to $100-million range. However, Fishbach said the company closed on a $130-million deal during the fourth quarter and is working on a $12-million deal, he said.
These days, it is easier to get financed for larger loan amounts of $50 million rather than smaller amounts of $5 million, said Chris Allman, VP of finance and capital markets at Thayer Lodging.
“If anyone wants to start a business out there and you could raise the money to lend at under $10 million, you’d make a killing,” Berk said. “The reality is that it takes the same amount of time to write a $10-million deal (as) it does to write a $50-million deal.”
When the topic of construction lending came up, Dakin said Wells Fargo is lending but made it clear they are not aggressively doing so.
“Yes,” she whispered into her mic when asked whether her bank was doing construction financing.
Construction plans need to be in-depth before getting financing for construction, Dakin said. Wells Fargo is not going to finance unless the team is pretty certain it is looking at a solid development plan. “You need to have all your ducks in a row,” she said.
“There are very few markets where it makes sense to build,” Allman said.
PMZ is taking on construction financing but only in the major markets, such as New York, Philadelphia and Baltimore, Berk said.
“We’ve seen a lot of what I call local relationship lenders go back to the construction market, albeit with a push,” Berk said. If the borrower pays down the local lender even if the borrower is at lending capacity, the lender might be willing to entertain the idea of doing another construction loan. The lender not having anything outstanding with the borrower is likely to spur activity.
Banks are proceeding with caution when it comes to international lending, panelists said.
“We’re not eager to jump into international lending,” Dakin said. Wells Fargo would entertain Hawaii and possibly London, but would not look at markets such as the Bahamas, she said.
Fishbach said the only market outside the mainland U.S. Mesa West would consider is Hawaii.
Resorts also are highly risky these days, Allman said. Because of the many components, he said he is not interested in the market. “It’s a scary place,” he said.
Wells Fargo, on the other hand, is doing deals for resorts, Dakin said.
Fishbach is concerned about rates going into the future. “One thing that scares me is our addiction to low Libor. The base rate has to go up,” he said.
Allman does not see rates changing much, but that isn’t necessarily a bad thing.
“As a borrower, I worry when a lender’s not making money,” Allman said. “Today, even with rates low, lenders are making money. They are getting large spreads, their cost of capital is cheap, and business is functioning well.”