GRAPEVINE, Texas—Steve Van knows a tough situation when he sees one, and what the hotel industry is experiencing is unprecedented. The current economy has provided a backdrop worse than the well-documented days of the late 1980s when the government established the Resolution Trust Corporation to combat the dearth of distressed assets created by the fall of the savings-and-loan industry.

Van believes the hotel industry needs another RTC to absorb all of the toxic assets that are in distress as well as those that will become distressed when commercial mortgage-backed securities loans mature during the next couple of years.

Steve Van, Prism Hotels

As the host for the ninth annual Fishing for Solutions: Servicing Hotel Loans conference last week in Dallas, Van said the current state of hotel lending is bleak. He outlined the historic major sources of funding.

Metropolitan Life Insurance Company is the largest traditional lender in commercial real estate with just under US$50 billion in loans, followed by Prudential, Northwest Mutual, New York Life and John Hancock. However, when it comes to CMBS loans, LNR Property Corporation is the largest player with over US$200 billion in loans. It is followed by CW Capital, Centerline Capital Group, Midland Loan Services and Capmark.

The top five CMBS lenders have seven times more money in lending than the top five life-insurance companies have.

 “The lending has moved away from New York to places like Kansas City and Dallas,” Van said. “It’s a different world.”

Van also lamented that net operating income at hotels will be down 39.1 percent this year.

“How much do you think value is down?” Van said. “A pretty good measure is NOI is down almost 40 percent then hotel values are probably down 40 percent.”

He cited the race between increasing revenue per available room and the potential for increasing London Interbank Offered Rates as one of the main issues facing the industry.

“What’s saving about half the hotel loans in America right now is the low LIBOR,” he said. “During the first 12 months of every recovery, LIBOR has gone up an average of a little over 350 basis points. At some time (during this recovery), LIBOR is going to go up, and mortgage payments are going to go up three or four times what they are now.”

Van also warned there won’t be enough capital to rescue the hundreds of billions of dollars of CMBS loans maturing during the next couple of years—and that is being exacerbated by the current “extend and pretend” phenomenon in which banks are extending existing loans because there’s nothing else they can do with them.

“With the maturity wall out there and the ultimate increase in LIBOR, the extend-and-pretend thing is like putting your homework off until 9 p.m. Sunday night,” Van said. “Well, 9 p.m. Sunday night is coming.”