Aries Capital’s chairman and CEO talks lending in secondary and tertiary markets, current underwriting terms for common hotel loans; and more.
Editor’s note: This article is part of a monthly series of Q&A articles from lenders who provide capital to the hotel industry. Hotel News Now provides the questions each month.
How would you describe the current lending market for transactions?
The hotel lending market has been robust since the market rebounded in 2011. 2016 is a year in transition in which bank construction loans have become very difficult, lenders are more conservative and cautious for permanent and bridge loans, and values have peaked or are declining in many markets. Loans are still available at very attractive interest rates, many in the 4s for properties with good cash flow and sponsorship. Aries Capital is still having a successful year in placing loans for our borrowers.
What are the two most important things an owner/buyer of a property in a secondary or tertiary market should know about the lending environment?
First, cap rates in secondary and tertiary markets are higher, and values are lower, so make sure there are multiple demand generators and that the operating numbers are strong. The brand should also be a recognized and quality brand as lenders will require brands in smaller markets, while they may finance independent hotels in primary markets.
Second, lender underwriting standards are more stringent in smaller markets. In primary markets, lenders may advance 70% of value and even allow mezzanine financing to provide higher leverage, while they may limit loan-to-value to 65% or even 60% in seasonal markets. Debt yields (defined as net operating income/loan amount) can be as low as 10.5% in primary markets, but they rise to 12% or more in some secondary and tertiary markets. Lenders will scrutinize new supply that may hurt market rates and occupancy.
What range of underwriting terms are you seeing for your most common hotel loans?
Permanent loans offer LTV of 65% to 70%--although the loan amount may be lower if the borrower is taking cash out—with 25-year amortization, 10-year term, rates from 4.25% to 5.25% and non-recourse for stable properties. Some recourse may be required for deals that have a risk element such as declining NOI.
Bridge loans can be up to 75% of current value but 65% of stabilized value, with terms of three to five years and interest rates of 5% to 8%, interest only.
Construction loans are getting more difficult and are 50% to 60% of cost at rates of 4.5% to 6.5%, interest only for experienced developers. Some nonbank lenders will advance up to 75% LTV at rates approaching 10%.
What economic benchmarks do you track to gauge the future of hotel lending and why? (Examples: RevPAR performance, GDP growth, unemployment statistics, etc.)
We track hotel performance such as revenue per available room as measured in the STR comparable set, new supply coming on line in the next 24 months, market employment data, future business such as conventions in the market and crime and other neighborhood statistics. (STR is the parent company of Hotel News Now.)
What’s the most important thing a borrower must have when it comes time to refinancing an expiring loan?
The critical factors to refinance an expiring loan include having net income and debt yield sufficient to refinance the principal balance, having a term of the franchise that exceeds the new loan term, making sure any PIP costs are reserved in the loan and having a borrower that has performed and made all payments on the expiring loan.
Neil Freeman is Chairman and CEO of Aries Capital, a full-service real estate lender and mortgage banking firm offering long-term, bridge and mezzanine loans, equity arrangement and government tax credit advisory and placement. Throughout his 35-year career, he has closed over $5.5 billion for all commercial property types.