Hotel development lending outlook brightens
09 JULY 2014 8:23 AM
Attractive rates from lenders are helping to bring hotel development financing back to the fore, speakers said Tuesday during a webinar.
REPORT FROM THE U.S.—While it’s not the rip-roaring days of 2007, the outlook for hotel development financing is continuing to brighten, panelists said Tuesday during a webinar.
Speakers during the Americas Lodging Investment Summit Summer Update panel titled “How to finance a new development” said that underwriting terms for attractive projects in attractive locations are positive. Neil Freeman, chairman and CEO of Aries Capital, said 10-year money is available at terms of about 4.75% to 5% on a 30-year amortization schedule. Loan to value for strong brands are generally 65% to 70%.
“I still think the market is in somewhat of an equilibrium,” he said. “There are good sources of capital available. It’s still not easy to get development done, but it’s doable with good sponsorships and good projects.”
He added that though the financing terms he’s seeing in the marketplace are luring borrowers, supply numbers should still remain in check. Billy Brown, chairman and CEO of Medical Hospitality Group, agreed, noting that construction starts appear to be lagging.
Brown said though several hotel companies are reporting robust pipelines, he does not know how many of those projects will actually come to fruition.
“We’re not at the silly part of the cycle yet,” he said. “It’ll be better in six months than it was six months ago.”
When sourcing a lender, Freeman said it’s important to find an institution that is likely to have some measure of longevity to it.
“When the extension or term comes up in three or five years and you need an extension, the lender will still be in business,” he said.
Brown said borrowers also need to think about their exit strategy when deciding which lender to use.
“Can you get out of the loan? Can you pay it off?” he said.
It might be worthwhile to consider a SBA 504 loan, Brown added. “It’s not all that wonderful, but SBA 504 is still viable, gives you a longer term on A and B pieces. If you catch the cycle wrong, you don’t automatically have your hand out in the street asking for a new loan or longer time.”
Panelists said brands that have the highest name recognition are generally favored by lenders. Additionally, Brown said those who have between 100 and 200 hotels in their portfolio usually are easier to finance.
“There’s more of a comfort level than with a brand that doesn’t have that distribution,” he said, adding that’s just one aspect of the loan decision.
Going to a bank with a brand that isn’t a household name does make a difference, Brown said. “It does change the amount of money in the equity stack,” he said.
The panelists discussed the obstacles faced in obtaining hotel loans. John Tishler, a partner at Sheppard, Mullin, Richter & Hampton, said EB-5 financing, for example, might not be the best option for some borrowers anymore.
“Right now, the banks are (offering) cheaper cost of capital than EB-5,” he said.
His fellow panelists agreed there are a multitude of issues surrounding EB-5, a federal program meant to stimulate job creation and capital investment from investors located outside the United States.
“Some will say EB-5 is a panacea,” Freeman said. “I think everybody here knows it isn’t.”
For one, Brown said if investors need to quickly get their money out of a project, EB-5 is likely not the best route.
“If you need to get out in three years, that could be a problem,” he said.
One other strike against EB-5 is that there are other forms of financing, Freeman said.
“Now that capital is flowing freer, there are a lot of developers who just don’t have the time to wait for EB-5,” he said. “If you have to wait a year and a half or two years for your money, you have to get a bridge, and bridge lenders are much more reluctant to bridge EB-5 than (for) tax credits.”
Panelists also said public subsidies are not as available these days.
“Right now, municipal-financed properties seems to be waning a bit because there’s more conventional financing,” Freeman said.
Also, Brown noted that some municipalities are having financial difficulties, which has limited the availability of such subsidies.
“It starts off being a red flag from Day One,” he said.