Money is available for borrowers who have experience in the business and a solid track record of performance, said a panel of lenders during The Lodging Conference.
PHOENIX—Financing is available for nearly any kind of hotel project—acquisition or new construction, branded or unbranded, gateway city or secondary market—but don’t bother if you don’t have solid experience and a stellar track record in the business, said panelists last week during a session titled “Find the money for expansion, construction and renovation” at the 19th annual Lodging Conference.
“Lenders really like hotels again,” said Bill Grice, executive VP of Jones Lang LaSalle, which acts as an intermediary to source debt and equity for hotel deals. “As an asset class, it has outperformed every other major food group in commercial real estate in the past 18 to 24 months, and it continues to outpace even what some had considered being lofty expectations.”
Lending is loosening for a number of reasons, the most important of which might be the performance of the hotel market.
“We’re seeing some of the strongest (net operating income) margins we’ve seen in a long time because operators are able to push (average daily rates), and occupancies are at an all-time high,” said Scott Andrews, managing director of hotel originations for GE Capital, Franchise Finance. “All the fundamentals are strong, so from a (hotel) owner’s standpoint it’s an awesome time to be in the market.”
While money is plentiful, most lenders want to deal with sponsors who have experience in the business or can partner with a seasoned hotel veteran.
“Lenders want to work with people they know are going to be successful, and there are too many other opportunities to place (financing) to bother with a developer who may not be able to make a successful project,” said Grice, who suggested a newcomer to the industry team up with someone who has developed or operated hotel assets previously. “It’s the best way to cut your teeth in this business.”
Developers looking to build new hotels should be able to attract financing, even for projects in secondary and tertiary markets and for boutique and unbranded hotels.
Grice said he’s working on a $300-million new construction project in the Washington, D.C., area that “wouldn’t have gotten off the ground 12 months ago.”
“We ended up with nine lenders proffering term sheets on the project,” Grice said. “Terms ranged from 60% to 80% loan to cost, and we even had some syndicate groups that wanted to do (commercial mortgage-backed securities) loans.”
“We’ve just gotten back to doing new construction financing,” said Andrews. “We’ll be selective, and it will be driven by the development experience of the sponsor. We won’t build a guy’s first hotel; he needs two or three under his belt.”
Andrews said GE Capital offers 24-month construction loans that convert to 5-year term loans once the hotel opens. During the construction period, the loans are full recourse at an interest rate calculated using the London Interbank Offered Rate plus 400 to 450 basis points.
“It steps down to 50% recourse at (certificate of occupancy), and we can further burn down the recourse two years out once (the hotel) stabilizes and hits certain debt yield metrics and debt service coverages,” Andrews said.
While GE Capital focuses on branded select-service and extended-stay properties, Michael Jaynes, president of Hall Structured Finance, said his company will consider all types of projects, even non-branded or boutique hotels. The company is closing on a loan for a new-build independent hotel in a third-tier market in the Midwest.
“Down the fairway for us is a strong, flagged project in a heavy business demand generator market,” Jaynes said. “In those situations we’ll creep up close to 75% or a little higher on loan to cost. We don’t exclude independents or other kinds of projects, but we will just be lower in the capital stack.”
One area Jaynes said he has “redlined” is the Bakken oil fields of North Dakota because of the lack of barriers to entry into enter the market.
“There are some other secondary markets where the barriers are low, but this is a whole different kind of animal,” he said. “More hotels are opening all the time, as are apartments, where many of the people who live in hotels today are moving to.”
“If you see the bandwagon going by it’s a little too late,” added Jon S. Wright, president & CEO of Access Point Financial. “As a lender (in this market) you’re doing more workouts than originations.”
Financing the PIP
As lenders face mandatory property-improvement-plan renovations from their brands, the lenders suggested refinancing the assets might be a strategy to fund these projects. For smaller PIPs and other capital expenditure projects, Grice said refinancings are happening in 85% of cases.
“If you have equity in a property and have a half-million-dollar or million-dollar PIP coming up, the easy play is for a balance sheet lender to refinance your asset, leverage it up to 75% and give you the PIP money to go forward,” Andrews said, adding GE Capital is closing on a $32-million refinancing package for a property that is facing a $4-million PIP in the next few years.
“We approved (the owner) for a $36-million loan, but we’re holding back $4 million to fund those PIPs over the next four years,” he said.