by Charley Babb
The cold, harsh winter weather that has covered the country has finally begun to subside, and the hope of spring is on the doorstep. While the frigid temperatures and snow may have run up most everyone’s heating bills, the winter has also brought warmth to the hearts of those who are seeking permanent financing for their hotel properties. Debt capital, like all capital, ebbs and flows with regard to any specific asset class based upon the future outlook for such properties, and the outlook for the hospitality industry is rosy at this time.
Six to nine months ago, underwriting standards were dictating that leverage was limited to 65% loan- to-value with maximum amortization periods limited to 25 years. Interest-only periods during the loan term were nonexistent, and spreads for interest rates were wider than for other asset classes, such as multifamily. Also, major hotel brands were certainly preferred, at times to the exclusion of lesser flags and limited service hotels.
What a difference a little time and an ever-improving hospitality market can make. Today the market is filled with capital for nearly every cash flowing hotel that is located within a stable market. We have even experienced success with placing loans on limited service hotels in tertiary markets, albeit with more conservative underwriting. According to a recent report prepared by Jones Lang LaSalle, the hospitality market has returned to levels seen prior to the recession and are approaching the 2006 peak levels for occupancy, ADR, and RevPAR. And, as is common in our experience, lenders are attracted to hot markets and property types in droves once the word gets out that performance metrics are healthy and improving.
CMBS lenders are the most aggressive lenders in the market at the moment for hotel loans. Even boutique hotels are seeing significant competition for their business. The abundance of capital may exceed the number of quality deals available for financing and will likely lead to continued relaxation of lending requirements. Expect to see leverage levels rising to 75% LTV, amortizations at 30-years, interest rates in the sub-5% to low 5% range, and interest-only periods increasing to 3 years on a 10-year loan term. This, of course, presumes a continuation of the status quo for the US Treasury yield curve.
Also, expect increased hotel construction activity and lending taking place as improved markets can now justify the additional inventory. Leverage will likely be at 60-65% of cost for non-SBA loans. Additional leverage may be available through the addition of mezzanine or preferred equity investors. Urban infill locations will be preferred to suburban, secondary, and tertiary locations due to the demand drivers present there. As always, sponsor strength and experience, competitive set, project economics, and hotel brand will all be significant factors in procuring a construction loan.
Should you have a need or opportunity to take advantage of such favorable capital market conditions for hospitality lending, please contact Charley Babb at CBabb@metcapital.com or any of the Senior Directors at Metropolitan Capital Advisors www.metcapital.com.