The question on the minds of nearly everyone in the hospitality industry is whether there is any financing available for hotel transactions. The simple answer is yes, but it's much more complicated than that.

"Funds are available, but the landscape has changed dramatically," says Tom Conran, a principal with Greenwood Hospitality Group. "Financing isn't yet widely available, but some is happening, particularly backyard lending by local and regional banks and balance sheet lenders. I also see the beginnings of movement among funds that see opportunities for good returns on their investments."

Many lenders and other money sources continue to be skittish about the short- and medium-term prospects for the hotel industry. Similarly, a lot of property owners are reluctant to sell assets in the current environment of depressed values, and many potential borrowers are unsure the market has yet to reach the bottom. But most of the respondents to this year's survey of the lodging lending community conducted by Hotel Brokers International and Lodging Hospitality say they're willing and able to provide financing to a broad spectrum of hotel projects, including acquisitions, refinancings, renovations and even new construction.

"The number of originated loans will increase drastically in 2010," says survey respondent Mark Owens, managing director of Ackman-Ziff. "Several lenders, existing and new, have entered or reentered the market and we anticipate this trend to continue."

However, as Owens adds, and most observers, concur, "Underwriting requirements will remain conservative. But (bid/ask) spreads will tighten, and increased competition within the lending community will provide better outcomes for our clients." Veteran hotel broker Brandt Niehaus of Huff, Niehaus & Associates says he's seen more interest in transactions in the last couple of months but that interest hasn't translated into many deals.

"Financing is the problem," he says. "Without financing, we need to be creative to get transactions done. At this point, a deal can only work if it's all cash or a lease purchase or small enough, less than $3 million, to do through SBA."

While Niehaus says the key to increased transactions is for banks to begin lending again, "they've never been known to be contrarians. They probably won't start doing much lending until they see the flock of starlings all going in the same direction."

While optimism seems to be building for the rest of this year and beyond, such wasn't the case in 2009, as most but not all lending activity sputtered to a halt. Still, some lenders were actually able to prevail.

"2009 was a grind of a year, although somewhat surprisingly we had a better year than we did in '08," says Cameron Larkin, managing director of Larkin Hospitality Finance. "While everything was more challenging, we were able to bring $37 million across five deals to closure for our hotel clients. I suspect 2010 will be another grind of a year, at least through the first half."

Survey Says
Nearly half of the lenders surveyed this year are mortgage bankers. Others in the group include investment bankers, SBA providers and regional banks and mortgage-backed securities conduit firms. While 44 percent of lenders say they didn't extend any hotel loans last year, that drop-off in production was less than was reported in 2008, when three-fourths of the sample said they reduced the number of loans they generated in the previous 12 months. Those lenders who were active in the lodging industry in 2009 averaged between five and seven loans, each between $10 million and $40 million. One very busy respondent extended six loans worth $230.5 million. Only one lender saw an increase in the number of hotel loans underwritten last year. That lender, an SBA 7(a) provider, extended 21 loans for a total value of $25 million.

Nearly every lender (94 percent) says they finance acquisitions and provide refinancing money. Fewer (88 percent) will finance renovations, and less will work with borrowers looking to buy turnaround or underperforming assets. While less than two -thirds of the group will lend on new construction projects, at least one lender believes in some cases it's easier to find money for ground-up hotel development than for any other kind of transaction.

"Right now, more money is available for new construction because, unlike existing assets, borrowers can present a clean slate," says Joe Epstein, president and founder of New Jersey-based First American Realty Associates. "If it's a project backed by a strong feasibility study which can demonstrate real need for the property, then financing is available. However, nearly all money is coming from regional sources as there are only two national pure hotel lenders left in the market."

While all of those surveyed will lend on full-service properties, nearly all (94 percent) do financing for limited service. Compared to last year, lenders are slightly less excited about extended-stay properties (81 percent will finance these projects, versus 85 percent in 2008). But the survey shows a small uptick in interest in timeshare projects: 13 percent say they'll finance vacation ownership versus 10 percent in 2008.

Favorite segments are upscale, first-class and mid-market hotels (94 percent will finance). There's less enthusiasm for resorts (73 percent) and economy properties (63 percent). A few of the respondents say they won't finance Mom & Pop motels or transactions for small independent properties under $3 million. All of the lenders surveyed will finance urban and suburban hotels, and nearly all (94 percent) will extend funds for hotels. On the other hand, highway hotels are only attractive to about 70 percent of the lenders. All of the lenders surveyed provide permanent and acquisition loans. Three-fourths offer construction and bridge loans, while most lend for property repositioning (69 percent) and offer mezzanine funding (56 percent). Just 44 percent of respondents said they provide preferred equity loans (down from 65 percent last year), while 25 percent (versus 40 percent in '09) lend for product improvement plans or for ff&e purchasing.

Here's a review of the financing terms, pricing and requirements these lenders use:

• Loan terms range from two to 25 years, with seven years the most common terms.

• Amortization periods range from 20 to 25 years.

• Debt coverage ratios range from 1.3 to 1.5.

• Although the respondents report they require loan-to-value ratios between 60 to 85 percent, many observers say it's very difficult to secure any financing with LTVs above 50 or 60 percent.

• Nearly 90 percent of lenders use trailing 12 months of operating performance data to compute debt coverage ratios, while 56 percent also factor a property's previous-year profit and loss statement into the DCR calculation. Included in most lenders underwriting criteria are anticipated renovation expenditures, reasonable proformas and future stabilized years.

• Non-recourse loans are becoming much more scarce, with just half of lenders saying they'll finance projects without personal guarantees.

"There's very little argument available today that can be made for non-recourse financing," says Epstein of First American Realty. "And hardly anyone is offering burn-offs or write-downs of recourse. About the only way to secure non-recourse financing is if the lender firmly believes the value of the asset is substantially worth more than what the borrower owes on it. Even then it's difficult to find."

• The majority of lenders say their loans are prepayable, while 81 percent say loans are assumable if the borrower is qualified.

• Fifty-six percent of respondents say they'll write new construction loans that evolve into permanent financing.

• Loan packages required by lenders typically must include a phase 1environmental and engineering report and a feasibility study.

The Outlook
While the lending environment is tight now, most respondents and other observers believe financing opportunities will improve as hotel operating data turns positive and sellers and buyers become more confident.

"There now seems to be some clarity in the capital markets with regard to hotels," says respondent Andrew Benioff,  managing partner of Llenrock Group. "The entry of both private institutions and new mortgage REITs that are willing to lend on cash-flowing hotels on a non-recourse basis is a huge boost for the industry. This will allow those (owners) with current CMBS financing that isn't overleveraged to refinance and hold on to their properties."

While transaction activity has been slow for more than a year, the number of deals hitting the market should increase as 2010 progresses. Both buyers and sellers seem to sense that hotel values are bottoming out. Also, lenders who have been patient with owners of distressed properties may soon force action on assets not meeting loan covenants or obligations.

"Eventually, something's got to give in the transactions market," says Doug Dreher, president & CEO of The Hotel Group. "There's something like $26 billion in distressed hotel debt and less than 10 percent of it has gone to REO status, which means the vast majority of that debt has not yet been processed. The tsunami will come, but so far it's been shockingly slow."

As the industry begins to post positive RevPAR numbers and consumer sentiment improves, buyers, sellers and lenders should start to engage in transactions.

"I see positive things happening in the industry, and as times goes on perception turns into reality," says Epstein. "Despite the current difficulties, it could be worse. In my 40-plus years in the business, I've never seen the hotel industry or the overall economy this bad, yet it's much easier to find financing today than it was during the RTC days of the late '80s and early '90s."