As economic and industry fundamentals improve, so do the number of investors looking to take advantage of the growing hotel distress and increase in transactions. The latest example is Strategic Capital Solutions, a New-York based real estate investment firm, which earlier this month unveiled its Hospitality Financing Program.

SCS wants to fund up to $130 million of debt and equity investments in new and existing hotels in select markets over the next 12 months, with everything from senior, mezzanine, preferred equity and other debt and equity investments in play. The program is aimed at sponsors looking to refinance existing debt or requiring a bridge loan as part of a recapitalization or property improvement plan, or those looking to acquire hotels or discounted notes from lenders.

Edward Mehrfar, a senior managing director with SCS, recently took some time to discuss the financing program and why he believes now is the time to invest in the lodging segment.

Why start the hospitality program now?
We see a big opportunity in the hotel sector. We think the time is perfect because of the lack of available capital and where we are in the cycle.

Is there a target for a split in debt and equity investments with the $130 million?
It’s structured to allow us to draw for different uses of the capital, in terms of leverage, pricing and structure. It really depends on the opportunity, and what’s really good about the program is we’re agnostic about what types of investment.

Has the firm focused on hospitality before?
When the firm was founded in 2002 we were doing hotel deals back then, when it was as bad as it is now. Basically we were founded with that particular expertise, but to be honest in the last couple years we haven’t done any hospitality deals. We haven’t found anything of interest. With macroeconomics and the fundamentals of the sector improving, and with the scarcity of capital available, it’s a unique opportunity right now. Our capital is flexible in approach, but not in terms of investment criteria.

What kind of timeframe are you targeting for these investments?
Typically we want to be opportunistic, a bridge mentality where we’re in for one to four years, ideally in that two- to three-year range. We think we can catch the bottom and in two to three years when things are on the uptick refinance or sell.

And you’re targeting deals in the $5-million to $40-million range?
Yes, but our sweet spot is really $15 million to $30 million.

So the focus is limited-service properties and not trophy assets in major markets?
We’re specifically focusing on hotels targeting business travelers, broadly anywhere in the U.S. but within that, city centers, airports and major business areas. We are focused on limited-service today, but the program is flexible. There’s very little capital for transactions, other than for trophy properties. Since most properties are overleveraged, there’s a large pool of sellers willing to get rid of problem assets, so it’s a good buy-low, sell-high opportunity.

Is the CMBS market returning?
Only for low loan-to-value rates, stabilized trophy properties and other more conservative underwriting.

Have you been surprised at the selling prices of some of the recent trophy assets changing hands?
Yes, we have noticed properties in those major markets trading at low cap rates. REITs have way too much capital and there’s a scarcity of good investments. Our program is designed to place capital for those other 95 percent of owners.

Will those major deals help drive up prices elsewhere?
I don’t think so. The transactional volume is going up, but I don’t think prices will. The bid-ask gap will reduce, but because askers will come down.

Do you expect the transaction flow to continue to increase?
Absolutely. We think 2011 will be an exceptional year. We’re seeing a lot of banks and special servicers starting to get into the market. As people gain confidence in the economy, hotels are the first real estate assets to go. Hotels are the right place to be now.