Hotel lending is back. Yet while financing is more plentiful than it has been in several years, it’s still generally only available for top-quality transactions and at rates and terms that might be difficult for some borrowers to accept. These are some of the conclusions from the annual survey of lodging industry lenders by Hotel Brokers International and Lodging Hospitality.

“We’ve observed one of the most rapid recoveries in the history of the hotel debt markets during the period from late 2010 through the early months of this year,” says Daniel Peek, a survey respondent and managing director of Holliday Fenoglio Fowler. “Substantial liquidity has returned in nearly all lending sectors, with life companies and CMBS originators leading the way.”

All but two of the 25 lenders surveyed say they’re actively providing financing to hotels. That compares to last year, when 44% of lenders surveyed said they weren’t lending at all in the lodging segment.

Survey respondents and other industry analysts cite several key reasons for the return of financing to the hotel market:

• The national economy is slowly, but surely improving, resulting in upticks in confidence among both consumers and businesses. As a result, business and group travel is up, and leisure travelers continue to plan vacation trips.

• While more volatile in recent months, the global political situations is generally stable. The dynamic can change quickly, however, as witnessed by the unrest in Africa and the Middle East and the earthquake, tsunami and nuclear crisis in Japan.

• The backlog of distressed hotels and hotel loans is beginning to clear as both borrowers and lenders see opportunities in an improving market. As Jim Merkel, president of RockBridge Capital, said recently at the Hunter Hotel Investment Conference, “Extend and pretend is over. Lenders have done it once or twice and now they’re fatigued. Deals will start to get done.”

Most lenders surveyed agree that distressed hospitality loans have made them change financing strategies. As Laurie Ivy, senior vice president, marketing for PMC Commercial Trust put it, “Many of our loans have been to refinance distressed loans or for the acquisition of properties that have been foreclosed or have distressed loans.”

• The most important factor fueling an increase in lending to the lodging industry is the dramatic improvement in operating performance in the U.S. lodging industry in the last 12-15 months. At the Hunter Conference, Jan Freitag of Smith Travel Research quantified the magnitude of the turnaround: in the 12 months ending January 2011, occupancy rose 6.1% and demand was up 8%, a record increase. And while rates only crept up .6%, RevPAR improved by 6.7%. Further good news is the fact new hotel development is suppressed, with supply growing by 1.8% versus a long-term average of 2.3%.

Improved hotel performance has a direct result on hotel transactions. One respondent said, “We anticipate continued recovery in occupancy and rates and, as a result, we should see increasing transactional volume in both refinancings and new construction.”

A recent forecast from Jones Lang LaSalle Hotels reinforces that outlook. The real estate advisory firm says hotel transactions volume in the Americas totaled $11.9 billion in 2010 and should top $13 billion this year. Portfolio transactions, largely non-existent in 2009, accounted for 27% of investment volume last year.

Survey Says
The 25 lenders in the survey included seven mortgage brokers, four each investment bankers and regional bankers. Other participants were SBA providers, life insurance companies, conduit lenders, credit companies and one private lender. A third of the lenders extended loans for $3 million or less in 2010. Forty percent provided financing between $3 million and $5 million; 27% offered funding between $6 million and $10 million; and the remaining 33% of respondents extended loans of $11 million or more. SBA providers were particularly active last year. One respondent says his company provided 35 loans last year at a total value of $40 million.

Lenders say they offer a wide range of funding: 80% of those surveyed provide acquisition financing, and the same percentage offer money for refinancings. Nearly three-fourths provide renovation financing, and about half will loan money for acquisitions of turnaround or under-performing properties.

A majority of lenders in the survey offer permanent loans (80% of respondents), acquisition loans (73%) and bridge loans and funding for repositioning (both 67%). About half offer mezzanine loans (53%) and preferred equity loans (47%). Of some concern, not many lenders surveyed provide funding for PIPs (40%) and ff&e financing (27%). While most franchise brands were lenient during the industry downturn in enforcement of PIPs and standards compliance, they’re more likely to require upgrades this year and beyond. But if financing isn’t available for renovations, some owners may face loss of flag.

Favorite segments among lenders are upscale and full-service (87% of lenders say they finance these categories), followed by midscale (80%), limited-service (73%), luxury (67%) and extended-stay (60%). Least-favorite segments are economy (33%) and vacation ownership (20%).

Properties in urban locations are most likely to get financing (favored by 87% of lenders), followed by suburban (80%), airport (80%) and resort (60%). Just 53% of lenders said they’ll make loans on hotels in highway locations.

Here is a summary of loan terms, pricing and requirements cited by survey respondents:

• Most lenders offer loan terms of five to 10 years for all classes of properties.

• Amortization periods range from 20 to 30 years, up slightly from last year’s survey, in which amortizations stretched only to 25 years.

• Debt coverage ratios range from 1.1 to 1.5, and loan-to-value requirements are 60 to 70 percent.

• In computing debt coverage ratios, 80% of lenders use trailing 12 months of operating performance data; 40% use rolling 12 months’ data; and 33% use the hotel’s previous year profit-and-loss statement. Future stabilized year projections are only acceptable by 27% of lenders.

• Non-recourse financing is making a comeback, as 80% of the lenders surveyed say they don’t always insist on recourse but typically only for stabilized operations. In last year’s survey, just 50% of respondents would even consider making non-recourse loans.

• A majority of lenders say their loans are prepayable, while 73% say loans are assumable by qualified borrowers.

• Other loan requirements cited by most lenders: appraisals, Phase 1 environmental and engineering studies and feasibility studies.

A Bright Future
Although most lenders are still conservative in the volume of loans extended and the terms required, the consensus among the group is that financing has returned to the lodging segment and loan volumes will increase throughout this year and beyond.

“While lending won’t be robust, it will improve,” says Jane Larkin, managing director of Larkin Hospitality Finance. “We expect to see the following: greater availability of debt open to a broader range of borrowers as the economy and industry continue to improve and a continued focus on refinance and acquisitions with very limited debt available for construction.

“Stricter underwriting will remain the norm,” she continues, “with brand, sponsorship, experience and location being important. Finally, there will be an increase in CMBS activity, non-recourse loans and the availability of fixed rates.”

Adds Andrew Benioff, managing partner of Llenrock Group: “There will be a much greater amount of capital flowing to the hospitality sector, coupled with many more deals that actually make sense. All things considered, 2011 will be a good year for the hotel sector.”