The Money Machine

Now may be the perfect time to obtain financing for a lodging project. Whether you want to acquire, renovate, reposition or develop a hotel, motel or resort property, an abundance of money is available at fair terms and attractive rates, according to the results of the annual survey of hotel lending sources by Hotel Brokers International and Lodging Hospitality. Most respondents to the survey said their loan dollar volumes will increase this year by 25 to 40 percent over 2004, which was also a dynamite year for hotel lending.

“It will be a great year. There are enormous amounts of capital available,” said one lender. “There continues to be significant availability of both debt and equity capital.”

“Hotels are the number-one asset type in the real estate market today,” echoed Sam Merchant, president and CEO of The Merchants Financial Network. “Our firm is aggressive in underwriting hotel financing backed by more capital availability and the receptiveness of hotel paper in the capital markets.”

Participants in the survey represented a wide variety of lending sources: nearly one-third are mortgage brokers, 22 percent are investment bankers and 16 percent are SBA loan providers. Others in the group included national and regional banks, credit companies, life insurance companies and mortgage-backed securities conduit companies.

All surveyed said they finance acquisitions, and 75 percent of the companies said they lend money for acquisitions of turnaround or underperforming properties. Most will finance renovation and new-construction projects.

Unlike past years, most hospitality lenders will now provide money for properties in nearly every segment of the business. Four out of five said they lend to both full-service and limited-service properties as well as extended-stay hotels. Seventy percent lend to resort projects, and 42 percent provide financing to timeshare developments. Most of those surveyed (80 percent) say they prefer upscale and mid-market hotels, and three-fourths of the lenders will fund economy properties.

“We typically make loans for properties in one of the four major hotel groups — Marriott, Hilton, InterContinental and Starwood — as well as some in the Choice system,” said Joe Green, president and CFO of Winston Hotels. “To us, the property and brand often mean more than the borrower. We always ask the question, ‘Could we own this hotel if we had to?’”

Bruce Lowery, senior vice president of GMAC Commercial Mortgage Corp., likes branded properties but will also make deals on independent hotels if the situation is right. At a breakout session on hotel financing at the Hotel Investment Conference in Atlanta in March, Lowery said, “Over the last nine years, we've made more bets on Residence Inn than anything else, and we also like Marriotts, Hiltons and Hyatts. But over the years, independents are among the top three or four groups of properties we've financed.”

GE Commercial Finance, Franchise Finance deals strictly with franchised properties but also has other criteria it applies in making its loan decisions.

“We look very carefully at the history of the sponsor,” said Jeff McKee, senior vice president, hospitality. “We typically want the borrower to operate at least two hotels with a minimum of three years of history in the business.”

What properties are hard to finance? The mortgage brokers and investment bankers participating in the survey said they typically won't finance older budget or economy properties or small independents under $3 million in value.

Panelists at the Hotel Investment Conference in Atlanta agreed with the bullish sentiments of the survey group.

“I'm amazed at the amounts of capital available right now and the aggressiveness of the lenders,” Joe Epstein, president of First American Realty Associates, said at the conference. “Interest rates are only going one way — up — so don't miss this window of opportunity.”

Indeed interest rates continue to rise, albeit slowly. Economist Donald Ratajczak told the Atlanta conference the Federal Reserve Board will probably bump up its rate in quarter-percentage-point increments until it crests at four percent near the end of the year.

“There's no question interest rates for lodging properties will be higher this time next year,” said Joel Stephens, vice president of CS First Boston, Real Estate & Securitization Group. “Loan-to-value ratios will also continue to push higher, and the spread between 10-year Treasury yields and interest rates won't get much lower than they are now.”

External economic factors shouldn't have much of a profound effect on the hotel financing market, believes GE's McKee. “It's always been a street-corner business, and for the most part, it's independent of macro factors,” he said. “So even during the industry downturns, we've had well-performing loans.”


Lenders in the survey reported a wide range of loan terms, depending on the type of loan and project, the financing vehicle and the qualifications and track record of the borrowers.

“While the old saying in the hotel industry of ‘location, location, location’ still holds,” said Lowery of GMAC Commercial Mortgage Corp. at the Atlanta conference, “what's even more important is ‘people, people, people.’ We look for the right people with the right assets in the right markets.”

Survey participants said they typically offer loans for terms from three to 15 years, with banks and SBA loan providers extending terms as long as 25 years. Amortization periods range from 20 to 30 years.

Debt coverage ratios extend from 1.0 to 1.5, with investment banks and MBSC companies on the low end and SBA providers, life insurance companies and mortgage brokers approaching ratios of 1.5.

The lenders agreed on a number of loan terms. A majority of respondents

  • use trailing 12-month operating results and previous year P&Ls to compute debt ratios;

  • calculate management fees at an average of four percent and reserves for replacement at between four and five percent;

  • include anticipated renovation expenditures, reasonable pro formas and future stabilized-year projections in their underwriting;

  • extend non-recourse financing for stabilized properties (mortgage brokers and investment bankers specify loan-to-value ratios of 65 percent or less, and SBA lenders won't extend non-recourse funding);

  • allow loans to be assumable, provided the new borrower has satisfactory operating experience;

  • allow pre-payment of loans, mostly with a prepayment charge or penalty;

  • require appraisal, phase 1 environmental and engineering reports.


If 2004 was a guide, this year and next will be banner years for hotel transactions. According to a recent study by Jones Lang LaSalle Hotels, the volume of transactions of $10 million-plus reached $12.9 billion in 2004, a 92.5-percent increase over '03 levels of $6.7 billion and four times the volume recorded in 2002. Last year's universe of transactions greater than $10 million represented 155 deals and 109,600 rooms at an average per-room sales price of $117,991.

About half of the transactions last year were portfolio deals. Two major ones were The Blackstone Group's acquisition of Extended Stay America and CNL's purchase of KSL Recreation.

The 10 largest single-asset lodging transactions averaged a per-unit price of $450,000, or four times the per-room average for all transactions in the study. The strength of the New York City residential market played a role in the top end. The two largest single-asset deals — the $675-million purchase of the 805-room Plaza Hotel and the reported $400-million sale of The Mayflower — were for properties that will be converted (at least in part in the case of The Plaza) to residential condominiums.

“It's a very vibrant acquisitions market,” said David Mumford, senior partner of The Mumford Co., at the Atlanta conference. “Prices are strong; buyer interest in tremendous; and the cost of capital is low. It all adds up to be a great time to be in the transactions market.”

Buyers, too, seek product in most markets and segments. As Andy Hinds, an appraiser with Hotel & Club Associates, Inc., said, “The top 25 markets are a target for many investors, especially the institutional investors, but that leaves a lot of opportunity in secondary and tertiary markets for the smaller fish.”

In the mid-market and economy segments, brokers report that nine- and 10-percent cap rates are typical for many transactions, but as Mumford noted, “Many of these deals are trading at lower cap rates, particularly for what I call aspirational buyers, those people who want to gain entry into certain brand families like Marriott and Hilton.”

Several properties on the market are even fetching sales prices above replacement costs. As one broker said at the Atlanta conference, brands in high demand include Hilton Garden Inn, Courtyard by Marriott, Residence Inn and “well-located Hampton Inns.”

Even though hotel sales are at near-record levels, new lodging construction remains sluggish. Smith Travel Research projects that U.S. room supply will grow by less than two percent this year and at a similar pace in 2006.

In addition to more-expensive labor, the cost of building materials (particularly steel and concrete) rose between 25 and 30 percent in 2004. Another five-percent increase in materials costs is expected this year, further dampening many developers appetite for new construction.

Yet some lenders seem eager to provide funds for new hotel construction. Tim Moore, managing director of Moody National Hospitality Group, a mortgage broker, believes that new development will begin to increase.

“While it's a great year for all lenders, construction financing requests will increase as the pendulum swings to new-construction projects,” he said. Moore's division entered the hotel market in July 2004 and expects to underwrite more than $200 million in loans this year.

GE's McKee is particularly bullish about new development. “Acquisition activity has been curtailed somewhat because cap rates have lowered to a point where it now makes sense to build rather than buy.”

Benchmarks, as of Feb. 23, 2005
Prime Rate 5.50
10-Year Treasuries 4.06
LIBOR Rate, 3-months 2.87

Capitalizing on the Good Times

Look at the titles of some of the panels scheduled for the upcoming New York University International Hospitality Industry Investment Conference and you'll be convinced that the hospitality industry is indeed in the midst of an upturn. One of the most obvious signs is a June 7 keynote address by Steve Wynn, chairman of the board and chief executive officer of Wynn Resorts, Las Vegas's most prominent development firm.

Set for Sunday through Tuesday, June 5-7 at the Waldorf=Astoria, the 27th annual edition of this show should again feature the optimistic buzz that characterized last year's conference. Conference Chairman Jonathan Tisch (also chairman and CEO of Loews Hotels) will spearhead a potpourri of general sessions, discussions and special events geared toward a profitable accommodation of hotels, financial institutions, developers and the technology that facilitates them. The conference begins June 5 with registration and a reception.

Business kicks into high gear on Monday. After a morning welcome from David F. Finney, dean of the NYU school of continuing and professional studies, the event officially begins with “The CEOs Check In.” Moderated by well-known futurist Lalia Rach, that panel will feature Laurence Geller, Steven Heyer, Christopher Nassetta, Curtis Nelson and Steven Rudnitsky. They head, respectively, Strategic Hotel Capital, Starwood, Host Marriott, Carlson Companies, and Cendant Corp. Rach is associate dean and HVS international chair at the Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management, School of Continuing & Professional Studies, NYU.

That morning, Ed Watkins, Lodging Hospitality's editor, will moderate “The Power of Partnerships,” a workshop on marketing featuring executives from Hilton, Best Western, Loews, Holiday Inn and the Waterford Group. Other workshops will cover design, the changing world of the luxury hotel, the latest legal trends and twists, creating the proper climate for effective financing and the explosive growth of Las Vegas.

Lodging Hospitality is a patron sponsor of the conference. At lunch on Monday, Gary Dietz, the magazine's publisher, will present the Stephen W. Brener Silver Plate Award to Charles A. Ledsinger, Jr., president and CEO of Choice Hotels International. At lunch on Tuesday, Kathleen Taylor, president-worldwide business operations, Four Seasons Hotels and Resorts, will receive the IREFAC C. Everett Johnson Award.

After the Silver Plate presentation, Soledad O'Brien, anchor-person for CNN's “American Morning,” will give a speech. Monday afternoon will feature panels on the economic outlook, the increasingly complex field of electronic distribution, the “full story” on full-service hotels, the outlook for limited-service, the growing profile of tourism marketing, how to negotiate private equity deals, and off-shore brand plans for U.S. hotel development.

Tuesday morning begins with an entertainment flavor when Terry Keenan, anchor and business correspondent for Fox News Channel, moderates a panel on relationship management featuring executives from Deutsche Bank Securities, UBS Warburg, Hilton and Marriott. Other morning panels will focus on the shifting nature of value, condo and “lifestyle” hotels, the fluid capital market, residence clubs and REITs.

Following Steve Wynn's luncheon keynote, the conference winds up with workshops on topics including mergers and acquisitions, right sizing the brand, labor issues and expansion of U.S. brands abroad.

Revenues from the conference are used to fund scholarships for students at NYU's Tisch Center.

Information on the conference and online registration are available at

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