Clifton Blake: Is hotel financing available?

By Salim Gulamani

The question we get asked the most from borrowers, lenders and even non-hotel people is simply, “Is Hotel Financing Available Right Now?”

The simple answer is MAYBE; however, the landscape has changed, and it sure does not look the same as it did even 6 months ago. Just remember, we were enjoying one of the best times in terms of lender liquidity, low rates, reduced guarantees, interest only periods, 70% Loan-to-Cost (LTC) etc.

So where do we begin…when it comes to the type of financing hotel owners are seeking, we will break it down into new construction and refinancing.

New Construction

Hotel development is challenging to finance currently since most lenders want to see a recovery in the hotel sector before putting out any additional funds. For those who have begun construction without financing in place (yes this does happen), or have missed their first draw date, this will be a more challenging endeavor. Overall, if the financing is not legally binding (i.e. an executed commitment letter), then the lender has the option to review whether they will finance the project, and in fact can walk away or revise the terms of the deal.

What if I require refinancing right now for my hotel?

The first question that is asked with all refinancing inquiries is whether the existing lender has any interest. If the answer is no, is it because the hotel was not performing well prior to Covid-19, or is the lender simply reducing their overall exposure in the hospitality sector?
If the latter, then some lenders may look at the deal, but you should expect reduced leverage/loan amounts (including putting money to reduce the loan amount), higher interest rate spreads, and more scrutiny on the guarantees.

If the latter, then some lenders may look at the deal, but you should expect reduced leverage/loan amounts (including putting money to reduce the loan amount), higher interest rate spreads, and more scrutiny on the guarantees.

1. Leverage – this has certainly been reduced from the peaks of 70-75% LTV we were seeing, to 50-55% LTV derived from reduced net operating income (NOI) and increased cap rates. Cap rates have been impacted with higher interest rates due to the risk associated with hotels along with a higher equity return threshold for investors. We are seeing borrowers request that the lender look at the “When Stabilized” prospective market value, which is a solution for the long term, but for now the “As Is” current value is what the lender will base the loan amount/LTV on. Lenders are always happy to look at increasing the loan amounts in the future if the hotel outperforms its projections and the value increases.

2. Interest Rates – when we see the news and read reports that pricing indexes and key government rates have come down, we need to consider that the risk premium for real estate has increased. This is even greater when it comes to the hotel sector, with spreads increasing anywhere from 100 to 300 basis points. Many lenders are including a rate floor or a minimum overall rate to ensure their returns in this asset class.

3. Demand Loans – this is something that many borrowers are familiar with (contributed to reduced interest rates) but do not necessarily understand for several reasons including the notion of “this will never happen to me.” A demand loan simply allows the lender the right to request partial or full repayment at any given time. This would be outlined in the loan agreement and should be reviewed by each borrower to ensure they are aware of this. The key message here is that lenders do not require any reason/rationale to demand repayment, even if the hotel is in good standing.

4. Guarantees – one of the major differences borrowers will see going forward are the guarantee(s) required and the scrutiny and detail of this information. Lenders will want to get comfortable with the guarantee(s) being offered and focus on two key areas. The first is the overall net asset value and LTV of the portfolio as well as whether the assets are part of a more diverse real estate portfolio, which is certainly advantageous. The second key area is the amount of liquidity the guarantor(s) have and how much cash flow is generated to support any payment shortfalls.

Overall, a handful of lenders will look at financing a hotel, but there will be more due diligence required including the above points, and a detailed business plan. This plan should include projections, demand generators going forward, and how expenses will be managed.

Borrowers may need to consider private financing as an interim solution until conventional financing returns. Although face rates may be higher, it is an alternative strategy to provide liquidity in a tight market and should be considered on a short-term basis only.

For any hotel financing, please give us a call and we would be happy to assist you in arranging your mortgage strategy.