By paying attention to the historical financial news, one may draw the following general expectations for 2014:

• The trend of the economic recovery is remaining steady the GDP of over 2% instead of 1.7% in 2013 but probably remaining under 2.5% with the unemployment rate inching down but not below 6.5%. This recovery has shown a steady expansion for the past five years giving confidence to us in the hotel industry that the revenues and the valuations will continue to grow.

• The consumer spending will show positive growth but increasingly skewed towards online shopping with drops in the in-store purchases leading to some job losses by the national chain retailers.

• Residential construction will continue to grow to meet the increasing demand

• The housing prices will probably face a modest modification dropping from the 11% last year to under 5% this year caused by two major factors: declining affordability due to high prices and new mortgage rules in effect since the beginning of this year.

• With gradual decline in the commercial vacancy rates, the commercial investment will experience an uptick compared to 2013

• The Fed will slightly modify the Quantitative Easing (QE) strategy leaving the mortgage rates rising but still attractive. We in the hotel industry will continue to enjoy another year of low rates with PRIME index remaining the same or increasing at most by 1/4 of percent by the year end.

• The implementation of the Affordable Care Act (ACA) will have little impact on the job market as many healthcare providers are scrambling to consolidate in advance of the ACA implementation but within the next few years, there will be a significant increase in the healthcare jobs.

• The stock market may finally see a plateau in the continued upward trend but probably in the 2nd half of the year.

• The government spending will continue to decrease (which means the deficit will decrease as well) but the drop in the spending will not help the job market and the economy.

More specifically on the hotel financing, we will continue to see revenues increase year over year. Discounting factors such as regional economy, brand, management, and other specific factors such as hotels in the stabilization phase, taking a simple non-scientific approach on a sample of our clients’ hotels nationwide show an 8.8% increase in gross revenue year over year for the 2013. The credit availability is not seeming to improve significantly in 2014. The following is a brief on the expected status of each hotel loan program:

CMBS Conduit (non-recourse)

The underwriting criteria is remaining the same with LTV of 65% to 70% and Debt Yield of 10.5 to 12. This means the Mezzanineloans with the rates in the teens with multiple points can make projects with LTVs of over 70% under this program fairly unattractive. The CMBS originators are however eager for new loans and are showing appetitie for hotels. With average spread of 2.5 to 2.75% over SWAP rate, as of the date of the writing of this review, the average 10 year fixed rates are at about 5.5%.   Read more on these loans…

Life Company

Similar to CMBS loans, the underwriting criteria and the terms of these loans have not changed dramatically and are fairly similar to the CMBS loans. Lower prepay and better customer service are the selling points but as opposed to the CMBS loans, these loans require personal guarantee of the sponsors.

Conventional
There is visible appetite by the commercial regional/local banks in hotel loans. The focus is still is on the lower Loan to Value (LTV) transactions of 65% to 70%. With the secondary market still unavailable for the non-SBA hotel loans, there is less interest in larger than five million hotel loans. The national non-depository lenders are still not a player in our industry. The rates for the conventional hotel loans vary from 5% to 6+% depending on the lender, the market, and the lender’s cost of funds.

SBA 7a

Continues to be the program to use for the loans of up to 5 million for higher LTV and for more challenging hotel loans. Some national lenders are saturated on the hotel assets but fortunately new players are coming to the market. Downside is that the increase in the SBA limit to 5 million has resulted in a significant upswing in the volume of these loans, hence the fraud and the abuse and naturally the mushrooming of the regulations making the SBA loans challenging for hotel investors with multiple partners and complex ownership structures who are taking advantage of the availability of these hotel loans. The hotel rates are generally averaging about 5.5%.

SBA 504

Probably the most cumbersome financing program to handle with fewer lending sources for the bank portion of the loan yet still more available to arrange than the conventional program. In fact the lenders prefer to use this program for hotels as it keeps the lender at 50% LTV in the first position. The rates of the 2nd loan by the SBA is issued by the SBA on monthly basis and is set across the nation and is fixed for 20 years with a 20 year amortization. The first loan however has rates that are varying depending on the lender and the market and range from 5% to over 7%. The refinance program has not been approved by the Congress yet and so the 504 can only be applied to the acquisitons.

Construction

More availability of hotel constructions in most markets. The sources may be national lenders if government loans such as the SBA or the USDA are used but most likely regional or local lenders for the conventional program. The key is the experience, the global cash flow, and the liquidity of the sponsors.

USDA

As usual under funded and tough to obtain with regional USDA offices of some states offering lower LTV of 70% for hotels. Generally the state level funds run out very quickly and dealing with the national level funds has so many job creation requirements that make it unattractive for hotels that have limited employment capacity.

for further questions and discussions, please reach Ramin Mostaan at (949) 477 5000 orramin@scicap.com