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Hotel Financing News

January 2015

Economic Expectations for 2015

 

By just reviewing the financials of our clients sampled from various states in the United States, it is evident that the majority of our clients had higher revenue either due to higher ADR, higher occupancy, or both. Today all fundamentals for hotels seem to be in place for continued growth in our industry including the following factors:

  • Job market:
    Remaining very strong and although Americans are not seeing tangible wage growth but are securely employed and feel confident that the job market is going to remain strong for the next few years. Starting this year, minimum wage increased in a number of states giving more spending power to their people. Arizona, Arkansas, Massachusetts, and Rhodie Island seem to have the highest increase.Twenty states are having increases starting first of this year.
  • Stock market: Still going strong in spite of couple of months of volatility due to the drop of the international oil prices giving rise in confidence and consequently consumer spending and travel. It does make sense for folks seeing their IRA/401K or simply stock market account balances rise to enjoy traveling and for businesses with higher worth and capital to expand business and business travel
  • GDP: Increased at an annual rate of 5 percent in the third quarter of 2014, up from 4.6% in the third quarter. Think of it as more exports than imports which means more production than consumption and translating to more income and more consumer spending and travel.

Factors that are positive but with some ramifications are:

  • Gas prices: The drop in the gas prices is probably one of the most significant factors for the boost in travel across the nation. Not sure how long it will last and at what price it will eventually settle at, but for as long as it does last, the resulting rise in travel is cherished by the hospitality industry. The down side is the loss of employment specially the temporary workers who stay at hotels with over 75% and even at 100% occupancy throughout the year. We hope that the oil companies can make adjustments and keep the operations while the international oil prices are remaining very low and under $50.
  • New constructions:
    Although some markets are showing serious pent-up demand for new room supply, many markets are not starving and the hoteliers are just enjoying increased revenue and profitability after few years of slow down. New development in these markets will mean drop of occupancy for the existing hotels and an ADR war with the newly developed ones.
  • New Lifestyle brands:
    The Millennial are gradually entering the workforce and are starting to travel both for business and leisure. The franchisors are now on overdrive establishing brands that appeals to the Millennial’s’ lifestyle. The existing brands with large reception area painted gray and rooms with an internet/network cable hanging from the desk maybe suitable for some of us the baby boomers but not for Millennial who are expecting lobbies with warm colors and ambiance for social gathering and hotels with advanced technology features. The focus on Lifestyle brands may take the attention off the existing brands with the franchise incentive and marketings weighed more towards the new brands. As if the hoteliers have not had enough to deal with since 2009, now they have to avoid getting behind the game and try to upgrade technologically for maintaining a share of the Millennial’s’ business in the future.

 

Expected Status of Major Hotel Loan Programs

 

CMBS Conduit (non-recourse)

In October of 2013 I sent an email notifying everyone that the CMBS loans were very attractive due to the drop of the 10 year SWAP index with the overall rate on a 10 year CMBS loan at 5.15% or so. This year, the 10 year SWAP index has dropped even further to under 2% (1.94% as of the today) with the 10 year term rate on a CMBS loan at 4% plus, an amazing rate if the hotel qualifies for these loans. This is the beginning of the year and the originators have strong appetite to process these loans. It appears that this may be one of the best periods since 2009 to obtain a hotel CMBS loan.  Read more on these loans…

 

Conventional
Although the secondary market for the hotel conventional loans have not opened yet, the many restrictions of the Frank Dodd rule is causing the community and commercial banks to see a rise in their available capital. This means that in spite of closed secondary markets for hotels, the lenders are having available capital to hold conventional loans on their portfolio. The LTV has gone up drastically and I have in fact seen couple of instances in which the lender has gone to 80% Loan to Value on conventional basis. In most markets however, we see LTVs of 65% to 70%.

 

The key with these loans is that although the lenders are community and commercial banks, the lender may not be necessarily in the region that the hotel is located in. Many lenders geographically handle the entire state or few states and that is one of the value adds by the Scientific Capital bringing outside lenders in for a transaction. The rates for these loans are ranging from low to mid 4s to mid 5s. for hotels with 20 or 25 year amortization.

 

SBA 7a
Continues to be the most popular program for the economy/mid-tiers and the loans of up to 5 million. The margin over the PRIME (still at 3.25% since 2008) has dropped from the previous years as credit availability has gone up and the spreads now range from 1.5% to 2.25% with outliers on each end of the spectrum. These loans are 25 year loans but the rates are adjustable, although Scientific Capital has placed few rare fixed rate 7as in the past year.

 

SBA 504

With SBA competing with the IRS in generating new rules and regulations, this program continues to grow in complexity and processing time. In general, this program should be used if the loan is higher than 5 million (so 7a cannot be used) or if the the borrower has used up the 5 million allocation and has to use Green 504 to obtain a new SBA loan (With Green program, unlimited number of 504 loans can be obtained). Otherwise the cost, the processing time, and the limitations imposed by this program make it unattractive for financing a hotel.

 

Construction
We continue to see more construction loans even in tertiary markets. The SBA 504 has been used in many of these construction loans allowing LTVs of up to 80%. The underwriting for these loans relies heavily on strong sponsorship with global positive cash flow, liquidity, and experience with existing other hotel operations preferably in the same market. There must be strong demand for new room supply in that market based on the feasibility study done by the borrower.

 

USDA
These loans are still the least favored options. Many lenders do not offer them and cannot sell them profitably in the secondary market. Additionally, the in the USDA loans has paralyzed the program and the secondary market is allegedly not interested in these loans.

 

Life Company

The underwriting criteria for these loans are similar to CMBS loans with the difference of strong reliance on the sponsorship as well since these loans are requiring full guarantee of the hotelier.

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

 

 

 


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