Hotel Financing News
We are approaching the end of the first quarter of 2011, the year in which we expected the economy to turn around and the credit to become more available. Well, the economy is showing slight improvement and we now have one month of good news with official unemployment at 8.9%. The political arena however is on its perpetual course of decline dominated by dinosaurs in Washington DC and a political structure established in the late 1700s all of which are keeping this divided country at stalemate about its future while the emerging markets are excited to not only catch up with America but possibility to surpass it in this decade. As the workforce has adjusted itself to work harder and invest more its personal time to avoid layoffs and the corporations have learned to adjust the operations to achieve higher productivity from the reduced workforce, the corporate profits are surging and so is the stock market. Hopefully US corporations have by now maximized the productivity of their employees and are reaching a demand level where they see need to hire new employees, here in America of course. This could offset the public sector layoffs and the slow down caused by gas price hikes. We undoubtedly see reduced occupancy unless the President allows the reserve oils to be used to keep the gas prices reaching $5 or more.
On travel and tourism, there are very good news coming from the Office of Travel and Tourism Industries. US travel and tourism output increased at an annual rate of 8% in the third quarter of 201, the largest increase since 2004. Also international visitor volume increased by 9% in 2010 and is expected to continue to increase by 6% to 9% each year through 2015. The one factor that may slow down this rate of course in 2011 is the higher gas prices.
On commercial real estate and the dooms days everyone was expecting with loan maturities coming up, it appears that Americans will be saved and as evidence of that the transaction volume of commercial real estate nearly doubled in 2010 to 120 billion of which hotel and office industries had the largest share year-over-year indicating that our industry is the first seeing daylight if Quaddafi’s madness doesn’t interfere with it this year.
On the credit front, some lenders are feeling their portfolio has stabilized and are now thinking of testing the water by closing some commercial loans. However, the majority of the lenders are still shying away from hotels and it is doubtful that we will see a change for the remainder of this year. If any the Middle East uprising and the hike in the price of oil is giving the lenders jitters on financing hotels. The SBA 90% guarantee and the 3% fee waiver came to an end in December and except few loans the remaining 400 or so on the SBA queue didn’t get funding by March 4th deadline. The 90% guarantee was very helpful in enticing lenders to fund some hotel loans but apparently those funded were generally stable hotels with increased revenue in 2010 who should not have required public assistance through SBA guarantee as opposed to the majority with some level of risk exposure that were the legitimate candidates for the 90% guarantee but instead were left orphans. Now we have lenders with seemingly saturated portfolios on hotels, SBA program back at 75% guarantee, USDA funds back to pre-stimulus times, and the majority of hotel loan requests showing risk exposures, a combination that is not so favorable for hotel financing.
The following is a brief description of the current and expected status of hotel financing programs or the capital markets:
SBA fee waiver and 90% guarantee ended in December 2010
As of the end of the December the 90% guarantee and the 3% guarantee fee waiver came to an end with new loans underwritten with 75% guarantee. Not only many lenders have to now re-submit those loans at 75% now, but due to unexpected level of capital and reserve required, they are going to be more conservative on their hotel underwriting criteria. In general in today’s credit market, the 7a program is probably the most widely available financing vehicle for the SBA qualified hoteliers.
USDA loan budget returning to previous levels
The supplemental funding available through the Stimulus funds allowed USDA to fund over 3 billion of guaranteed loans by the end of 2010 fiscal year. The level of funding however is expected to return to 1.3 billion not to mention that only a portion of this fund is available now until FY 2011 budget is passed. With the waive of new USDA loan demands and the shortage of funds, new measures to boost the fund availability may be required and may include increasing the 2% guarantee fee to 3%. Meanwhile the approvals may be conditioned on the availability of funds which means the loans cannot close until the funds become available and the guarantee is issued by the USDA.
SBA 504 Refinance is now official and in effect
Finally after months of expectations, the SBA issued a policy notice with the detailed regulations on refinancing through 504 program. For now, the refinancing is reserved for those with the highest needs who are facing possible actions by the lenders due to the maturity before 12/31/2012. So any hotel owner who has a maturing loan by this date can qualify if:
Combined Loan (first and 2nd) does not exceed 90% of the appraised value
Payments are current for the past 12 months
Total loan amount of not more than 15,000,000
Maturity of the loan is not beyond 12/31/2012
The loan to be refinanced must be seasoned for minimum of 2 years
The loan to be refinanced is not a guaranteed loan (SBA 7a or USDA)
Additionally, with the Stimulus bill, a guaranteed pool program was set up providing guarantee for the first trust deed of 504 loans. A major disadvantage of the 504 loans is that the first loan is a commercial one and lenders who are euphoric with SBA or USDA premiums of up to 10 to 13 points in the secondary market are avoiding the 504 first trust deed financing as this program offers premium of probably 4%. A typical SBA lender offering a 1 million 7a loan will sell it in the secondary market for 90,000 or so while selling the same loan if under 504 program at about 35,000. It is evident then why it is hard to find 504 lenders.
There is good news on 504 loans as many foreign nationals who are trying to obtain US green card and need to invest in America are in fact lending on the first trust deed on 504 loans but this has to be an acquisition scenario where jobs are created. Additionally, some investment firms and hedge funds are at least trying to get to this market while the 504 first trust deed guarantee pool is in effect. In obtaining a 504 loan, these avenues have to be painfully discovered as well.
Life Companies are still on the sidelines or are very cautious
A survey of life companies indicated that most of them are still on the sidelines when it comes to hotel financing. Those that are showing lukewarm interest are looking for top brands in primary or select secondary markets, mostly full and some limited service with steady cash flow allegedly at 50 to 65% loan to value, debt coverage ratio of 1.3 to 1.5, and debt yield of 11 to 14, a new parameter that pulls down the loan to value on these loans. Surely there are hotels in US that meet these criteria!
CMBS Conduit Loans are having a come back this year
The volume of these loans are expected to quadruple year over year in 2011. Unfortunately hotel are still going to suffer and the requirements are similar to those of the Life Companies including mostly major brands, major metropolitan Service Areas possibly some secondary markets, stable hotels with historical cash flows and low loan to values with debt yield of 11 to 14 depending whether full service or limited service. By the summer of this year however, it may be more practical to obtain a CMBS loan than a life company one and so for those borrowers with hotels that meet the criteria, it worth looking into this program in 2011.
Conventional Bank Loans still absent, a reflection of the American economy and credit market
Hardly one can find commercial non-guaranteed bank loans in this credit market. Lenders are being guided by the regulators to keep a balanced portfolio and to keep the volume of loans on special use properties at minimum. Furthermore the regulators have re-graded the loans on the banks’ portfolios. This means many loans that were graded in the past as safe may now be graded as risky, even if they are fully performing. With the loan grade sliding towards high risk, the banks’ reserve and capital requirement increases as well. This easily translates into lowered credit volume availability by the banks, a contradiction of what we all hear from the media who claim the government is pushing lenders to loosen the credit criteria. It is doubtful that the conventional hotel financing, other than with local relationships and under certain circumstances to become widely available in 2011 and probably in 2012.
Construction financing still anemic
Hotel construction financing is still scarce and will remain so in 2011. Many hotels are still suffering from lower RevPar and lenders are not taking risk by helping supply new rooms in this economy while many existing hotels have dropped below 50% occupancy. Other than very few and sporadic financings offered by local banks with low Loan to Values and strong client relationships, The only possible source seems to be hedge funds but for larger projects of over 25 million again in Major Servicing Areas, very strong sponsorships, and major brands. Although construction credit squeeze is an issue for our industry, it is a far more serious problem for America where the infrastructure is old and tired and already ranked in 20s in the world. There is a chasm in unemployment rate from its current position of 8.9 to standard 4 or 5% and that is the construction jobs. Unless credit market loosens up, the unemployment will probably remain fairly high.
Hedge Funds capturing more market share but still insignificant
These funds are focused on primary markets, major brands, and larger projects with very few focusing on projects under 25MM and probably more interested in the 50+ million range. The advantage of these funds is that they accommodate strong sponsors who are acquiring turn around projects, a distinguishing factor between these funds and life and CMBS funds, hence unstable properties if acquired with strong business plan and financial backing can obtain financing of up to 65%. In fact construction financing is also possible up to 55% to 65% but even at more selective criteria.
Private Funds continue to be expensive and unreliable
These funds have traditionally been very expensive and that is if it is not a scam to rip off borrowers from something called an “application fee” which is generally a large deposit of up to $25,000. In this economy a hotel loan with interest rates in teens and and upfront points of up to five points cannot be digested by any hotel operation.
Foreign Banks are still avoiding American markets
Many of US larger hotel projects used to be financed by foreign banks who were trying to have fingers in the American pie as well. Soon after the 2008 market collapse they left the party with a hangover and have not returned yet. It is possible that with the new financial regulations, specially the new Basel III implementation due December of 2012, many foreign lenders are studying the new strategies for doing business in foreign countries including the US. Another category of lenders who financed nearly all low to mid-level limited service hotels in the past decade were Asian banks established here in US as American banks. They are still busy clearing their portfolio, still having special assets to deal with, and still having upcoming foreclosures. Although they are open to look at new hotel projects, but are only financing hotels through 7a program if it is an attractive project. In essence, they are no longer a key player in our industry and it does not appear that they will be re-entering the hotel market this year.
NMTC, a great program, but impractical terms
Although this is a valid option to reduce the leverage and Loan to Value, the specific requirements of this program from the leverage lender makes this program unattractive. In particular, two requirements including the lender loan to be stand still for 7 years and the lender not having direct lien on the hotel makes this program very unattractive to the lenders. Only few lenders in US do understand and have accommodated for this program but have no or extremely low appetite for hospitality projects. NMTC contradicts SBA and USDA loan terms and requirements and hence cannot be combined with those programs. Additionally, NMTC may not be considered as equity and the borrower has to offer tangible equity aside from NMTC.
for further questions and discussions, please reach Ramin Mostaan at (949) 477 5000 or email@example.com