Scientific Capital generally recommends conventional financing whenever it is available and the project meets the lender’s qualifications. However, regional banks do not always provide attractive terms, requiring us to evaluate alternative financing programs.

CMBS financing can also present challenges for many hotels. CMBS lenders typically deduct 3% of revenue for management expenses in their cash flow calculations, although they do not escrow this amount, and require a 4% FF&E reserve, which is generally escrowed. As a result, the combined 7% deduction can significantly reduce the cash flow available for debt service, causing many hotels to fall short of CMBS underwriting requirements.

In this case, however, the hotel met the minimum CMBS underwriting requirements, achieving a Debt Service Coverage Ratio (DSCR) of 1.6x and a Debt Yield (DY) of 14%. However, the covenant DSCR that the lender requires as it monitors the cashflow during the term of the loan is at 1.3.