Financing of a Hotel with CMBS non-Recourse
Conduit Loan in Texas
Scientific Capital arranges this 8.4 million CMBS non-recourse conduit hotel loan for the 13 million acquisition of the Holiday Inn of Webster. With the saturated CMBS market on hotel loans and the tepid appetite for new originations and the oil industry related slow down of the economy of Texas, placing a CMBS loan for this acquisition was a risky proposition. The difficulty in arranging CMBS loans specially for hotels is mostly due to the fact that the underwriting and the approval takes place after the third party reports are completed and reviewed generally five weeks into the process. Additionally, the firm that securitizes the loan for the originator has to complete its due diligence as well deciding whether it approves the securitization of the loan. By then the legal councils of both the lender and the borrower will have spent hours on negotiations, review of the loan documents, and other legal matters. Hence, there is an element of uncertainty and high cost of nearly 50 thousand dollars or more before the full approval is obtained. This is where Scientific Capital excels, in carefully analyzing the hotel, identifying the challenging factors of the transaction, determining the risk in pursuing a CMBS loan, examining the capability, the track record, and the appetite of the CMBS lenders that are candidates for the subject transaction, and deciding whether the risk in obtaining an approval for a CMBS loan for a subject transaction is reasonable or other loan options have to be considered.
The following are some of the risk factors considered for the Webster project:
- CMBS originators took too many hotel loans in the past few years, some securitized at some of the losses and some were unable to sell some the loans and had to keep them on the books for extended period of time, hence there is tepid appetite for new hotel CMBS loans due to the risk associated with the securitization
- Houston economy has been showing slow down year over year specially because a lot of companies in the Bay area/Webster are either oil companies or suppliers and vendors to the oil companies
- Hotel occupancy rates in many markets are down in Texas in 2016 due to slowing of the oil industry activities
- With the 1031 exchange deadline looming, time was of essence leaving no time for back up plans
- With rising CMBS interest rates for hotels and the cash flow requirements of the borrower, a 30 year amortization was necessary
After careful analysis, Scientific Capital determined the level of risk reasonable to proceed with a CMBS loan and successfully closed the loan in 59 days from the day the application was submitted to the originator meeting the 1031 exchange timeframe and the purchase contract deadlines.