Review of the non-recourse
CMBS Conduit hotel loan program
Rate: 2.75% to 3.5% over 10 Yr SWAP index or the 10 Yr Treasury
The spread is determined based on factors such as the quality of the hotel, the sponsorship, loan amount, and the market. The 5 or 7 year loans are based on corresponding SWAP or Treasury indexes
Minimum Loan: 2 million
With the cost and the limitations of this loan type, it is very much recommended that loans smaller than 5 million not be considered for CMBS loans unles the hotelier is keen on the non-recourse feature in which case, Scientific Capital is able to place loans as small as 2 million
Loan to Value: Up to 70% for hotels
On exceptional project, it may be possible to push to 75%. Any higher loan to value need to be achieved by stacking a Mezzanine loan behind the CMBS loan. In the current market, most originators like to be in the 65% to 70%
Debt Yield: 12%+
The Debt Yield is probably the most examined parameter by the CMBS loan originators
Example of calculating Loan amount for a specific Debt Yield:
If the Net Operating Income (Before depreciation, interest, and amortization) is $800,000 and the Gross Revenue is $2,700,000, then the maximum loan at the Debt Yield of 10.5, FF&E reserves of 4%, and Management of 3% is calculated as follows:
Net NOI = NOI – FF&E reserves – Management reserves
Net NOI = $800,000 – Gross Revenue x 4% – Gross Revenue x 3%
Net NOI = $800,000 – $108,000 – $81,000 = $611,000
Maximum loan amount allowed by this Debt Yield = NOI/DY = $611,000/10.5% = $5,819,047
Debt Service Coverage Ratio (DSCR): 1.35
Reserves: 4% minimum for FF&E
The FF&E reserve is determined for each hotel depending on the hotel’s characteristics, age. Generally, the minimum reserve for the FF&E is 4%
Initial Deposit: $35K to $50K
Each originator collects a different amount of initial deposit and any unused portion is returned to the borrower in case the loan is declined or the borrower cancels the application. It is expected that at the minimum, the application fee in the range of $5K to $10K would be non-refundable.Originators do immediately involve their attorney in processing the loan, order third party reports, and perform site visits which does exhaust the good faith deposit
Amortization: 25 to 30 years
Standard amortization is 25 but 30 year is available for stronger markets and newer hotels
Prepayment: Defeasance for 10 years
The prepayment penalty in these loans are significant and variable depending on the note rate and the SWAP or Treasury index at the time the prepayment is being calculated. If at the time of prepayment, the market rate is higher, then the prepayment penalty is lower, if the rates drop below the note rate, the prepayment penalty is much higher
Costs: $67K to $80K on the average
The closing statement may have any or all of the following items:
| Lender Estimated Fees and Costs | ||
| CMBS Originator Fee | $7,000 to $10,000 | |
| Service set up fee | $350 | |
| Site visit and inspection | $2,500 | |
| Issure regulation AB II review | $2,500 | |
| Search and Report Fee | $300 | |
| Appraisal | $8,000 to $12,000 | |
| Engineering and Environmental | $3,000 to $4,500 | |
| Zoning | $600 | |
| Insurance review | $2,500 | |
| Lien searches, Lexis | $4,000 | |
| Underwriting Fee | $15,000 | |
| Originator Legal Fees | $28,000 to $33,000 | |
| Appraisal Review | $800 | |
| Environmental Review | $400 | |
| Wells Fargo Lockbox Setup | $2,500 to $5,000 | |
| TOTAL Estimated Originator Related Costs | $67,600 to $80,600 | |
| Other Expected Costs | ||
| Borrower’s Council | $5,000 to $20,000 | |
| Escrow and Title | Depends on the transaction, size of the loan, the market, etc. | |
| Escrow accounts | The Originator will escrow the taxes for the months remaining to the property tax due date. It also escrows certain number of months for the insurance premium. PIP is escrowed at 125% of the total estimated cost | |
Benefits of CMBS Non-Recourse Loans for Hotels
Rate and fixed term
Rates are generally lower but most importantly, these loans are fixed for 10 years, although 5, and 7 year terms are available as well
Non-recourse
Non-recourse means that no personal guarantee is required from the sponsors. However, the borrowers are responsible for what is called standard Carve-Out provision which means that the bad acts of the borrower such as fraud, non-permitted transfers, waste, etc. results in recourse liability to the borrowers, possibly to the extend of the losses.
Procedures and loan documents
Since these loans are pooled and sold in the market, the underwriting, loan processing and servicing, and the loan documents themselves are market standard
Assumption and transfer of ownership
These loans are assumable and the borrowers can have the buyer of their hotel assume these loans to avoid a the hefty prepayment penalty
Drawbacks of CMBS Non-Recourse Loans for Hotels
Prepayment penalty
There is a Lock-out period of 2 years followed by defeasance which is a very high prepayment penalty
Originator fees
Due to the nature and the structure of these loans, there are added costs that are not required by any other conventional loan program, although at the same time, there is no point charged by the originators either
Upfront escrows
Insurance and taxes are reserved (at 1/12 of the annual amount on monthly basis). Replacement reserves are determined by the lender according to the engineering report. All pending PIPs will be escrowed in the reserve account as well
FF&E reserves
Depending on the conditions of the hotel, a percentage of gross revenue of the hotel will be reserved in escrow account
Cash management account or lockbox
A sweep (lockbox) bank account is established by the originator (generally through Wells Fargo) just before the closing. There are two types of sweep accounts, a springing lockbox (soft lockbox) and a hard lockbox account. In springing lockbox option which is the preferred type of cash management account, the lender establishes the lockbox but the lockbox is not active until a an event takes place triggering the activation of the lockbox. An example of such event is past due on payments, taxes, or insurance escrow payments, drop of debt coverage ratio, etc. where upon occurance of such events, the lockbox get activated and all revenues of the hotel has to be deposited onto the lockbox, payments and reserves be deducted by Wells Fargo, and the remaining amount be deposited (swept) onto the operating account of the hotel. In case of a hard lockbox, the lockbox is active from day one and all revenue has to flow through the lockbox.
Flexibility
Since these loans are pooled and sold in the market, there are nearly no negotiation and flexibility on terms in the loan documents
Subordinate financing
No secondary secured financing (ie. lien behind the CMBS loan) is allowed without the consent of the CMBS lender. Mezzanine loans are allowed if the term of the Mezzanine loan is not shorter than the term of the CMBS loan. Generally with the Mezzanine loans, depending on the market and the hotel, the Loan to Value can be pushed higher to 80%
Covenants
Throughout the term of the loan, the principals will be subject to net worth, liquidity, and financial reporting. Hotel’s DCR cannot drop below what is imposed by the originator
Customer service
As these loans are pooled and sold in the market, the servicing of the pool of these loans are given to servicing companies and as such, there are no relationship based customer service
Management company
The management company, if any, and the management agreement have to be approved by the lender
