Scientific Capital

Hotel CMBS Conduit Loan

Review of the non-recourse

CMBS Conduit hotel loan program

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

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 5 million

On exceptional projects, it may be possible to push to 75% but in general higher than 70% loan to value need to be achieved by adding a Mezzanine loan behind the CMBS loan. In the current market, most originators like to be in the 60% to 65% in tertiary markets and 65% to 70% in primary and secondary markets

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

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%

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

Standard amortization is 25 but 30 year is available for stronger markets and newer hotels
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
The closing statement may have any or all of the following items. Some lenders have lower costs and others may have higher fee structures. Scientific Capital seeks financing from lenders with the lowest costs and fees, however selection of a lender depends on the quality of the sponsor’s credit and experience and the cashflow, the locaion, and the brand of the hotel.
Lender Estimated Fees and Costs
CMBS Originator Fee 5,000 to 10,000
Service set up fee 0 to 350
Site visit and inspection 200 to 2500
Regulation AB II review 0 to 2,500
Search and Report Fee 300
Appraisal 5,000 to 12,000
Engineering and Environmental 3,500 to 5,200
Zoning 600 to 1,200
Insurance review 2,000 to 2,500
Lien and credit searches 1,200 to 4,000
Underwriting Fee 8,000 to 15,000
Originator Legal Fees 25,000 to 33,000
Appraisal Review 500
Environmental Review 400
Wells Fargo sweep account Setup 2,500
TOTAL Estimated Originator Related Costs 64K to 86K
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

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 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.
Since these loans are pooled and sold in the market, the underwriting, loan processing and servicing, and the loan documents themselves are market standard
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

There is a Lock-out period of 2 years followed by defeasance which is a very high prepayment penalty
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
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
Depending on the conditions of the hotel, a percentage of gross revenue of the hotel will be reserved in escrow account
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.
Since these loans are pooled and sold in the market, there are nearly no negotiation and flexibility on terms in the loan documents
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%
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
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
The management company, if any, and the management agreement have to be approved by the lender

Our Other Popular Hotel Loan Programs

SBA (7a)
SBA 504