Banks Challenge Wall Street As Funding Source

NATIONAL REPORT? Wall Street conduit financing is (a) too restrictive for the hotel industry, or (b) eminently conducive to meeting hotel industry financing needs. Both trains of thought may be on the right track? depending on who arranges the capital outlay as well as who needs the funding. Remarks by Hotel Finance Specialists suggest that the Washington, D.C.-based, self-professed ?bank alternative to Wall Street? believes ?local and regional banks have once again established their pre-eminence with respect to hotel financing.? Reasons behind the firm?s rationalization include perceptions that: ? Wall Street has [to a great extent]abandoned large, securitized individual asset loans as well as development loans; ? There is a lingering mistrust of Wall Street due to last year?s pull-back; ? Banks, in some cases, understand local markets and have developed new products to better compete with Wall Street; and ? Banks offer the highest dollar [amounts]in many markets. John Costanzo, an underwriter with Hotel Finance Specialists, took these observations a step further. ?The main reasons banks are supplanting Wall Street as the preferred source of hotel financing [in smaller capitalizations]are because they don?t exact pre-payment penalties, they permit second mortgages, and they routinely offer shorter turnaround times on lending decisions,? he said. Largely agreeing with Costanzo?s point of view? but admitting it?s probably still very much a minority opinion? is Burt Eaton, partner with Hempstead, NY-based Hospitality Funding Group. ?We bring no loans to Wall Street,? he said. ?Wall Street just doesn?t understand the hotel industry. It only understands cash-flow, and not the position and other benefits hotels enjoy.? Surveying the lending scene from his vantage point as a loan broker working for hotel properties across the country, Eaton similarly draws other conclusions about the way banks function vis-a-vis Wall Street. ?Conduits demand a tremendous amount of front-end fees, levels well above those that portfolio sources require,? he noted. ?Additionally, Wall Street loans can often prove too slow to originate because due-diligence and decision-making usually takes so long.? Other advantages he ascribes to banks include flexibility in that, ?with loans from conventional lenders, hotels that either outperform or underperform their expectations can renegotiate sometime down the road? an alternative virtually impossible when dealing with Wall Street.? Eaton also noted that ?today?s banks are loaded with cash. Even after loans close, [the banks]end up selling them to portfolio insurance companies.? Not surprisingly, this too ties in with some of Costanzo?s remarks. ?There is a general cap to the amount of money a bank will offer via a non-securitized [i.e. portfolio] loan. Accordingly, most of the mega-sized financial transactions get securitized and are ultimately brought to Wall Street,? Costanzo admitted. Disagreeing with the notion that Wall Street is losing ground in the hotel-financing arena is Steve Gold, president of Beverly Hills, CA-based Center Financial. ?While the industry may not be seeing Wall Street capital sources vigorously beating the bushes for business, there?s no question there is still considerable opportunity for funding via this venue,? Gold said. ?What we?re seeing at this time,? he continued, ?is less equity for hotel financing, as well as fewer exotic alternatives. However, conventional financing channels are still holding strong. To be sure, there seems to be an upsurge in mezzanine and bridge financing; certainly more so than that of a year ago. And, in these instances, the line-up of lenders includes Wall Street as well as many bigger banks and other financial institutions.? Notably, the West Coast mortgage specialist contends he is able to objectively discuss the current financing climate primarily because of his organization?s correspondences with a number of investment banks. As such, it?s