NATIONAL REPORT—Ask Nicholas White, a senior credit analyst at Indianapolis-based Hotel Capital, LLC, to briefly describe the industry’s current financing situation and he points to a mixed bag. “We see the current lending environment as improving overall. It’s improving at all price points and in all regions of the country. And when it comes to branded versus unbranded assets, lenders prefer branded,” White responded.
“Yet the industry is still struggling with flushing out non-performing notes and distressed deals, a situation that is likely to last for the next 12-18 months,” he said.
“A correction is occurring in our industry,” he added.
In part because new construction financing is still hard to come by, especially for major projects in the U.S., relatively few of these large-scale undertakings are going forward. One exception is Extell Development’s One57 mixed-use development currently under construction in New York City.
At 90 stories, One57 is being billed as the largest mixed-use, hotel/residential tower in North America when it is completed in the summer of 2013. A 210-room luxury Park Hyatt Hotel will occupy the lower portion of the tower, located on West 57th St. across from Carnegie Hall, with 95 high-end condominium apartments at the top of the tower.
Gary Barnett, president of Extell, has described the project’s architectural and design team as “the most talented in the world.” Putting together the financing seems to have taken equal talent. According to The Commercial Observer, CIT Real Estate Finance in March closed on the last $50 million piece of a $700-million syndicated construction loan on which Bank of America served as administrative agent.
But the $700 million only covers half the cost of developing the record-setting project. Other participants in the syndicate include Banco Santander, SA; the Abu Dhabi International Bank; Capital One; and the Bank of Nova Scotia.
For less ambitious deals involving industry tiers lower down the food chain, financing has become comparatively easier. The Sonnenblick-Eichner Co., for example, this month completed arranging $29 million of first-mortgage financing for four existing limited-service hotels—with a total of 292 rooms—located in Los Angeles, San Diego, Half Moon Bay and San Luis Obispo, CA.
The financings were 10-year fixed rate loans, priced in the mid-5% range with 30-year amortization. Two of the hotels are branded (one a Holiday Inn Express, the other a Best Western Plus), while the remaining two are unbranded. All four have positive cash flow.
Elliot Eichner, a principal in Beverly Hills-based Sonnenblick-Eichner, noted that there’s sufficient liquidity in the capital markets for these kinds of assets. “We were able to create a competitive environment among lenders that resulted in such favorable financing terms for the owners,” he said.
Added Patrick Brown, another Sonnenblick-Eichner principal: “The capital markets continue to improve for hospitality product, and pricing continues to tighten.”
A new source of funding that has recently gained significant traction is the EB-5 Program. The program, also known as the Immigrant Investor Program, works in conjunction with the U.S. Citizenship & Immigration Services division of the Department of Homeland Security to provide green cards for foreign nationals who invest a minimum of $500,000 in job-creating projects in targeted employment areas. The acronym EB stands for “Employment Based.”
“Under the EB-5 Program, each investment in a hotel development must encourage economic growth and result in the creation of 10 new full-time jobs,” explained Henry Liebman, president & CEO of Seattle-based American Life, Inc., which has been a strong proponent of EB-5 as a funding vehicle.
Most recently, American Life, Inc., and its Los Angeles-based joint venture partner, Williams & Dame, in late-March held a launch event for their latest hotel development funded entirely with EB-5 Program equity.
That project, a dual-brand Courtyard by Marriott and Residence Inn by Marriott, is estimated to cost $168 million, create more than 1,000 jobs, and generate millions of dollars in revenue to the City of Los Angeles. The location is downtown across from LA Live, where Marriott International already manages a dual-brand JW Marriott and Ritz-Carlton, along with a Ritz-Carlton Residence.
The 174-room Courtyard and the 218-suite Residence Inn will be housed in the 23-story building. The project also includes almost 12,000-sq.-ft. of meeting space and 5,100-sq.-ft. of ground-floor restaurant and retail space. Local tourist officials look forward to the roughly 400 new guestrooms coming on line in mid-2014. According to local officials, however, the average city has 7,300 hotel rooms available downtown in close proximity to its convention center. Even with the new inventory, Los Angeles will only have 2,100, so the downtown market remains seriously underserved.
Though the EB program was established by Congress in 1990 to stimulate the economy, it hadn’t grown popular until the past few years. “It wasn’t until the severity of the 2009-2010 downturn, until people began to see how beneficial it could be,” Liebman explained at the Los Angeles launch event, noting that earlier EB-5 funded projects in Seattle and San Francisco had proven successful.