NATIONAL REPORT—Whomever coined the phrase “It doesn’t hurt to ask” was clearly never able to solicit for a hotel loan during these historically illiquid times in the real estate debt market. After all, those who do inquire about such debt now are typically either greeted with an outright rebuff that’s on par with a teenager-in-love level rejection or a sheet of terms akin to a voluntary financial prison sentence. In other words, hotel owners find themselves now saying, “Sorry I asked.”
But such has been the hotel lending environment—except for the select-service deals that sneak through—for about a year-and-a-half now, though the last few months seem to have been decidedly more austere, looking at loan origination totals. And it does not appear that conditions will begin to improve for at least another few months, according to experts, who at least point out that things won’t get any worse for debt-starved investors, who remain sidelined.
“During the past few months a lot of assets have been shifting around in the sense that banks are moving notes to the government, but as far as things really changing? In terms of making hotel loans—not really,” assessed Ed Blum, the managing director of Molinaro Koger’s capital markets division. “Local banks, regional banks and life companies are making some loans, but unlike the glamour days, the Merrill Lynchs and Bear Stearns of the world and other large Wall Street banks are gone. Except for their existing clients, they are not active. We were recently talking to one of our best clients, who has a long-term relationship with a healthy bank and they couldn’t get a good loan proposal.”
Even those lenders that are healthy and have historically been active in the hotel realm are keeping their doors shut, added Brendan Sullivan, a managing director of the Carlton Hospitality Group. “They’re really focusing on managing their existing portfolio,” he said. “So if someone were to get hotel financing today it would have to be a strong sponsor with a pre-existing lender relationship and the trailing 12 months’ numbers will dictate the loan proceeds. No bank is lending more than $50 million and if you could get 60% [loan to value]I would say you’d be very thankful. And for many other investors, when they speak to lenders, they’re not getting any clear signal as to what may be possible.”
Among the reasons many borrowers can’t even get a phone that most lenders involved in multiple real estate asset classes may be ignoring the hotel sector for now. It’s a trend Cameron Larkin, managing director of Larkin Hospitality Finance, has been monitoring even while his firm has managed to fight for some recent refinancings on select-service properties.
“Hotels are probably the easiest thing to say no to because they’re largely misunderstood by many lenders from my perspective,” Larkin said. “Everyone reads the same story line: hotels are tied to [gross domestic product]and that’s going down, so hotels must be going down, but that’s not always true. So the lenders all have 40 deals on their desks they haven’t returned calls on, and so they’ll cherry pick the easiest deals and anything other than a hotel is easier.”
Of course, there are lenders out there that are singularly focused on the hotel sector. RockBridge is among the more well known and the firm is making deals, albeit on a selective basis because now, more than ever, it can afford to be picky.
“We see tremendous opportunities today on the debt side of the business, but there’s just been a complete market dislocation for hotel credit and sources of capital that were there in a big way from 2005 to 2007,” explained Jim Merkel, RockBridge’s president. “Certainly, it’s a very well-documented situation in the credit markets. You read about it everyday, but that has created opportunities for those that have capital and that can fund first mortgage debt deals at low leverage and good all-in rates. But I can’t begin to tell you the average loan terms. The fact of the matter is every deal is different and the cost of capital is high. Anybody that tells you ‘this is where the market is’ doesn’t know what they’re talking about.”
Cold shoulder
Another reason for the cold shoulder from some lenders is, of course, the fact that many of them are too busy tangling with existing non-performing hotel loans on their books and trying to avoid taking back the assets even though defaults are rampant. Consequently, according to a recent report by the Plasencia Group, loan extensions may become rampant even though “some would argue that extending a loan at current leverage levels might simply be prolonging the inevitable and actually exacerbating an already bad situation.”
What everyone is seemingly hoping will ameliorate this whole situation, though, are the federal government’s financial programs designed to bolster lenders and take bad loans off of their hands, thereby enabling them to lend more freely again. So patience may eventually prove to be a virtue for investors.
“We have a number of factors sort of putting off the day of reckoning. It’s the government’s [Term Asset Loan Facility] and the private investment program that hasn’t taken its final form yet,” Sullivan said. “Until they do take final form, banks and servicers are going to try to work with borrowers as much as possible [on existing loans]. Toward the end of 2009 and early 2010 is when it will come to a head.”
But the question still remains how much of an impact these programs will have. “The government had to do something to help straighten out banks and their balance sheets, but I’m not sure they’ve done enough to really force the banks to make loans,” Blum said. “At some point the government will have to go back and say, ‘We’ve given you billions of dollars and you must start making reasonable loans.’