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Hotel owners looking for leverage must contend with a reluctant lending community
First, the good news: Debt capital appears plentiful for stable, cash-flowing lodging properties. That's because the CMBS market is always on the lookout for loans, including those on hotels, that it can pool. Plus, leverage comes at a cheaper price due to lower interest rates.
Now, the bad news: While underwriting terms haven't budged much (usually a 65% LTV and a DSC of 1.5), lenders are taking a closer look at the sponsorship of a potential deal as well as the location of the asset, thereby constricting the flow of money to lodging.
On the equity side, private capital still dominates, say the experts. But even private investors now confront lower return expectations in a softening economy that has cut deeply into business travel volume.
And construction financing? Well, there's always the powerball lottery. Considering the persistent disdain lenders have for new lodging projects, perhaps the easiest way a developer could obtain money for a ground-up lodging play is by winning the big jackpot.
"Today, private equity is very expensive," says Richard O'Brien, executive vice president and CFO of Irving, TX-based lodging REIT FelCor Lodging Trust. "Debt is be(coming more expensive and available at lower leverage levels. And the capital is more discriminating as to sponsorship. In the hotel industry, the operator makes much more of a difference than in other collateral types. As a result of private equity being expensive and debt available at higher cost and lower leverage, it's hard for deals to pencil out."
"In the current hotel investment arena, debt financing remains available, although the terms are much tighter," seconds Harry Pflueger, managing director of In.,ia/ES(; Hotel Partners in Newport Beach. CA. -Borrowers with preexisting lender relationships and proven track records see-king lower 1-:I'Vs will be more successful. Additional guarantees or credit enhancements from the operator will help."
Bruce Lowrey, vice president of ihc hospitality division in the Tysons Corner, VA office of GMAC Commercial Mortgage, states that in 2001. his firm will probably match the $500-million lending volume it notched in 2000. Likewise, terms have remained in the range of 1.50 to 1.40 debt service coverage and 70% to 75% . What has changed, however, is...