Commercial Magazine

Not All Hotel Lending Is Created Equal

The right disaster-recovery financing can speed a return to normalcy

By Brian Lee

Help-wanted pleas can apply to many things after a hurricane or other natural disaster ravages a city. That includes “help wanted” in the form of financing assistance for hotels seeking to cope with the damages caused by such disasters.

Through creative loan structuring, commercial mortgage brokers can help lighten the burden of hotel developers and owner-operators who need to rehabilitate or totally rebuild their disaster-stricken properties. In such cases, mortgage brokers should first ask their hospitality clients about insurance proceeds that may be available to restore the properties.

Interim financing should be arranged if there’s a shortfall on the insurance side or when an owner wants to take the opportunity to upgrade the property beyond its pre-disaster condition. A lender will want to know that the projected net operating income the hotel will achieve after the renovation will be sufficient to justify a permanent loan to replace the interim loan used to finance the renovation work, says David Sonnenblick, co-founder and principal at real estate investment bank Sonnenblick-Eichner Co.

A mortgage broker should determine the property’s performance level prior to the hurricane or other natural disaster. Also, Sonnenblick adds, the broker needs to know how other hotels in the market were performing prior to the disaster.

Financing details

The owner of an Atlantic Beach hotel could not rebound from Hurricane Irene after it struck the North Carolina coast in 2011. A direct lender handled the refinancing for the property under a new owner. The arranged deal freed up proceeds for other needs as well, beyond the renovation and conversion capital.

The financial institution was able to structure bridge financing within 10 days of application. The hotel, under a new flag, reopened in 2013. With the resulting boost in revenue, the new owner was able to refinance the property at a lower interest rate and 37 percent greater leverage, according to Access Point Financial.

Sonnenblick points out that lenders doing these types of interim loans are often either commercial banks or private debt funds. Commercial banks, compared with private nonbanks, will normally require recourse and usually offer slightly better rates and a bit lower loan-to-cost (LTC) ratio — look for around 50 percent to 60 percent — on interim financing for renovating a damaged hotel property.

A little more expensive, private debt funds will offer recovery capital in the 6 percent to 8 percent rate range, depending on the property. They also will typically take a slightly higher place in the capital stack. Private debt funds may go as high as 70 percent, 75 percent and, in some cases, 80 percent on the LTC, with respect to the costs of fixing the damage as a result of a hurricane and repositioning the hotel in the market, according to Sonnenblick.

Mortgage brokers should understand how the capital stack is structured and also whether lenders will be willing to participate in deals in which they don’t have a priority position in the event of default, says Dharmesh Patel, executive managing director of hotels for Colliers International and the recent chair of Colliers’ national hospitality practice group for hotel-investment sales.

“One of the major trends in hotel development we see in this cycle is that the borrowing is more conservative and the developers are putting more equity into their deals,” Patel adds. “Current debt ratios are often 60 to 65 percent, compared with 75 percent or more in the last cycle, so mortgage brokers have less to work with and may need multiple lending sources to suit their clients’ needs.”

Braving the storm

The effects of a major hurricane on a city’s hospitality industry extend from property damage to lost jobs, canceled future bookings and more. Recovery capital in the form of interim loans can serve as a bridge over troubled financial waters for hotel owner-operators in storm-ravaged markets.

“ Mortgage brokers can help by having an open discussion with these borrowers about predatory lenders and their tactics. ” 

“It’s one thing when you have to manage delinquent borrowers, but we’re talking about relieving the burden of good operators in bad, often very challenging situations,” says Jon Wright, chairman and CEO of Atlanta-based Access Point Financial, a hospitality-market direct lender. “As owner-operators, it’s obviously the bulk of their livelihood. In most [disaster] instances, it’s then the panic button.”

The financial costs for hotel operators and owners can be staggering in the wake of a major natural disaster. Hurricane Harvey, which this past August flooded extensive sections of Houston — the nation’s fifth-largest metro area — could ultimately entail total damages of between $70 billion and $190 billion. The latter estimate is equivalent to the combined toll of hurricanes Katrina and Sandy, and represents a 1 percent hit to the national economy.

In most instances, owner-operators have to play the waiting game as well — waiting on insurance proceeds and other reimbursements after such destructive, naturally occurring events make life and business anything but normal. Delayed-payment plans and other financial concessions from lenders can go a long way when hotels are picking up the pieces after a storm.

One direct lender in the hotel sector, for example, offers select borrowers affected by such natural disasters a financing plan that includes six to 12 months of no payments and 18 months of interest-only payments. Rates stay in the standard 7 percent to 9 percent range for loan amounts typically ranging between $50,000 and $15 million.

Borrower beware

In the aftermath of a devastating hurricane, hotel owner-operators with distressed properties may be tempted to jump at a seemingly easy financing offer. Mortgage brokers can help by having an open discussion with these borrowers about predatory lenders and their tactics, including the financial reward some lenders pay brokers for placing loans with inflated interest rates.

“If it’s too good to be true, it might well be,” Access Point’s Wright said. “Borrowers [and brokers] need to be on very high alert as to who they’re dealing with. It’s not uncommon to find out lenders are really injecting capital under false pretense with the objective of taking back the property or, at the very least, taking over management of the asset.”

Business-interruption insurance can be another critical source of assistance that can help property owners stay calm and avoid making bad financing decisions while a hotel is recovering, Sonnenblick says. This insurance can help pay for operations and debt service so owner-operators are protected, typically for 24 months of interruption.

With predatory lending always a factor in the market, especially in the wake of a major disaster, it’s imperative for mortgage brokers and hotel owner-operators to dive deep into a financial institution’s history before inking a deal. The interest rate should not be the sole litmus test for doing business with a particular lender, Wright adds.

Author

  • Brian Lee

    Brian A. Lee is an Atlanta-based freelance writer and former editor of Western Real Estate Business magazine. He does work for the William Mills Agency, a public-relations company that represents Access Point Financial on special projects.

You might also like...