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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2012

Hotel Loans May Be Headed for Trouble

Hospitality assets likely won’t recover until the economy does

Commercial mortgage brokers working with hotel deals this year may face an uphill battle. Lenders likely will be reluctant to finance new hotels and resorts — or to refinance existing properties — if they already have nonperforming loans and are trying to decide when it is appropriate to jettison them.

Hospitality is cyclical, and lenders are either excited or standoffish. In today’s market, they would rather wait for the market to rebound instead of taking risks. But this recovery may not happen in the near future. Forecasts signal further deterioration in hospitality revenues this year. Pricewaterhouse-Coopers predicts that revenue-per-available room (RevPAR) will increase 6.2 percent this year, down from a 7.5 percent increase in 2011.

The tough year ahead is a continuation of a downturn cycle that began with the financial meltdown in 2008 and 2009. The industry had borrowed a great deal in 2006 and 2007, gambling on five years of financial growth ahead. The situation in 2011 was still bleak, however. Lenders are faced with the reality that many hotel assets do not have the projected value on the capitalization rate of the loan. Loans are maturing and there is little liquidity. There also is still a lot of debt-maturity pain awaiting the market this year.

The main lesson to be learned is that the market may not, by itself, create a significant appreciation in value for a hotel asset. Brokers and their clients must take this into consideration when packaging a hospitality deal. Because there has not been a meaningful increase in the supply of hotel rooms, many believe that properties will begin to see increases in occupancy or the average daily rate, but real revenue growth is feasible only when the market is robust. 

Lenders understand that if the economy continues to sputter, the industry will follow suit. For already financed properties, if an asset is in financial trouble, lenders may be ready to take action and cut their losses. As trusted advisers to their hotel-owner clients, commercial mortgage brokers should know the possible maneuvers lenders will make to deal with nonperforming assets. This knowledge will help clients determine how their business will be affected, as well as what the chances are for a refinance or other loan modification. 

Lenders that find hotel assets that are undervalued on their balance sheets may do three things:

  1. Engage with independent industry professionals to determine the financial health of the asset.
  2. Accept bad news and create a plan to move forward. Believing that the cycle will improve and that the financial health of the asset will return may be a bad strategy.
  3. Create a time-bound plan to move assets from their balance sheet. This may mean a write-down. It’s better to clear up what is not going to work and be ready for what will as the cycle improves.

Lenders, as well as hotel-owner clients, can get out of these uncomfortable circumstances with the right guidance. The first step is to find clarity; the second is to accept help from a professional who knows the business. Commercial mortgage brokers working with hospitality deals must know how the market is performing so they can best advise their clients.


 


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