Lenders to the hotel industry assess the current lending environment and discuss different forms of financing available to developers.
LOS ANGELES—As the hotel industry progresses later into what’s already been a long up-cycle, lenders continue to work with developers to finance new construction.
At the recent Meet the Money conference, a panel of lenders in the “Creative financing: mezz and beyond” session talked about where lending stands and what debt options are available to the hotel industry.
The lending environment is active and competitive, said Ben Brovender, director at Citigroup. A lending vacuum appeared to be forming in 2009, but now, for general investment purposes, it feels like a healthy lending environment, he said.
Pricing is pretty consistent for bridge loans and value-add, said Mat Crosswy, principal at Stonehill Strategic Capital. He said he’s seeing more equity groups moving into Stonehill’s space, which is putting pressure on its yields. Senior lenders along with mezzanine and preferred equity players remain strong, he said. Liquidity is there, but only the right deals are getting financed, he said.
There are only a few groups that are doing stretch senior construction financing for the new construction of hotels, said Krystal England, senior director and head of hospitality at Canyon Partners Real Estate. Her company backs construction projects where it can get the yield it’s looking for, which requires being comfortable with the market and its incoming supply, she said.
“I think the biggest challenge for us is identifying those markets and submarkets,” she said.
Canyon Partner’s underwriting standards haven’t materially changed over the last couple of years, England said. It’s still focused on supply and taking a conservative approach to its projections on revenue per available room growth in different markets, she said. It’s also skeptical of what contribution F&B outlets will have on a property’s bottom line, she said.
“I think that consistency really allows us to have that constant presence in the markets in which we operate,” she said.
If anything, Stonehill’s underwriting standards continue to tighten, Crosswy said. There is a trade-off in that yield comes down for the company, but the goal is to give clients the best risk-adjusted return, he said. The cost of labor and construction continues to grow, he said, and even experienced developers are seeing cost overruns, which does create opportunities on the bridge loan side.
“It’s leveraging all sides of our company,” he said. “To enhance our underwriting, we make sure we’re structuring the best deal not only for us but for our borrower.”
One change during the loan process is borrowers looking for provisions within their original commercial mortgage-backed securities debt for future mezzanine or property assessed clean energy financing, Brovender said. He said he sees more borrowers taking this approach, and there’s nothing wrong with that.
“A lot of people are raising their hands, saying they like PACE equity, but they don’t need it today. But can we allow for that five years from now?” he said.
PACE financing uses one of the oldest forms of financing: assessments, said Joe Euphrat, managing director at CleanFund Commercial PACE Capital. The new aspect about PACE funding is that it allows private capital to be used on improvements specific to a building rather than an improvement district, he said.
“Instead of roads and sewers and underground utility lines, it’s energy efficiency, water efficiency, seismic upgrades, renewable energies,” he said.
PACE has 20- to 30-year fixed-rate financing that is fully amortized without a loan agreement, he said. The only form of obligation is the assessment, which is part of the property’s tax bill, and that is how his company is repaid, he said.
The only involvement state governments have in PACE financing is through the state assessment statute, Euphrat said. Everything else is done on the local level, he said. Some states might not have legislation for it because PACE financing is structured as a new tax, and people don’t like new taxes, he said.
“Even though the financing might lead to new elements like new jobs and energy efficiency and water efficiency, it’s new and it is a tax,” he said. “Having said that, we are working with constituents in these states. We’re working to help these states think it through and introduce legislation.”
California is the most mature of the PACE states, Euphrat said. There, up to 30% to 40% of the total construction budget can be available for PACE financing, he said. The senior lender for the project has to approve including PACE financing in the capital stack, he said, and even then the lender might place a limit on the amount.
“Our approach with PACE capital is if we can help this part of the capital stack, that would be great,” he said.
The EB-5 Immigrant Investment Program has received an extension through 30 September, said Matthew Hogan, VP of project development at CMB Regional Centers. The program allows immigrants to receive U.S. visas by investing in projects that create jobs within regional centers as defined by the U.S. government.
For the program to receive authorization again, there’s talk of regulatory changes, such as increasing the investment threshold from $500,000 to as much as $3.5 million, he said. There’s also talk about tightening restrictions for who could qualify.
“There’s a lot of scrutiny on the program as far as where the projects are getting done,” he said. “The biggest issue now plaguing EB-5 is it’s been the victim of its own success. The program only allows 10,000 visas a year.”
It could take investors from different countries different amounts of time to receive a visa, he said. An investor from China could wait up to 16 years before he or she is eligible for a visa, he said. The wait time for Vietnamese investors is six and a half years, he said, and India’s wait time has increased from five years to more than eight.
“It’s becoming harder and harder to acquire the clients interested in EB-5 because they know they will put in half a million, construction will happen, they’ll create jobs, but then they still have a waiting game in which they’re not eligible for a visa,” he said. “It’s causing a significant amount of concern.”
The concern over the program is making sure it’s done appropriately and that it’s well-monitored and well-structured so the money goes where it’s truly needed, he said. The currently status of the program is that is has slowed down significantly, he said.
The structure and deals have changed as the program and industry have evolved, Hogan said. He said he’s seen more mezzanine debt in EB-5 financing than before. He’s also seeing fewer regional centers doing common equity, which was a significant portion of the debt it provided about five to 10 years ago, he said.