Lenders, though leery, say financing is available
Lenders, though leery, say financing is available
30 MARCH 2017 8:36 AM

New supply and economic uncertainty could make loans harder to come by in some markets, but plenty of options for financing hotels still exist. 

ATLANTA—The competition is hot right now among hotel lenders, especially for larger loans, experts said during panel discussions last week at the Hunter Hotel Investment Conference.

One exception may be loans for new construction, according to Tom Day, EVP of Wells Fargo Bank’s hospitality finance group.

“Access to capital has really, really shrunk or slowed down over the last 12 months. … From Wells Fargo’s perspective, we have not traditionally been a big construction lender in the hotel space,” Day said. “We have focused more on transition, reposition and acquisition financing. And I would say today our appetite for construction financing is even less.”

Part of the reason behind that, he said, is some lingering uncertainty about the economy.

“We’re deeper in the cycle, and although things have seemed to improve from an economic outlook over the last 90 days, that’s more of a philosophical view than an actual hard data view,” he said. “There’s still some questions about the economy and how it’s going to play out.”

But new supply remains the biggest factor in making new-construction loans harder to come by, Day said.

“That new supply not only impacts the ability of one to get a construction loan,” he said, “frankly it impacts the ability of someone to get a hotel loan anywhere …. If you’re looking for financing and a lot of new supply is coming to the market, our job just got a lot harder from an underwriting standpoint.”

The players
Not all lenders are as hands-off with new-construction loans.

“There’s still seems obviously a lot of desire to develop,” said Scott Andrews, EVP and senior managing director of hotel franchise finance at Phoenix-based Western Alliance Bank.

Andrews said his company financed about $130 million in ground-up construction loans this year.

“I will say that almost every one of those are existing customers on their third construction loan with a big player who owns and operates 25-plus properties and has a great development background,” Andrews said.

Filling the void where some bigger banks fear to tread are regional and community banks, as well as debt funds looking to take advantage of the shaky lending environment to set their own terms, panelists said.

“Everyone has their niche,” Day said. “The insurance companies typically go for bigger deals. They look for more stable cash flow; they want to book that transaction, put it to bed and not worry about it. Not the case with the other lenders. … The group that’s having a bigger role today, a bigger impact, is the debt funds. They’re doing it because they’re trying to fill … a loss of appetite among some of the other players.”

Another player is the commercial mortgage-backed security loans market, which “traditionally has been very accommodating,” according to Scott Dauer, managing director at J.P. Morgan.**

Where CMBS loans come more into play is in the refinancing market, Dauer said.

“The refi wave is here in earnest, and the reaction to it has largely been underwhelmed in terms of the impact it’s having. Loans are getting refinanced,” he said. “In terms of CMBS, the balance of 2017 is about $5 billion of remaining hotel fixed-rate loans that need to be refinanced."

The bottom line, sources said, is that there is liquidity in the market and enough financing out there for developers who are seeking it. It comes down to the property and the pitch.

What lenders look for

Krystal England, senior director and head of hospitality at hedge fund Canyon Partners Real Estate, talks during a lending panel at the Hunter Hotel Investment Conference about the criteria her company uses when deciding which projects to finance. (Photo: Robert McCune)

In a separate panel at the Hunter conference titled “Hotel lending today … on larger loans,” lenders discussed what they look for when deciding what projects to back.

It helps, they said, to have some history.

“We want a sponsor who has a track record,” said Michael Jaynes, president of Dallas-based developer Hall Structured Finance. “They don’t have to have 20 properties that they’ve developed. … We just have to feel comfortable that between themselves and their team, they can get the project built on time and on budget.”

That track record doesn’t have to be perfect either, said Krystal England, senior director and head of hospitality for Los Angeles-based hedge fund Canyon Partners Real Estate.

“Any lender who’s lived through the downturn has a few dings in their record,” she said. “Provided we can get comfortable with that, we can proceed. We do look for hospitality experience. It’s very difficult for us to get comfortable with a sponsor’s first hospitality project.”

Anand Jobanputra, SVP of the hospitality finance group at Wells Fargo Bank, said the most important part of the equation for his company is “people first.”

“We want someone who’s been through several cycles and has been proven to really focus on the people,” he said. “If the market does turn and things turn sour, will these guys do the right thing and step up?”

A big part of that is being upfront and honest with the lender, panelists said.

Issues in the past, with foreclosures for example, are going to come to light during background checks anyway, said Jeff Frank, VP of the real estate finance group for Goldman Sachs.

“If that’s the way we find out about them, the committee that I’m going to present things to is made up of people, and they’re going to react like people even though we should be focused on facts and the issues,” he said. “If they felt like something was withheld from us, they’re going to react in a certain way to that. So the more forthright you can be about those issues, and the more details you can provide around the collateral and … how you acted … is going to be important, and can really speed things up during the process rather than creating this extra week or two of back-and-forth with the lender …”

Big year
That strategy has paid off for the panelists.

“In 20 years, we’ve taken back one hotel,” Jaynes said. “We made a lot of construction loans pre-recession, so we feel pretty good about the track record. And we lost money on one hotel.”

England said Canyon Partners has reported similar results.

“Since I joined the firm, post-downturn, we’ve not taken any loans back,” she said. “We’ve had some properties that have performed in the range of double our underwriting. That indicates the strength of the market.”

Both are expecting 2017 to be a big year for their firms.

Hall Structured Finance “closed $150 million (in loans) last year,” Jaynes said. “We’re looking to triple that this year. … There’s less and less people in our space providing construction loans, and we think this is a make-hay year for us.”

Canyon Partners Real Estate, England said, “is looking to close just under $50 million, which is big for us … by the end of April on the hospitality side, and I expect that can get up to anywhere between $150 (million) and $200 (million) this year.”

*Correction 30 March 2017: A caption previously published with the feature photo for this article misidentified a panelist.
**Clarification 30 March 2017: An earlier version of this story included some inaccurate information about CMBS loans. 

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