Lenders still cautious on new-build deals1 Mar, 2012 By: Andrew Sheivachman Hotel and Motel Management
|Midscale product, such as the Holiday Inn Martinsburg, developed by Hawkeye Hotels, can still find lenders in select markets.|
National Report– While the overall U.S. economy has seen a decrease in unemployment and stabilization in the balance sheets of banks, hotel developers still face an uphill battle finding lenders to finance new-build projects.
“Other than New York or Las Vegas, we don’t see any major increase in full-service supply in any major market across U.S., primarily due to a lack of construction debt,” said Lou Plasencia, head of The Plasencia Group. “The other variable is developers asking why they should spend two or three years getting permits, ramping up and then stabilizing when they can buy an existing hotel in a distressed situation and be cash-flowing fairly quick."
His company’s 2012 Lodging Investment Roadmap finds that lenders are using a combination of projected 2012 NOIs, a comparison between peak year results and trailing-twelve-month cash flows to determine their activity, finding data from 2009 and 2010 to be almost meaningless.
“We are seeing quite a bit of balance sheet debt, but what you’re not seeing is lending coming from community and regional banks because they were so badly burned during the crisis,” said Plasencia.
Regulatory issues have made it risky for lenders to consider hotel deals with partners lacking an established track record in development.
“Overall, lenders like hospitality,” said Bob Coleman, editor of The Coleman Report, which is focused on small business loans. “The problem is that regulators continue to hammer lenders who may have had an affinity for hospitality. Very active hotel lenders have had to step back a little bit because of those pressures.”
But with fundamentals improving in both hospitality and the broader economy, deal making is on the rise.
“Lenders that had no desire to be real estate owners have by charter to move properties off their books after three years, without an extension,” said Plasencia. “A lot of lenders were waiting until opportunity funds improved. Now that numbers are improving, owners want to sell into an up market."
There are a variety of government programs popular with hotel developers, such as SBA 7(a) and the EB-5 Regional Center Program. EB-5 loans have enjoyed growth due to their reliance on sources of foreign capital looking to emigrate to the U.S..
“With EB-5 loans, it depends on where your project is,” said Ravi Patel, principal at Hawkeye Hotels. “As long as the investor knows they won’t lose money; they want to make sure they get the visa and create the jobs.”
Despite the overall lack of growth in full-service product, there are still regions where economic growth makes hotel projects an attractive investment.
“The secondary market is as good as it has ever been,” said Coleman. “There are more smaller banks that are able to do those larger deals.”
Coleman said areas like North Dakota, spurred by a growing hydraulic fracturing industry, are rife with opportunities if developers can find the right lender.
“It’s a process that will continue to be challenging in certain areas,” he said. “Capital is very inexpensive for lenders, and how do lenders make money? They have to make loans.”
For those who still hope for a return to pre-2008 levels of development, lenders have learned to be cautious.
“Overall, we’re not going to go back to where we were in 2008,” said Coleman. “Some people are predicting perhaps a double-dip recession, but lenders are shedding bad loans and focusing on bottom lines. The same applies for hotel operators and owners. We’re all getting smarter.”