Hotel Financing Is Available But At a Cost

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The accepted wisdom is that financing is unavailable for most hotel projects. It's not true. Lenders are willing to finance a wide variety of hotel deals, including acquisitions, renovations and even new construction. But there's a catch.

While available for those who want it, hotel financing comes at a price many developers, owners and potential acquirers aren't ready to accept. Back in the middle part of the last decade, lending to the lodging industry was so plentiful and relatively cheap that borrowers developed a bad addiction. They became accustomed to receiving financing at 80% or 90% loan-to-value ratios at low interest rates with no recourse required. I'm a poor magazine writer and I probably could have qualified for a loan in 2005 to build a Microtel. For better or for worse, those days are over, thanks to the bursting of the real estate bubble, the near-collapse of the financial system, the Great Recession and the severe drop-off in hotel demand.

Now seven years later, hotel entrepreneurs may still be addicted to dealmaking, but they're wincing at what lenders are requiring: LTVs of 50% to maybe 60%, tighter overall underwriting standards and closer looks at borrower credentials (There's no more room for newbies or wannabes, which means my dream of building a Microtel along I-80 in Nebraska is dead in the water.).

Slowly but surely more lenders are reemerging in the hotel sector of commercial real estate. And as more sources of financing appear on the landscape, competition will eventually take hold and financing terms will again begin to ease. I don't think you'll see the overzealousness of the 2000s any time soon, but those of you with an addiction to the hotel deal could soon be back in the game. In fact, now is a great time to at least lay groundwork for deals you might be able to consummate sometime down the road: as soon as later this year but even more likely in 2013 or '14.

Now for a shameless plug. A number of serious lenders in the hotel industry will be in attendance at the upcoming Midwest Lodging Investors Summit in Chicago on July 16-18. A Lenders' Pavilion, a first for the conference, will feature 10 companies who are willing to talk about financing your deal. For more information and to register for the event, go to the conference website.

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