Editor’s Note: It’s a safe bet that many hotel owners who signed loan documents for a new mortgage with a CMBS lender years ago never fully understood the complex, sometimes arcane, world of securitized financing that they were about to enter. This column examines the parties involved in a CMBS transaction and the critical roles they play during the life of the loan.

Since 2003, roughly $110 billion of lodging mortgage debt has been originated and securitized into real estate mortgage investment conduits (REMICs) in the United States, collateralized by slightly over 18,000 lodging properties. To put this number into greater context, there are by several estimates roughly 51,000 hotels in the entire U.S. hotel market.

So, the notion of financing hotels with a conduit or REMIC mortgage was by most measures successful, given the apparently large number of hotels financed with this method. This type of financing offered a ready source of senior mortgage debt, often at attractive pricing and terms.

The cycle continued until late 2007 and early 2008 when the music stopped rather abruptly because of the rapid deterioration of the credit markets. After the failure of Bear Stearns, and more dramatically Lehman Brothers, the game was really at an end.

Longstanding criticisms

Even when the securitization era was in full swing from 2005-2007, borrowers would often complain about what appeared to be overkill in documentation at closing. The necessity of placing the hotel asset in a special purpose entity and other seemingly arcane and annoying requirements, such as the need for a separate director who was not supposed to be affiliated with the real ownership entity, was bothersome to borrowers.

And the biggest complaint often voiced by borrowers was that there was apparently no real lender to talk to in the event that a question or difficulty arose in connection with the loan.

It is obvious that this financing market has clearly become sour, if not alarmingly depressed. Currently there is an estimated $66 billion to $70 billion of hotel mortgage debt still held in the universe of REMIC trusts. This difference in dollar amounts is based on how the measurement is calculated, such as whether foreclosed/REO hotels are included in the calculation.

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