CHICAGO — It’s become a thorny issue of perception versus reality in the hotel financing world. Contrary to popular belief, lenders have not completely shut off the capital spigot, says Ravi Patel, vice president of finance and development for Hawkeye Hotels in Burlington, Iowa. “There is lending occurring. It’s just much different than what we were accustomed to a few years ago.”
While the Mortgage Bankers Association reports that hotel loan originations plummeted 88% in the first quarter compared with the same period a year earlier, several industry experts say that deals $20 million and under are still getting done.
But no one disagrees that it’s a rocky terrain for borrowers. For example, lenders typically require Hawkeye Hotels to plunk down anywhere from 20% to 40% equity on new construction projects before a loan is granted. The equity requirement is up sharply from a few years ago for the seasoned developer, which owns 40 hotels, primarily in secondary and tertiary markets in the Midwest.
Lenders also increasingly want to see a comprehensive feasibility study to assess the merits of a proposed development. “Some banks won’t even look at your deal if you don’t have a feasibility study,” says Patel. “They’re asking for 1,000 documents now, which they were never asking for before. My father has been in the business for more than 30 years, and when I first brought some of the [bank requests for information] to him, he said, ‘You must be going to the wrong banks, they’ve never asked for this stuff before.’”
The young executive’s comments came during a finance panel discussion Tuesday morning as the Midwest Lodging Investors Summit drew to a close at the Marriott Downtown Chicago. National Real Estate Investor moderated the 75-minute session.
Rural properties tap federal loans
Despite the tough financing climate, Hawkeye Hotels has closed on six loans totaling $41 million during the past six months, including three loans for new construction and three for refinancing. “Construction loans are a little bit tougher to come by,” readily admits Patel. “A lot of our refinancings I haven’t had a problem with at all.” Patel also has been tapping every finance source possible, including the United States Department of Agriculture, which offers relatively low interest-rate loans for properties in rural areas.
Joe Epstein, president and founder of First American Realty Associates, a mortgage broker in Fairfield, N.J., says that developers today want to be in markets that are “recession foolproof” — markets where there is strong demand for the product they’re building in a particular segment.
Military training bases provide an excellent source of built-in demand for hotels, says Epstein. He recently arranged financing on two Candlewood Suites, one in Fayetteville, N.C., near Fort Bragg, and the other near Parris Island in South Carolina. “If you build a new, wonderful product and you are closest to the base, it is very easy to convince local and regional lenders that there is categorically a demand and a need in that segment.”
College towns can be a good bet
Epstein believes strong deal-making opportunities can also be found in university towns. “I’ve worked on a number of things near Chapel Hill [University of North Carolina at Chapel Hill]. I’m working on something in Durham, [N.C.] near Duke University. I also find that there are some outparcels in major shopping centers.”
For deals under $20 million, financing is available for smart and resourceful borrowers who are not overleveraged, emphasizes Epstein “I’ve always maintained that no matter what the market is, if you have a good deal, one with a demand and need in the segment, with an owner and operator that has a track record, with somebody whose head is still above water, there is somebody out there under a certain set of givens that will do the deal.”
The title of the breakout session, “Creative Financing: Where to Find Money,” prompted panelist Rich Niedbala, senior vice president of the Midwest region for the Plasencia Group, to humorously question the word choice. “Unfortunately, the session is called ‘creative financing’ and that’s what got us to where we’re at right now,” said Niedbala, referring to the years of loose underwriting that is now manifesting itself in higher loan defaults and delinquencies as the economy sours.
For many borrowers, the more conservative lending climate remains a period of readjustment, says Niedbala. “There is still this cognitive dissonance going on between what people had been doing deals at and what you have to do a deal at today. It hasn’t fully come to roost yet.”