Securitized lenders were heralded as a driving force in commercial real estate finance during the boom years, but in the down cycle the lenders who have held loans on their balance sheets through thick and thin will be the catalyst for establishing a floor on hotel valuations and resuscitating a weak property sales market.

That's the opinion of Charles Tomb, president and CEO of Integrity Hospitality Advisors based in Stamford, Conn. “Once that first big bank or small regional bank starts to come out and say, ‘OK, here is what we're doing with our balance sheet,’ the others can't be criticized.” Tomb addressed valuations and the state of the market during a panel on distressed hotels at the 15th annual Lodging Conference in Phoenix Sept. 25. “The visibility of write-downs against their balance sheets — that's the catalyst.”

As regulators turn up the heat on banks to clean up their balance sheets, the ensuing mark-to-market of assets will not only help CMBS special servicers better manage the expectations of bondholders, Tomb says, but it also will stimulate commercial real estate financing. “Right now valuations are all over the place. These opinions of value coming from brokers are pieces of paper that nobody can hang their hat on.”

But exactly when balance-sheet lenders will take the write-downs is uncertain. Jerome Cataldo, president of Schaumburg, Ill.-based Hostmark Hospitality Group, says a paralysis of sorts has set in industry-wide stemming from a fear of criticism. “You can apply that to the lender, the buyer, the seller, every aspect of the industry. For example, the buyer says, ‘I don't want to be the first guy to buy at the wrong price. I want to wait for the bottom.’ ”

The hotel distress is spreading. An estimated 650 hotel loans are in the hands of CMBS special servicers, says Bill Linehan, executive vice president at Atlanta-based Hodges Ward Elliott, a brokerage and investment banking firm. The special servicers manage loans in default and conduct the workout or foreclosure process.

“The staggering number is the watch list, which has over 1,400 hotels that are in technical default,” says Linehan. The total delinquency rate for CMBS hotel loans 30 days or more past due rose to 4.9% in August, up from 4.7% in July and 0.3% in September 2008, reports Horsham, Pa.-based researcher Realpoint.

Hotel loan delinquencies are expected to rise further as business and leisure travel slow, resulting in greater declines in revenue per available room and average daily rate.

To bolster their standing with lenders and regain equity lost in falling valuations, an increasing number of owners are seeking joint-venture equity partners. For example, a REIT or private equity source might take control of the asset and use its balance sheet to renegotiate a bank loan or seek an extension of the note.

As the economy rebounds, one big challenge facing Cataldo of Hostmark is the underwriting analysis. “Even as demand comes back into the marketplace, where is it going to go first? What type of assets is it going to?”