NEWPORT BEACH, CA—More investors are flocking to the hotel sector than ever before, for a number of reasons. As GlobeSt.com reported exclusively earlier this week, Lone Oak Fund has provided financing for three separate California hotel properties, including the purchase of Newport Beachwalk Hotel here. GlobeSt.com caught up with the firm’s Alexa Mizrahi to discuss what’s behind all the trading activity and some of the new acquisition strategies buyers are using to acquire hotels.
GlobeSt.com: There have been a lot of hotel trades in California recently. What’s behind all the activity?
Mizrahi: We’ve seen an increase in demand for loans on hotel properties, both acquisitions and refinances. On the acquisition side, the demand is coming from local and foreign investors, and it’s due to lack of inventory in multifamily properties and other investment avenues. Being in California, there’s a lot of demand for hotel stays. Also, there’s an opportunity here to really gain yield. On the multifamily and non-owner-occupied properties, cap rates are compressed so low, and the lack of inventory is moving investors to other areas to search for yield. Hospitality is one of the large areas for that.
GlobeSt.com: What new acquisition strategies are buyers using to acquire these hotels?
Mizrahi: One of the main strategies they’re using is a fast close. Borrowers can take advantage of acquisition opportunities by having a 10-day close of escrow or a more-competitive purchase offer. They can have an edge by using our bridge-loan financing options rather than a conventional loan. High price and speed to complete the transaction are key. If there is more than one offer, the buyer who can close quickly typically wins over the buyer with conventional financing who has to go through many channels before the loan is approved. Also, borrowers like that our financing offers no pre-payment penalty. They might use us for the acquisition and in a few months take out an SBA loan or conventional loan at no penalty to them.
Banks can’t compete with us in terms of speed. To compete with banks in terms of leverage, we allow for junior financing behind us. Working with us on the Newport Beachwalk Hotel purchase, the borrower was able to finance 80% with three different lenders, and all three loans were closed in less than two weeks.
It’s speed, but also service. When you’re dealing with a larger bank or SBA lender, you’re dealing with a pyramid of reviewers. But here, the principals who make the final decision work directly with the borrower. We offer a quick response, and the borrower is working directly with the loan committee.
GlobeSt.com: What other refinancing trends are you noticing in the hotel sector?
Mizrahi: The refinances tend to be owner/operators trying to pay off existing debt and position the property for a conventional loan and SBA takeout. They come to us to pay off existing mortgages, upgrades to the properties, tax liens or debt to clean up the properties, and they’re driven by low rates. Investors who focused on traditional sectors in the past have migrated to hospitality. It’s also appealing to investors abroad as an asset type with which they feel comfortable. A lot of demand is being driven by international investors who definitely see opportunities in our hotel market.