Hotel Lending Remains Slow, Bigger Loans Stall

When HVS asked lenders to identify which sorts of hotel projects they would consider for loans currently, 75% said that existing chain-branded hotels were most likely to get loans. Coming in at 68% was refinancing existing hotels; at 45% was renovation/expansion of existing hotels; at 34% was existing independent hotel acquisitions; and at 25% were new construction hotels.

When HVS asked lenders to identify "the maximum loan size you would currently consider for lodging property loans," 39% said $1 million to $5 million; 48% said $5 million to $10 million; 48% said $10 million to $20 million; 45% said $20 million to $40 million; 25% said $40 million to $80 million; and 14% said $80 million plus, indicating that few lenders show interest in large projects. According to feedback provided by lenders, the following table summarizes the range and median of the loan-to-value ratios considered appropriate for each of the loan size ranges indicated in this paragraph.

For all but the smallest loans, the loan-to-value ratios currently considered acceptable by lenders is generally in the range of 50% to 65%, according to HVS.

Several questions in the survey also asked lenders to identify current lending parameters such as the most appropriate debt-coverage ratio, amortization period, loan term, and interest rates they are currently considering for hotel loans. The findings are summarized as follows and represent the most frequent responses of lenders who participated in the survey.

In the current environment according to HVS, the vast majority of lenders are only willing to consider recourse loans and significant collateral is required. Therefore, HVS asked survey respondents to identify "what collateral is required for a typical hotel loan," "what are the most important characteristics that lenders seek in a borrower," and "what are the most important characteristics that lenders seek in a hotel project." The key findings are summarized below.

Required collateral for a hotel loan include: land, improvements, FF&E (furniture, fixtures and equipment); first mortgage, additional shareholder or management operator guarantees; personal guarantees, letters of credit, ground lease; and high cash equity, lien on shares and all assets.

Important characteristics for a borrower include: Ownership experience with proven track record; depth and structure of management team; strategy and risk policies; capital, financial stability, access to equity, net worth; and integrity, credit history, brand support, reputation.

Important characteristics for a hotel project include: Reliable projections of future operating performance; market, location, demographics; brand, experience, sponsor, asset's size, type, age, and operator; loan structure, appropriate leverage and DCR; CapEx and maintenance schedules and history; competitive existing supply, new supply; and solid history of cash flow and a strong balance sheet.

"As many believe the economy has begun to emerge from recession in early 2010, significant uncertainty remains about the economy and many lenders are being affected by continued declines in hotel values backing their existing loans," says HVS. As a result, the availability of loans in the hospitality sector continued to be limited. Although economic conditions have stabilized and show early signs of recovery, investors in the hospitality industry are still cautious with capital, HVS says.

With loan-to-value ratios remaining around 50% to 65% and interest rates increasing to near 8.5%, HVS expects to see a relative increase in the number of all-cash transactions in the hospitality sector compared to recent years. "Most banks and non-bank lenders have remained selective in their loan underwriting and many are preserving capital for other uses."

The fact that lenders continue to require high levels of equity and collateral from borrowers is likely to lead to a significant decline in supply growth in the near-term, says HVS. "Moreover, many existing hotels will need to be refinanced in the next three to five years. If loan-to-value ratios remain at current levels, this implies that a large number of owners will need to contribute additional equity to their hotels or convince lenders to extend the terms on existing loans."