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NEW YORK CITY-Lenders remain hesitant about making loans on lodging properties. But there are indications they are willing to refinance hotels that have a healthy cash flow and solid sponsorship.

That was one of the trends Jones Lang LaSalle Hotels uncovered while speaking to lenders at the recent New York University International Hospitality Industry Investment Conference held at the Waldorf-Astoria here. In a “Debt Capital Markets Bi-Monthly Update,” JLL found that several prominent lenders have halted their hotel origination programs. However, others were actively seeking to lend on hospitality. “Their mantra, of course, is strong cash flow and excellent sponsorship,” wrote JLL researchers.

“We are not seeing many transactions, so anything that is getting underwritten today is probably on a refinance basis for existing hotels that are cash flowing,” Jeffrey Davis, executive vice president, Jones Lang LaSalle Hotels.

Pricing on such loans range from 8% to 11%, with banks eyeing debt yields between 12% and 16%, Davis details. Furthermore, when underwriting, banks put the property’s financials under rigorous review. “They are basing the underwriting of the debt yields on forward looking stressed numbers,” he says. “They take the hotel’s budgeted ’09 numbers and apply some sort of a stress test to get to a pressured NOI.”

Yet banks need to lend and with the ability to borrow at a low cost and originate loans at much higher pricing than they historically have, lenders are getting creative to make the transactions more palatable to borrowers, relates Mathew Comfort, senior vice president in the real estate investment banking group of Jones Lang LaSalle. “The low leverage levels and the current pricing in the market are very difficult for borrowers to swallow,” he says. “But there is some creativity on behalf of lenders to try to structure the pricing a little differently to make the current pay a bit lower by putting in points up front as well as potentially slicing the loan into a participating mortgage.”

Another issue swirling within the industry is whether the recently instituted government stimulus programs such as TALF will have any impact on lending to hospitality properties. In one regard, TALF, if it does nudge banks to actually dole out debt, could help the general lending environment. Whether loans backed by hotels would qualify has yet to be determined. “TALF will have a lesser impact on hotel financing at the outset, given the way the program is structured,” Comfort states. “It only finances investors on the triple A portion of the CMBS. Our understanding, given the way that lenders are underwriting hotels right now, the triple A portion on hotel deals will be less than it is on other product types.”

In some instances, lenders have found themselves the inadvertent owners of hotel properties. Recently, Sunstone Hotel Investors decided not to make its June 1 payment on the $65-million mortgage backing the W Hotel in San Diego, opting instead for an “elective default”.

More such maneuvers can be expected in the future, Davis predicts. “Whether they like it or not, banks might wind up owning a hotel,” he says. “A lot of it will happen in the resort sector where the owner/operator had ambitious renovation plans and doesn’t want to fund the asset anymore. You are going to see the banks controlling the supply of inventory relative to hotel product going forward.”

Comfort sees the W San Diego action as a bellwether that could impact how public hotel stocks trade and perhaps spur other owners to follow the same path. “Analyst reaction was mixed,” he says. “There were certain REIT analysts that thought it was very positive move by Sunstone; others critiqued them for it.”

Nonetheless, by ridding a large chunk of debt from its balance sheet, Sunstone could end up looking more attractive to stockholders, Comfort says. “The property was not making enough to cover debt service. To get it off their balance sheet means they no longer have to inject cash into the property.”

Meanwhile, Davis says that all the talk in the marketplace about distressed properties waiting to be snapped up at a steep discount is just that at this point—talk. “That’s not to say we aren’t going to see that in the next six to nine months,” he says. “The money out there is being patient. Relative to the debt capital markets, if those opportunities do present themselves and banks are able to buy those deals at an attractive basis, we will see a loosening of credit by balance sheet lenders. They may be in the same position as the equity players: Waiting on the sidelines for the right deals.”

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