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DENVER-A peanut gallery of experts are debating whether or not the market has hit bottom or not, meanwhile Denver-based Hospitality Real Estate Counselors is leaping into the fray sourcing hotel loans. The hotel broker is partnering with an undisclosed opportunity fund to source hotel loans of $12 million to $35 million for select-service hotels and some full service assets. “The sweet spot will be Marriot, Hilton and Starwood branded hotels, primarily select service like Courtyard and Hilton Gardens,” explains Geoff Davis, president of HREC Investment Advisors. Their aim would strike these 125-room to 350-room brands with a non-recourse program for acquisitions, refinance and repositioning.

“The biggest problem we have in our industry right now is the availability of money,” points out Sumner Baye, president of International Hotel Network. “We’re not out of the credit squeeze yet. The lenders are not lending in the way whole hospitality industry would like.”

The capital source, Davis remarks, has a fair amount of hospitality investments and is very familiar with the hotel industry. “They understand that there will be opportunities in the next two years to do acquisitions, renovations, repositioning plays and that’s what the capital seeks to do, to refinance, take advantage of maturities, discount pay-offs, and good sponsors being able to reposition assets.”

The loans are structured to be up to 85% of the project/asset value and will range in rates up to 10%, on either a fixed or floating rate basis. “In exchange for going to 85% LTV,” Davis notes. “The pay rate is pretty reasonable, depending on the deal, average 8-10% interest only three- to five-year term, but its very much a participating mortgage, which means they’ll end up taking 15% to 25% of the cash flow and the residual, because they’re solving to higher yields. The lender will end up selling off the A notes of these loans and keeping the B and the mezz.”

This is showing a bit of confidence in a market that have been theorized as heading for a double-dip in 2011, based on the idea that unemployment is still a major concern and has no large-scale solution in sight. HREC is betting the other way, however. “We think the market has bottomed out and we don’t think there’s any near cure for RevPAR,” Davis concedes. “But we don’t see big declines coming, so in general we think we’ve bottomed out.” He estimates peak revenues will come back on a three- to five-year timeline, which is how HREC chose the length of the loans.

This is also the source behind a few lockouts for the loans, namely that the borrower wouldn’t be able to prepay the loan or refinance in the first two years. “We’re projected a much longer recovery period than some people, which is why the nature of this capital is less load up front and more participation on the backside.”

“Things are improving tremendously,” Baye says. “Things are turning, there’s a light at the end of the tunnel. So whatever you’re thinking about doing, we’re getting a surge of business all of a sudden.”

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