COVER STORY, MARCH 2009

HOSPITALITY LENDING UPDATE
Financing still available for small, regional hotels.
Jon Ross

Bob Daly, chairman of the Danville, Virginia-based hotel group Daly Seven, is anxiously anticipating his next project, a Hampton Inn and Suites in Huntersville, North Carolina. The developer concentrates on properties in Virginia and North Carolina and is currently overseeing the finishing touches to a few small projects that were started last year. To finance the upcoming construction in Huntersville, Daly will have to take out a small loan at a time when the lending market for new construction is nearly non-existent.

“I used to be 100 percent sure that I would get loans,” says Daly, who last took out a new loan on a development about 10 months ago. Most recently, he dealt with refinances of existing properties, all of which were relatively easy to arrange. “I feel fairly confident that we’ll be able to get a loan, and I feel fairly confident that we’ll get a loan at reasonable terms, but I’m not quite 100 percent sure.”

Daly’s outlook on the current state of the hospitality market — an industry that is in dire straits but is still limping along — echoes the state of things for small hotel brands. Lending is stringent in the Southeast hotel market. Transactions requiring loans worth more than $15 million — sales of full-service hotels and luxury developments — are nearly impossible to push through. But deals involving smaller brands like Hamption Inn and Holiday Inn Express, which are transactions that typically involve loans of less than $15 million, are still viable in today’s economy.

Daly is one of the few developers who may get a construction loan; the majority of the market is centered on acquisitions. “When you get north of $5 to $10 million, it starts to get a lot thinner in terms of the number of institutions that are willing to finance hospitality product,” says David Mumford of Newport News, Virginia-based The Mumford Company. His firm has taken a huge hit due to economic pressures and is facing a 27-hotel decline in sales from 2007 to 2008. On the whole, hotel sales throughout the region are fairing better than new developments during the recession, Mumford says. Lenders feel comfortable dealing with tangible assets. With new developments, rating future asset performance in the current market is a stab in the dark. “A lot of lenders, if they’re going to be in this segment, they’re going to be in it with stuff that has some track record,” he says.

As the recession took its toll on national banks, the institutions’ ability to lend on developments and acquisitions stopped. Regional and local banks stepped up to fill the gap, and the size of the hotel real estate arena contracted. “The big banks are up to their eyeballs in all their troubles, and the super-regionals have been cautious,” Mumford says. “That leaves you with just local and mid-sized regional banks in terms of the banking community.” The lending gap has cleared the way for life insurance companies, but these organizations typically present nearly unattainable terms. Another result of the lending freeze is that owners have to go to double or triple the amount of lending institutions to acquire the same loan. Once they find an institution, the terms have changed. Lenders are searching for properties with great sponsorship, owners with significant operating experience and a depth of financial resources before approving loans. “They’re looking for properties that are certainly not on a major deceleration path in terms of revenue performance, so that in and of itself is a challenge,” Mumford says.

These economic hardships are leading to a new way of doing business in the hotel world. In the transactions that come across his desk, Teague Hunter, president of Hunter Hotels in Atlanta, deals with lenders who want to know each property before they commit any money. These are local and regional institutions who deal with developers in a specific geographic area. Both organizations may know each other and probably have worked together in the past. “It takes doing business the old-fashioned way,” Hunter says. “We just have to get back to the basics.” The Wall Street banks that were primarily associated with the larger deals have vanished from the market as attention shifted to smaller assets. While these larger fish weren’t interested in smaller transactions, as the economic veil lifts, many of the banks will be looking for deals. “Those guys are bright enough and they’re greedy enough that they’re going to figure something out, but when is anybody’s guess,” Hunter says.

 Brokers and developers are looking for a clearing in the storm. As with minor lending crises in the ’80s and early ’90s and the financial unrest after Sept. 11, hotel players know the current economic pressure has to end sometime. The economy is, after all, cyclical in nature. “We have cycles, everybody just forgets it,” Hunter says. “They love the heyday, and they forget the down cycles.”  He points out that this downturn somehow seems sharper and more acute than past troubles in the market, and is probably being felt a little more in the Northeast and other regional markets. The Southeast, Hunter says, has experienced a softer pinch because of its key fundamentals: weather and infrastructure. “Long-range, the Southeast is going to be just fine,” he says. “It’s fairly conservative. There was nothing overly hot or overly sexy about it. It’s a nice, simple market.”

Developers and brokers in the Southeast are still adjusting how they do business in the near term. Daly is focusing on exercising more caution and taking a hard look at his operations. “Our business levels are down 15 to 20 percent,” Daly says. “When you see declines like that from the previous year, you certainly take a pause and make sure you’ve got backup strength with cash. You look at ways to be more efficient. You’re looking to streamline everything.”

While many in the industry can’t make a prediction as to when things will brighten up, the consensus is that this year will be dismal in terms of commercial real estate. The weak financial markets, a lack of consumer confidence and a general penny-pinching mentality means the hotel market is in for a long 2009. “Everyone is predicting a very, very slow economy this year,” Daly says.

“Everyone’s trying real hard to get deals done,” Hunter echoes. “Nobody’s expecting zero. Deals are still happening.”

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