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GLOBAL HOTEL
NETWORK (SM) REPORT
The State of the US Hotel Finance Market |
This week's GLOBAL
HOTEL NETWORK (SM) REPORT takes a look at "The
US Hotel Finance Market" and is written by Greg
Friedman, Manager, Business Development, GMAC Commercial Mortgage
(Atlanta). He writes,
Most lenders and borrowers can testify that doing deals in 2001 has been
everything except smooth. The advent of tighter underwriting standards
has left many borrowers struggling to complete new construction and
renovation projects. Lenders appetite for hotel financing has diminished
with the increasing delinquencies and defaults coupled with a dipping
RevPar that has been exacerbated by the recent terrorist attacks.
Borrowers must realize that creativity and patience will be a necessity
to complete projects in this turbulent market.
One common question that has arisen from these tighter markets, “Where
is the Money?” Even with tighter markets, money is available for
good projects that make sense. These recent economic shortfalls and
world tragedies have only made getting financing trickier and more
expensive. Most new development and renovation projects are being funded
through local and regional banks that are financing only 60% to 75% of
the project value while requiring higher debt service coverage ratios.
The stringent requirement of injecting up to 40% equity has forced many
hotel owners and developers into a precarious situation.
Many developers and owners have utilized some type of supplemental
financing program to help reduce their equity injection. Borrowers
typically find that getting a FF&E loan/lease via GMAC Commercial
Mortgage - Asset-Backed Lending Division or getting a Mezzanine loan via
Starwood, Choice, Cendant, etc is cheaper than injecting additional
equity. These programs may seem limited in scope, but they may be
the key component to completing your hotel project. Several borrowers
utilize FF&E financing/leasing or Mezzanine financing to bridge the
gap between primary debt and equity.
GMAC Commercial Mortgage - Asset-Backed Lending Division’s (“ABL”)
FF&E financing/leasing program provides a good model to examine how
borrowers have successfully employed supplemental financing. Their
programs typically offer up to 100% FF&E financing with three to six
years fully amortizing terms. ABL financing can increase the total debt
on the property to 80% Loan To Value when coupled with the primary debt
as long as the debt service coverage ratio is above 1.25 in the
stabilized year (post renovation or construction).
The following are some examples:
Example 1 - New Construction Marriott Courtyard
Total Project Cost: $11,100,00.00
1st Mortgage/Regional/Local Bank: $6,100,000.00 (55% of Total Project
Cost)
ABL FF&E Lease: $2,000,000.00 (18% of Total Project Cost)
Equity: 3,000,000.00 (27% of Total Project Cost)
Example 2 - New Construction Embassy Suites
Total Project Cost: $49,000,000.00
1st Mortgage/Regional/Local Bank: $25,000,000.00 (51% of Total Project
Cost)
2nd Mortgage: $4,000,000.00 (8.2% of Total Project Cost)
ABL FF&E Lease: $6,000,000.00 (12.2% of Total Project Cost)
Equity: 14,000,000.00 (28.6% of Total Project Cost)
Both these projects demanded more equity or an additional financing such
as a FF&E loan/lease to cover the shortfall of capital needed to
complete it. These examples demonstrate how a developer can retain
5%-20% of his equity for use in another project, or eliminate the need
to find equity in a turbulent market.
Example 3 - Renovation Crowne Plaza
Total Capitalization: $30,000,000.00
1st Mortgage/Regional/Local Bank: $20,000,000.00 (66.7% of Total
Capitalization)
ABL FF&E Lease: $700,000.00 (2.3% of Total Capitalization)
Equity: $9,300,000.00 (31% of Total Capitalization)
With tighter underwriting criteria, refinancing a loan may not be the
best solution. More lenders are looking for established properties that
are well positioned and are not in need of a renovation. Example 3
demonstrates how short term FF&E financing of renovations cannot
only save you from refinancing existing low rate mortgages but also from
adjusting large amounts of equity.
These examples highlight how borrowers struggling to complete recent
projects have utilized FF&E financing to ensure successful closure.
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GHN WEB SITE RECOMMENDATIONS
American Hotel & Lodging Association
www.ahla.com
Asian American Hotel Owners Association
www.aahoa.com
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The GLOBAL HOTEL NETWORK (SM) REPORT is a regular feature
of the weekly globalhotelnetwork.com e-Newsletter -- http://www.globalhotelnetwork.com/public/ghn.e_newsletter.html
read by Top Tier decision makers in the global hospitality & travel
industry.
To subscribe -- at the Year-End Special Subscription Rate
-- please contact Robert Harp at mailto:harp@globalhotelnetwork.com.
Copyright (c) 2001 Global Hospitality Resources, Inc., San Diego, CA USA
www.globalhotelnetwork.com
All rights reserved. Reprinted with permission.
CONTACT INFORMATION:
Global
Hospitality Resources, Inc.
www.globalhotelnetwork.com
13444 Pantera Road,
San Diego, California, 92130 USA
Telephone: 858-793-3366 Fax: 858-793-3367
E-mail: ghr@globalhotelnetwork.com
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