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By Rushi Shah
Because non-recourse CMBS and other Wall Street institutional investors focus primarily on the property, your hotel’s flag will be a key factor in your lender’s decision.
Hotels with strong brands, such as Marriott and Hilton, that enforce operational and physical standards, support owners by providing sales and management training and tools, negotiate preferred pricing with vendors and generate demand via marketing and membership loyalty programs, are typically better positioned for success with more predictable performance. The risk of the borrower defaulting on the loan is lessened, and if there is a default, the lender is more confident it will have a favorable exit strategy.
Most non-recourse permanent loans get pooled together to get converted into rated and non-rated bonds that are sold on the secondary market. The investors of the non-rated bonds are called B-piece buyers, and the rated pieces are policed by rating agencies. These buyers and agencies determine the quality of loan collateral they want in their bond pools. Their preference is for better flags because of the belief that during times of economic distress, the higher quality brands receive better support from corporate.
Q. What if my hotel’s flag is lower on the chain? Is my property still eligible for non-recourse financing?
As you move down the chain scale and further out into secondary or tertiary markets, underwriting metrics tighten and LTV ceilings may be lower. Standards used for these assets differ widely from what would be applied to a top flag in a gateway city as the property’s ability to weather the ups and downs of business is less predictable. Factors such as being near an airport or other high-demand location, or within a market with high barriers to entry for competitors, however, can compensate for a less premium brand.
One of the key underwriting metrics lenders utilize is debt yield. This is calculated by dividing your net operating income (after FF&E reserves, a management fee and before debt service) by the loan amount. The lower the flag, more remote the location or less stable the historical cash flows, the higher your debt yield requirements and lower the loan amount. Debt yield metric for the loan is conceptually similar to cap rate for the value of your property. Experienced financing intermediaries understand that every deal has a story, and can creatively structure a deal to mitigate the lender’s risk while still meeting the borrower’s needs.
Most CMBS shops must limit their hotel exposure to only 20 percent of their overall mortgage pools. As they approach their quotas, they may be increasingly selective about which hotel flags to include. Be aware or engage an advocate who is aware of which flags lenders have funded in the past, who is nearing saturation and which firms still have capital for hotel assets.
Q. Do I need my franchiser’s permission to refinance?
As part of the financial transaction, your lender will require a legal agreement to be put in place between the lender and your brand. Known as a “comfort letter,” this document outlines the lender’s right to continue, renew or terminate the franchise agreement if the borrower defaults on the loan. This letter also gives the lender assurance that your property and the franchisee is in good standing with the franchisor. Obtaining a comfort letter can take up to 45 days, even longer if the borrower or the property is not in good standing with the brand. Make the request early, and ensure you have resolved any inspection issues, are up to date on franchise fees and on top of any PIP requirements. Discrepancies can delay or even scuttle your transaction.
If the brand requires a PIP and it is coming due in the near term, the lender may hold back a portion of the proceeds. The funds are released as work is completed. If the PIP deadline is further out, the lender may collect additional reserves from the borrower to fund the improvements.
Even well-managed properties, however, sometimes run into snags. As a highly active intermediary, we’ve repeatedly been called upon to use our relationships and past experience with franchisers to negotiate outstanding issues and move loans forward to closing. ■
Rushi Shah is an executive vice president at commercial mortgage banking firm Aries Capital, LLC, and president of its online non-recourse platform LendingCap Commercial. Since 1991, Aries has arranged/funded over $5 billion in financing in the U.S. and Caribbean. Shah held previous positions at Northern Trust. A member of AAHOA’s Strategic Business Advisory Committee, Shah holds an MBA from The University of Chicago’s Booth School of Business.
Did you know?
Most CMBS shops must limit their hotel exposure to only 20 percent of their overall mortgage pools.