By Rushi Shah
If you are in the market for financing and have more than one commercial property, you may benefit from taking a cue from the fast food nation and opting for a “combo.” Cross-collateralizing, or bundling two or more properties into a single non-recourse loan, can attract more lenders, garner better pricing and transform a property that is considered too much of a risk on its own, into a loan-worthy asset. This strategy can work when acquiring or refinancing existing assets, or using the imputed equity in an existing property to acquire a new one.
Safety in numbers
Investors who buy pooled CMBS loans as bonds on the secondary market will pay more for less risk. Having the increased insurance of multiple properties satisfying the loan – especially if in diverse markets – will be attractive to these investors, lenders and you, the owner. If one hotel suffers a slow-down in cash flow, the additional properties can often pick up the slack to prevent any interruptions in payments. Keep in mind, however, that all of the properties are on the hook to repay the loan if you do default.
Measured by the company you keep
A hotel in a secondary or tertiary market, or with a flag further down the chain scale, may become more palatable to lenders when paired with a property in a strong market with a top brand.
For example, we recently had a client who wanted to refinance his Day’s Inn. As a lower mid-scale brand, Day’s Inns can be challenging to securitize. Bond investors consider the flag risky and its inclusion affects the reputation risk in the loan pool. A non-recourse loan is often out of reach, unless the hotel is in an exceptional market and/or near a major demand driver. In this case our client’s hotel was in a lackluster location and somewhat mismanaged.
Because the Day’s Inn was ineligible for a non-recourse loan on its own, we added the borrower’s high-performing Hampton Inn to the mix. With the addition of the second hotel, the Day’s Inn’s shortcomings were tempered by the strength of the Hampton brand, Hilton’s extensive reservation system and the Hampton’s solid cash flow. We were able to get the lender comfortable that the loan’s debt service would now be sufficiently supported and closed the loan with cash out. Using a similar strategy, we also recently closed a Microtel crossed with a Holiday Inn Express in a tertiary market.
The whole is worth more than the sum of its parts
Because the time and cost to underwrite and process a commercial loan is the same no matter what the loan size, most CMBS shops have strict minimum loan amounts for non-recourse loans. Individual hotels needing an amount below the threshold may become financeable if combined under one larger loan. Larger loan amounts and portfolios catch more lenders’ eyes and usually reap better rates and higher LTVs. Investors are likely to negotiate more for a larger portfolio as there are more profit dollars to go around.
Kill two birds with one stone
While we strive to make the commercial loan process as streamlined as possible, it still demands a lot of effort and time. Underwriting multiple properties simultaneously increases the transaction’s complexity (especially if they are not the same property type) but can also provide economies of scale in the areas of legal counsel, third-party fees and resource capacity over two separate loans executed linearly. An experienced intermediary can negotiate with your lender and third parties to identify and maximize any potential savings.
When to choose a la carte
An obstacle that might prohibit you from cross-collateralizing properties is ownership. Each of your properties may be held by different legal entities. You’re the common link, but your co-owners and their goals for the properties most likely widely vary. Fortunately, if you are able to gain consensus from your partners, it is actually quite simple to structure the loss-sharing agreement among the owners to accommodate this scenario.
Your future plans for your properties must also be considered before you finance them as a portfolio. Down the road, will you want to sell one property but keep another? Properties can be unwound with a simple negotiation upfront of a “release provision” clause in the loan documents. However, this type of structure may lead to additional consideration by the lender and can sometimes trigger slightly higher rate or lower proceeds depending on the risk of the individual properties. This is when an intermediary’s expertise can prove invaluable. ■
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 Founding & Allied Member Committee, Shah holds an MBA from The University of Chicago’s Booth School of Business.