This is the first article of a five-part series exploring the current environment and options for long term, fixed-rate financing of hotels. We cover both recent beneficial shifts in hospitality lending and the risks associated with refinancing as the peak of the market cycle predictably gives way to down cycle effects. The central theme surrounds the importance of proactively managing a hotel’s mortgage financing costs to both take advantage of refinancing opportunities and to reduce the possibility of financial distress in any business scenario.

The effort involved with refinancing your hotel’s mortgage can seem as unappealing as tax preparation. Expectations of confusing paperwork, complicated options, consuming time commitment, and general information overload can make for an onerous process.

And honestly, why bother? Your hotel’s cash flow has never been better. Plus, you’re busy rolling out new amenity program requirements, managing staffing challenges, and planning or digesting your next/last hotel acquisition or development project.

But like an unexpected tax refund, proactively refinancing hotel mortgage debt can save you a great deal of money. After all, financing decisions made today will have profound effects on your hotel’s cash flow and profitability in the future. While few of us in the hospitality industry expect a near-term downturn, the consensus among both lenders and hotel owners is that today’s historically low interest rates will not be with us much longer.

Nobody has a crystal ball to see future rate moves or changes in the economy, but if you plan for the inevitable hospitality downturn when the cost of money is inexpensive (like now), you will enjoy above-market returns in any business scenario.

Refinancing Into A Down Cycle

Because of where we currently are in the hotel market cycle (likely nearing or at the peak), most borrowers with loans coming due in the next few years will be refinancing into the down-slope of the cycle. One of the predictable effects of an industry downturn is for many lenders to exit the hotel market as originators are pulled to manage increasing delinquencies and loan workouts.

Market liquidity may be further constrained as a tsunami of conduit loans begin maturing in 2007. The conduit market for hotels essentially didn’t become mainstream until 1997 when only 479 hotel conduit loans were originated. Exponential growth followed. For example, according to Trepp, LLC, during 2006 $166 million in conduit loan balances came due for repayment. In 2007, $933 million of the 10-year term loans mature. In 2008, maturing balances grow to a staggering $2.8 billion, with growth continuing.

The simultaneous effects of reduced cash flow (due to reduced RevPAR during a downturn), lender retrenchment (due to increased loan delinquencies), and a significant spike in maturing loans (due to the mainstreaming of hotel conduit loans starting in 1997) all make for a difficult-to-impossible refinancing environment. None of the above reflect today’s heady environment in the hospitality industry. But both the inevitability and effects of a downturn are known characteristics of our 9-year average peak-to-peak market cycle. Hoteliers should ensure rigorous management of their mortgage debt to avoid otherwise predictable financial distress.

Put It In Your Calendar

Over the past 30 years, our firm has lived through many cycles and changes in both the hospitality industry and capital markets. The current “perfect storm” of low interest rates, available capital, and elevation of hospitality as a favored asset class will not last forever. This is the time to make a review of your hotel’s current financing a priority. Take advantage of the current lending environment to protect your hotel’s return on investment in the future.

Next in the “Hotel Financing Revisited” series: “When to consider refinancing”, “Recent interest rates and spreads”, “Capital market shifts benefit hoteliers”, “Financing options”.

About First American Realty Associates, LLC | First American Realty Associates, LLC () is a national hospitality company that focuses exclusively on hotel financing including construction, acquisition, refinancing, renovation, and repositioning/conversion loans. The firm has long-time lender relationships with banks, credit and finance companies, CMBS conduits, and insurance companies. Founded by Joe Epstein in 1976, and with offices in New Jersey and Texas, First American has financed 512 hotels across 44 states totaling $2.05 billion. Its licensed professionals have over 50 years combined Hospitality and Financial Services experience. They are members of the Mortgage Bankers Association (MBA), American Hotel & Lodging Association (AH&LA), and Certified Commercial Investment Member Institute (CCIM).

About The Author | Cameron J. Larkin is Senior Vice President of Hospitality Financing & Business Development at First American Realty. He has 14 years experience in the financial services and management consulting industries. Prior to First American Realty Larkin spent ten years working across six of GE Capital’s finance businesses in the US (Denver, Richmond, Stamford, Cincinnati, Dallas) and Europe (Prague). Prior to GE Capital he was a Senior Consultant with Andersen Consulting (now Accenture) for 3 years in their Hartford and Denver practices.

A native Vermonter now living in Dallas, Larkin earned his MBA from Columbia University and a B.S. in Business Administration from the University of Vermont. A seven-time marathon competitor, Cameron brings the same dedication and energy to his career every day.

Cameron Larkin
Managing Director
469-916-8518
Larkin Hospitality Finance

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