Hotel & Motel Management - June 2, 2008 - (Page 16)

16 On Finance IN THE details Banks still offer lending Sizing and pricing loans Decline personal guarantee Solicit other lenders H&MM June 2, 2008 | HotelMotel.com www.HotelMotel.com/digital_edition Mitigating personal guarantees on debt ith the securitized lending market virtually moribund, banks seem to be escalating their commercial ﬁnancing activities. Over the past few months, when credit markets have been especially roiled, I’ve still found most banks more than willing to consider hotel mortgage opportunities. In fact, three hotels we over- W By Jeff Wilder H&MM Columnist see recently have received a total of seven deﬁnitive ﬁrst-mortgage lending offers from six different regional banks. The ﬁnancing offers have been attractive from a historical perspective with interest rates ranging from 5 to 6.5 percent, amortization schedules in the 20- to 25-year range and loan terms of 10 to 20 years. Most lenders doing real-es- tate loans look primarily at the twin metrics of debt service coverage ratios and loanto-value levels when sizing and pricing loans. The DSC for hotels is usually around the 1.3 range, meaning that the property’s net income before debt service should be at least 130 percent of the annualized mortgage debt service. This provides a nice proﬁt cushion, assuring the lender that its debt payments can be met. And, LTV levels in the 50 to 75 percent range of appraised value also clearly offer an adequate property valuation cushion to the lender. Personal guarantees of debt repayment usually only are sought as additional protection against foreclosure. So if a lender makes an otherwise acceptable mortgage offer, yet seeks a personal guarantee of debt as well, what are a borrower’s options? Decline to provide the guarantee, pointing out that the loan most likely is conservative and the property’s economics should stand on its own merit. Request a limitation of the guarantee to a portion of the borrowing. Offer to provide a guarantee, with the understanding that once you submit a full year’s ﬁnancial statement to the lender (for a period subsequent to loan closing) showing cash ﬂow results exceeding a certain DSC ratio that the guarantee will be extinguished. Solicit a mortgage from another lender. Agree to guarantee the principal of the loan. I’d like to address one nonbank lending source widely used by hotel borrowers: the use of Small Business Administration loan programs. These programs generally require personal guarantees of the mortgage debt, with interest rates slightly higher than conventional bank debt. However, there are two advantages that may make personally guaranteeing debt worthwhile for some borrowers: capital availability and junior ﬁnancing behind the ﬁrst mortgage. This is a very useful feature, as it allows the leveraging of a property that a borrower may ﬁnd necessary in order to complete a property purchase or access funds for future capital improvement projects. hmm@questex.com Jeff Wilder is president of Wilder Ventures LLP, a New York Citybased asset management company, and an adjunct professor at New York University. E-mail him at jswilder1@aol.com. CIRCLE NO. 122 http://HotelMotel.com http://www.HotelMotel.com/digital_edition http://www.hostmark.com

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Hotel & Motel Management - June 2, 2008 Contents State Programs Help Define Green Hotels AmericInn Boosts its American Presence Questex, The Bench to Host Russia Event Perspective Letter to the Editor Legally Speaking Guest Column Marketing Matters Consultant's Corner Satisfaction Trends On Finance Travel Trends Cornell Insights Energy Star Update Maintenance Doctor Management Trends Trends & Stats Finding Financing Challenges Developers Credit Crunch Still Tops List of Lawyers' Concerns Mixed-use Funding Bleak, Panelists Say Luxury Landscape Keeps Pushing Higher PTACs Events Casegoods Seating Energy Controls and Sensors Pest Control Electronic Locks Transactions Supplier News Timeshare Misconceptions Still Prevalent Awards People Ad/Edit Index Marketplace Classifieds Checking Out

Hotel & Motel Management - June 2, 2008

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