The Hotel Times - June 2008 - (Page 16) CAPITAL OUTLOOK » BY JOE EPSTEIN No more easy money Hotel lending market needed a correction and got it I Joe Epstein is president and founder of First American Realty Associates. t has been almost nine months since the CMBS market crashed and burned. Those unbelievably enticing long-term, fixed-rate, non-recourse, highly leveraged interest-only loans no longer are available. This is not a new phenomenon. It happened in 1998 as a result of the Russian devaluation of the ruble and the monetary collapse in Argentina. We got along without the conduits then and we will get along without them now. The era of ª easy money,º overzealous and insane underwriting, and lenders participating in auctions instead of making loans has ended. In its place, the golden rule has been firmly reestablished. The return to ª normalcyº has arrived and those lenders whose doors remain open are completely in charge of the asylum. Insurance companies, local, regional, community and foreign banks, credit and finance companies, pension funds, the SBA and private investors have money and are making loans. With the conduits out of the mix, they are being flooded with loan requests. As a result, they are being conservative and at times, pricey. There has been a dramatic return to basics and a flight to quality. Only ª good dealsº are getting done. Cash is once again king and definitely required. On new construction and acquisitions, most lenders are insisting on a 25-percent to 35-percent cash infusion. On refinancing, they want to see a 1.35 to a 1.40 debt-service coverage ratio on existing numbers. Projections and future stabilized numbers are not being considered. Thirty-year amortization, interest-only loans, large cash outs and non-recourse construction loans are almost extinct. Instead, expect 25-year payouts, amortization from the time of Certificate of Occupancy, little or no cash outs, and personal guarantee burn-offs based on performance. The interest rate environment has been volatile. Spreads have widened dramatically, but interest rates have remained relatively unchanged because all of the underlying indexes (prime, Libor, T-Bills and swap rates) also have declined. On a 5-year refinance, a local lender might still fix a rate in the high 5percent range. However, nationally, on 5- to 10-year loans, fixed rates have been coming in between 6 percent and 7.25 percent. Despite the national and global liquidity unwind, talk about recession and rising energy prices, our economy and the hotel world have been resilient. Segmentation is alive and well. New brands are popping up all over. Demand still is exceeding supply and we are not in any immediate danger of overbuilding in most markets. We are not seeing the kind of occupancy, average daily rate and revenue per available room increases that we achieved in 2006 and 2007. However, although occupancy is expected to decrease slightly in 2008, ADR and RevPAR are projected to rise above the 3percent rate of inflation. As long as a full-blown depression doesn' t hit, we still are way ahead of the game. A correction in the hotel lending market was needed. We got one without enduring an oil embargo, a terrorist event or a depression. We can now move ahead at a measured pace with sane underwriting and project valuation. Be happy. It could have been a lot worse. All lenders could have stopped lending. hmm@questex.com 16 The Hotel Times June 2008 www.TheHotelTimes.com http://www.TheHotelTimes.com
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