GlobeSt.com: What are the main differences between bank loans and CMBS loans?

Rushi Shah: Most bank loans require the borrower to have a deep relationship with the lending institution including the borrower's deposit business. Banks will usually also require borrowers to provide personal guaranties, otherwise known as recourse. If the property fails, a borrower's personal assets are on the hook to satisfy the loan, along with sometimes millions of dollars in penalties associated with recouping the loan. Conversely, CMBS loans are typically non-recourse with no ties to one's personal wealth. While Wall Street lenders are still very concerned with the quality of the borrower due to accountability to investors, those lenders are more focused on the property needing to be liquidated, or the “exit strategy” in the event of a default.

Some banks may offer non-recourse financing for smaller loan amounts or lower LTVs, but usually limit it to shorter five- or seven-year terms. CMBS loans are available up to a 10-year term without recourse, allowing today's low rates to be secured for a longer period. Furthermore, unlike a bank loan, CMBS loans are assumable. If an owner decides to sell a property before the loan matures, the buyer can assume the CMBS loan and the seller can avoid pre-payment penalties.

Bucaro: Borrowers often think that they don't need a non-recourse loan because they are confident in their management abilities and the property's successful track record. Where non-recourse becomes critical, however, is when events occur outside of the owner's control. For example, the Great Recession in 2008 had a profound impact on hotel owners, and the performance of their properties. Many hotel owners lost their properties because the assets could not generate enough income to service the debt, and in many cases the property was worth less than the loan amount. Banks were forced to foreclose on their borrowers, and liquidate the properties. In addition, the borrowers were sued for their personal guaranties and many were forced into personal bankruptcy. With a non-recourse loan, the owners would have had the option to give up the property without any additional personal liability and without permanently tarnishing their credit.

Shah: Getting cash out of your hotel may also be easier with a CMBS loan. Unlike banks, Wall Street lenders are not subject to FDIC or other regulatory requirements, which results in less strict underwriting standards and the ability to lend at higher LTVs. This is good news for hotel owners who rode out the market in recent years (often investing individual funds in order to keep existing loans in good standing) and are now seeing property values increase.

Aries Capital recently had a client whose hotel had doubled in value since closing his original bank loan. The new CMBS loan will allow him to keep the property and increase his leverage at a very attractive rate and without recourse. The new financing will also enable him to take out more than $6 million in cash to use to grow his portfolio from four hotels to six hotels.

Other notable recent transactions for Aries Capital include securing $36 million in permanent debt and $7.2 million in preferred equity for repeat client Innisfree Hotels' Hampton Orange Beach in Orange Beach, AL. These mark the sixth, seventh and eighth transactions that Bucaro has obtained for Innisfree since 2012, bringing the total amount financed on behalf of the Gulf Breeze, Florida firm to over $187 million. As a follow-up to the CMBS loan, Aries secured an additional $7.2 million in preferred equity on the same property, which provided Innisfree with capital to pursue future acquisitions. Shortly after closing, Aries Capital brought Innisfree a joint-equity investment opportunity with Janee Hotel Corporation and Killington Hospitality Group for the acquisition of Killington Mountain Lodge in Vermont near the popular Killington Ski Resort.