Capital Is Plentiful, Creative for Many Hotel Properties

Even though the economy is opening up, hotels continue to suffer as business travel remains muted.

Add this lingering effect to the fact that there were more than one billion unsold room nights in 2020, and it is clear why many hotel owners are not able to meet their debt-service payments or cover their basic operating expenses. Some others are making these payments out of pocket.

Even if they’re surviving, they may still have to make it two to three more years before conditions return to normal. The good news is that there is plenty of rescue capital out in the market, according to Trepp. Lenders are providing capital in many forms for hotel owners, whether it is equity to purchase properties or creative debt structures to ensure liquidity and carry interest until stabilization. There is so much capital out there that hotels aren’t being discounted today.

For many lenders and capital providers, hotels provide an attractive alternative to other real estate investment classes, such as multifamily and industrial properties, according to Trepp.

“We are a basis lender and see an opportunity to lend in the hotel sector right now,” Randy Reiff, chief executive of Allegiant Real Estate Capital, tells Trepp. “The volatility of hotel cash flows makes a lot of investors nervous. As a result, many are quick to sell off in distressed markets. People need to travel and don’t be surprised if the market recovers more quickly than many think. We believe this provides a great opportunity to obtain attractive risk-adjusted returns.”

It’s important to note that some hotels are faring better than others. With leisure demand leading the recovery, the bulk of liquidity available for hotel loans has been earmarked for assets that cater to these travelers. “Lenders are aggressively pursuing these assets and providing capital,” according to Trepp. “They’re including interest reserves that allow for debt-service payments for up to three years. Hotel properties with near-term maturities or with limited or no operating history that cater to leisure travelers are finding an abundance of available financing, which has resulted in interest-rate compression.”

For instance, Fort Partners recently secured a $105 million loan that will be used for the acquisition and modernization of the Four Seasons Hotel Miami—a 221-key hotel that is part of a 70-story mixed-use tower that includes office space, residential condominiums, an Equinox health club, retail space and a parking garage. 

Madison Realty Capital provided the financing under a program that offers transitional loans to institutional sponsors.

Michael Conaghan, partner with Fort Partners, noted that Madison offered a highly competitive rate with a flexible structure.

But there is also capital available for hotels that don’t rely on leisure travelers. Trepp says that lenders are also attracted to well-located properties with limited or no operating history or hotels that have not yet seen their cash flows improve. It says financing for these types of assets typically requires a multi-tranched structure, with a lower leverage first mortgage and a subordinate mezzanine and/or preferred-equity tranche.

This structure can be helpful for hotel owners who do not have the capital to keep their existing loans current or ones facing a pending loan maturity against a property lacking the in-place cash flow to refinance an existing loan. Trepp says the subordinate tranche in these transactions is typically priced in the 10% to 12% range. However, it could be as high as 15% to 17%, depending on the property’s location and perceived risk.