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Top 4 Hotel Financing Obstacles And How to Get Around Them – By Brian Holstein,

Do you have upcoming hotel financing needs? Whether you are in the market for a simple refinance or acquisition financing, a discounted-payoff (DPO) financing or a PIP-induced recapitalization, the same rules apply.

Do you have upcoming hotel financing needs? Whether you are in the market for a simple refinance or acquisition financing, a discounted-payoff (DPO) financing or a PIP-induced recapitalization, the same rules apply.
The hotel loan market has been on a good run for the last twelve months with competition among lenders heating to a point not seen since prior to the financial crisis. Lenders are beginning to focus increasingly on areas outside of pricing and leverage in order to preserve loan profitability and keep mortgage leverage below the aesthetically pleasing 70% loan-to-value level.
SIMPLY PUT, WHAT THIS MEANS FOR HOTEL LOAN BORROWERS IS THAT LENDERS ARE WILLING TO LISTEN TO YOUR STORY, NOW MORE THAN EVER, TO WIN AND CLOSE YOUR BUSINESS.
The following list identifies the top 4 hotel financing obstacles and advice on how to approach them:
#1 – NOI UNDERWRITING ADJUSTMENTS
Unfortunately, the borrower’s NOI doesn’t aways look like a lender’s NOI. Lenders implement a series of underwriting adjustments to determine an “underwritten” NOI. Below are the most common adjustments: 

#2 – RECESSIONARY BATTLE SCARS
It has become commonplace for borrowers to have at least one, or multiple, instances of default, workout, foreclosure or bankruptcy as a result of the most recent recession. Prior to the recession, most lenders would avoid such borrowers. Nowadays, if lenders took that same stance, there wouldn’t be a whole lot of qualified borrowers.
The foremost question that arises when underwriting the above situation is whether or not the sponsor “played nice” in such times of distress. It is our job to help craft an explanation in a manner that is easily digestible and viewed favorably in the eyes of a lender. Almost every financing we have worked on post-financial crisis included one or more of these stories. We have been successful, without exception, at telling that story and getting credit approval.
#3 –LOAN TERM FRANCHISE EXPIRATIONS
With an exception for recently constructed hotels, it is often difficult to execute franchise agreements with term in excess of ten years. This poses a problem when seeking five or ten-year permanent financing. Lenders are reluctant to take on the risk that their collateral will be down-flagged or become un-flagged during the term of the loan or at the time of maturity.
A cash flow sweep structure can solve this problem. The sweep is triggered by a non-renewal of the franchise agreement prior to the franchise expiration. The sweep is a temporary mechanism, with all swept cash returned to the borrower once the franchise agreement is renewed and there are sufficient funds available to pay for an associated PIP.
#4 – PREPAYMENT PENALTIES
Prepayment penalties typically come in the form of yield maintenance or defeasance. Prepayment penalties make it more difficult to take advantage of cap rate declines, as the penalties become more costly as interest rates decline. Below are the most effective ways to mitigate prepayment penalties:

The author, Brian Holstein, is a Senior Vice President at HVS Capital Corp. Mr. Holstein is primarily responsible for the origination and placement of debt financings and investment sales. Prior to joining HVS Capital, Mr. Holstein closed more than $1 billion in commercial real estate loans and underwrote more than $20 billion of loans while working at a direct lending institution. Mr. Holstein’s experience as a commercial real estate banker gives him a unique perspective on loan underwriting, pricing, structuring and closing. 

Brian Holstein – Senior Vice President
HVS Capital Corp.
(303) 512-1223 
bholstein@hvs.com 
http://www.hvscapital.com/personnel/brian-holstein

Posted by on September 18, 2013.

Categories: Features

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