Property Types Hospitality
Sept 24, 2007
By: Eugene Gilligan, Hospitality Correspondent
Richfield Hospitality Inc. currently manages 29 hotels, but also advises hotel owners on new property acquisitions. Aik Hong Tan, the company's president, discusses what changes he is seeing in the lending and transaction arenas, given today’s tighter credit environment.
CPNHospitality: In light of the credit crunch, what changes have you seen in the lending environment for acquisitions?
Tan: On CMBS loans, underwriting has become much tighter. Loans are being given based on trailing 12 net operating income numbers. Over the last two years, many times you could qualify based on a repositioning or rebranding strategy. Conduit lenders have become focused on trailing 12 NOI numbers, and more equity is being required from borrowers.
More lenders are going to banks that they have a relationship with. But those loans are recourse loans, where CMBS loans are not. And these loans are more expensive, as CMBS loans are based on a spread higher than the 10-year Treasury, while bank loans are based off the prime rate.
CPNHospitality: Since the credit crunch, have you seen a slowdown in transaction activity?
Tan: Not really. There continues to be a good amount of activity. It is taking a longer time to close deals. Over the next six to 12 months, we are going to see a recalibration. Because debt has gotten more expensive, we are going to see cap rates come up. So, hotel prices are going to come down. Sellers are going to have to be more realistic. Some sellers, of course, are going to want to get the same prices that hotels sold for two years ago. It’s going to take them a while to get the hang of it.
CPNHospitality: If you worked with a hotel owner today who said he wanted to sell his hotel, would you tell the owner to wait, or to sell now?
Tan: It really depends on the situation the seller is facing. If the hotel has good cash flow, and a refinancing is not imminent, this may not be the time to sell. But an owner who has to refinance in the next 12 months may not be able to get as high a debt level as on the original loan, and may have to put more equity into the deal. That owner may want to sell now.
CPNHospitality: What else are lenders looking for from borrowers who want to acquire a hotel?
Tan: They are definitely looking at the brand of the hotel, and they want to see a top brand. When you start moving into a headwind, the stronger brands will prevail. And lenders are looking closely at the condition and the location of the hotel.
We have seen a return of rational underwriting, which had gotten a little bit out of hand. This is a correction, and it’s not bad for the industry. But it’s going to mean short-term pain for everyone.
By: Eugene Gilligan, Hospitality Correspondent
Richfield Hospitality Inc. currently manages 29 hotels, but also advises hotel owners on new property acquisitions. Aik Hong Tan, the company's president, discusses what changes he is seeing in the lending and transaction arenas, given today’s tighter credit environment.
CPNHospitality: In light of the credit crunch, what changes have you seen in the lending environment for acquisitions?
Tan: On CMBS loans, underwriting has become much tighter. Loans are being given based on trailing 12 net operating income numbers. Over the last two years, many times you could qualify based on a repositioning or rebranding strategy. Conduit lenders have become focused on trailing 12 NOI numbers, and more equity is being required from borrowers.
More lenders are going to banks that they have a relationship with. But those loans are recourse loans, where CMBS loans are not. And these loans are more expensive, as CMBS loans are based on a spread higher than the 10-year Treasury, while bank loans are based off the prime rate.
CPNHospitality: Since the credit crunch, have you seen a slowdown in transaction activity?
Tan: Not really. There continues to be a good amount of activity. It is taking a longer time to close deals. Over the next six to 12 months, we are going to see a recalibration. Because debt has gotten more expensive, we are going to see cap rates come up. So, hotel prices are going to come down. Sellers are going to have to be more realistic. Some sellers, of course, are going to want to get the same prices that hotels sold for two years ago. It’s going to take them a while to get the hang of it.
CPNHospitality: If you worked with a hotel owner today who said he wanted to sell his hotel, would you tell the owner to wait, or to sell now?
Tan: It really depends on the situation the seller is facing. If the hotel has good cash flow, and a refinancing is not imminent, this may not be the time to sell. But an owner who has to refinance in the next 12 months may not be able to get as high a debt level as on the original loan, and may have to put more equity into the deal. That owner may want to sell now.
CPNHospitality: What else are lenders looking for from borrowers who want to acquire a hotel?
Tan: They are definitely looking at the brand of the hotel, and they want to see a top brand. When you start moving into a headwind, the stronger brands will prevail. And lenders are looking closely at the condition and the location of the hotel.
We have seen a return of rational underwriting, which had gotten a little bit out of hand. This is a correction, and it’s not bad for the industry. But it’s going to mean short-term pain for everyone.
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