Hey All,
I was wondering if any of you wonderful people have materials to get a 101 view of basic valuation parameters for Hotels and Lodging.
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Hospitality loans for a refinance generally size to a 10-10.5% Debt Yield (NOI / Loan Amount) for maximum proceeds depending on the quality of the asset an dif there's any capital improvement you're planning on using the proceeds for. Standard underwriting assumptions of of 1.25x DSCR (on 30-year amortization) remain, along with a 4% FF&E Reserve and a standard 3-3.5% Management Fee depending on the Hotel's operator. Additional metrics Lenders may take include adjustments to Sales & Marketing, G&A, etc.
If you're talking construction, you'd be looking at 60-65% LTC (maybe 75% depending on the Sponsor's history with the lender, history as a developer, or the size of their balance sheet) with a 3+1+1 term (3-year loan with 2 one-year extensions). Most lenders won't allow you to take the cash flow either after C of O, so that's going to be your best time to refinance, usually 12 months after opening underwriting to your Year 3 stabilized NOI.
Rates for Hotels right now we're seeing 150-250 bps. above the 10-year swap rate (for a securitized refinance) which is an all-in rate of ~3% to 4% -- crazy time we're in now! For Construction loans, most (80-90%) will be priced over LIBOR with a credit spread of 400-700 bps. depending on the quality of the asset, frothiness of the market, and the lender's risk appetite within their portfolio. That brings you to an all-in rate of ~6% to 9%. Fees on those loans will also be 1% origination fee, .50% exit fee, with anywhere from .25% to .50% extension fees.
I agree with a lot of what you said but would add some comments/caveats:
Agreed on dscr, min 1.50x is very common for hotels that are requesting 10 year fixed rate debt. And increasingly for limited service hotels, 25 year am as opposed to 30 year am is requested by B buyers. Hospitality is tough, it is the product type that gets the most kickouts by B buyers in a CMBS pool.
This was very helpful thanks!
I can’t wrap my head around swap rates. Why would a borrower want this? Isn’t this a lot of risk if we were to be in a rising interest rate environment? What are the pros/cons?
Why not a fixed rate? Thanks!
Pay the Bank a fee to lock-in a lower interest rate then the one they currently have? Depending on how much money the swap saves you long-term it can be a good move. Have been seeing this a lot lately in my group.
In addition to @umioryi60" 's killer response, I would also add that data points are best found from HVS and Trepp.
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