A Catch-22 for Hotels
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Older Chicago-area hotels not planning a major reno or rebranding to keep up with the Joneses (i.e. new construction) will struggle significantly (especially if you factor in that many of them are already wrestling with ghost problems), but hotel financing options in the $10M-and-under sweet spot are tight due to a limited number of lenders that will consider this special purpose asset class.
Thorofare Capital SVP Felix Gutnikov (right, at RECon with CEO Kevin Miller) tells us non-core assets in non-core submarkets are improving, but they're in need of a facelift. The issue: Smaller deals under $10M will have trouble getting interim financing, and in some cases CMBS financing, because few CMBS lenders can do an on-book execution, put the loan on their balance sheets for a year, do the reno, then lock in the CMBS for the takeout. CMBS lenders are focusing on total volume while demand from the secondary market is strong, incentivizing them to work for larger $10M-plus checks, he says. These smaller remodels stay stuck in the middle, unable to attract CMBS (which likes stabilized deals) and out of reach of smaller credit unions and community banks.
Hotel owners have to turn to the private capital markets for one- to three-year short-term renovation money, but it's an easier get for regional operators versus mom and pops. Thorofare just closed an $11.5M loan in one week against a 242-room Sheraton in Lisle/Naperville (formerly a Wyndham, above) for new owner Vinayaka Hospitality Lisle, making the property a prime CMBS target next year once it is stabilized, Felix says. SBA lending could help these smaller deals, but the restrictive underwriting requirements mean many deals fall flat and never close. On the larger, more competitive side, banks today end up undercutting each other with such a low cost of capital that sometimes the risk-adjusted return isn't favorable, he adds. (Anything you can lend, I can lend better.)
Snapped with Kevin and VP Larry Wass. Felix expects a strong year for local hotels in 2014, noting that Thorofare has been in talks with several private investment firms, experienced hotel operators that have raised fund vehicles or have JV'd with large investment firms to buy up distressed hotels, on pace to buy over $1B in hotel properties in the Midwest. Interest rate fear is somewhat overblown, he says, since rates have gone up nearly 100 bps in the last nine months and that hasn't significantly slowed down value-add hotel activity. Felix is looking forward to returning home to Chicago from LA over Thanksgiving, so he can see the family and drive around to check out Thorofare's local debt investments. (The company grew loan holdings in Chicago to over 1M SF, approaching $50M, in 2013.)