Contact Us

Lenders Pulling Back On Financing Hotel Projects

Hotels are struggling to raise rates this year as the market is inundated with new supply, and experts say many lenders are becoming more conservative in their financing of hotel development deals. 

Arbor Lodging Partners' Vamsi Bonthala, JDM Capital's Joseph DeMatteo, Brookfield's Bruce Wiles, Aronson's Aaron Boker, Peachtree Hotel Group's Greg Friedman, RLJ Lodging Trust's Kate Henriksen

Peachtree Hotel Group CEO Greg Friedman, speaking at Bisnow's Hotel Leadership, Investment & Management Summit in D.C. last week, said he typically goes to regional banks to receive construction financing for new hotel projects, but he said that has become more difficult. 

"It's a lot more challenging and usually you’re coming in with a lot more equity," Friedman said. "The cycle is a lot more tempered on the debt side, what we’re seeing is banks continue to be extremely conservative."

Goulston & Storrs' Corey Wilk, Pod Hotels' Rani Gharbie, Greenworks Lending's Jessica Bailey and Hidrock Properties' Abie Hidary.

Pod Hotels Head of Acquisitions and Development Rani Gharbie said lenders haven't stopped making deals, but they are taking a closer look before making a bet on a project. 

"What we’re seeing is more scrutiny from these players," Gharbie said. "They look at sponsorship credibility, are these guys able to build on budget and on time, and can they weather through a down cycle. Then they start looking at the economic fundamentals of a deal, and they’re a bit more conservative."

Gharbie said many of the loans on Pod Hotels' projects have come to around 50% loan-to-cost, a relatively low percentage that creates less risk for banks. Greenworks Lending CEO Jessica Bailey also said she is seeing 50% LTV deals closing, but higher percentages than that can become challenging. 

"It does feel at least in the hotel sector that there’s been a little bit of pullback on leverage from the senior lenders," Bailey said. "You do see sponsors wanting 60-70-75 [LTV] and senior lenders saying saying 'whoa whoa whoa, we we want to pull back a little bit.' ... It feels like that’s happening more in the hotel sector than other markets that we lend in."

The pullback on LTV creates more opportunities for gap financing such as the PACE Financing that Greenworks specializes in, Bailey said. Another source that can fill the gap is EB-5 financing, said Phillips Realty Capital principal Mark Remington. 

Hidrock Properties' Abie Hidary, Phillips Realty Capital's Mark Remington and Davis Hotel Capital's Geoff Davis

Remington also said he is seeing banks lending only up to 50% or 55% of the capital stack. He said some debt funds are willing to go up to 65% or 75%, but the interests rates become significantly higher. 

"In the bank world they’re reserving their precious capital for their best clients," Remington said. "They’re doing lower leverage and more recourse. The debt funds are filling the void as they did 10 years ago."

Davis Hotel Capital founder Geoff Davis said life insurance companies are also becoming more conservative in their lending, but he is seeing other capital sources come in and fill the gap. 

"Right now, banks and life companies are trending down in terms of their terms, with lower LTVs and more recourse," Davis said. "Trending up is debt funds, opportunity zone funds and high net worth investors."

Savills' Marc Magazine, OTO Development's Corry Oakes, Donohoe Hospitality's Thomas Penny, Wells Fargo's Jennifer Dakin, B.F. Saul's Mark Carrier, Hersha Hospitality Management's Naveen Kakarla and Arent Fox's Kimberly Wachen

Wells Fargo Senior Vice President Jennifer Dakin, leader of the bank's Hospitality Finance Group, said the performance metrics of the hotel market play a role in lenders becoming more conservative on new developments. 

"Land costs are very expensive right now, and you’re not seeing the rate growth you need to make the deal work," Dakin said. "What that means is I’m going to be coming down on my potential advance. We typically top out at 65% [LTV], but that doesn’t necessarily make sense. I might come in less than that."

Hilton's Kevin Jacobs and LW Hospitality Advisors' Dan Lesser

Hilton Chief Financial Officer Kevin Jacobs said global hotel performance is "unfortunately regressing to a low-ish mean." In the U.S., he is seeing rising construction costs that should slow down development, but that trend hasn't yet fully materialized. 

"You would have predicted in the U.S. with build costs, you'd think that development in the U.S. would slow down, and it has to some degree, but there is still a flight to value," Jacobs said. "You don't see a lot of full-service luxury getting built these days, but there's still a lot of stuff getting done in the mid-market in the U.S."

ZDS' Eric Zuena, Marriott International's Jennifer Connell, Crestline Hotel & Resorts' James Carroll, Preferred Hotels & Resorts' Robert Van Ness and HVS' Susan Furbay

In addition to mid-market hotels, many developers are also moving toward trendy, boutique hotels that are not associated with a large, corporate brand.

HVS Vice President Susan Furbay, who previously worked on financing deals at GE Capital, said these independent hotels are typically more challenging for lenders to finance. 

"From a lender’s perspective, when you bring a truly independent, boutique hotel it does raise a red flag," Furbay said. "You’re not going to get 75% LTV on these independent boutique hotels, you’re going to be expecting to 60% at most. There’s definitely more disciplined underwriting."

Pebblebrook Hotel Trust's Jon Bortz and White & Case's Gene Leone

Pebblebrook Hotel Trust CEO Jon Bortz, whose firm completed a major acquisition of LaSalle Hotel Properties last year, owns a collection of independent hotels he called the "Z Collection." He said it can be more challenging to bring in customers to independent hotels because they don't have major distribution channels and brand loyalty programs, so it is critically important to hire the right operators. 

"You have to go get your business, there is no button to push where customers show up," Bortz said of independent hotels. "You have to have people who know how to do that. Most of the time, they don't come out of the brand side, they come out of the independent side, because you need to be prepared for rejection, for the fact that no one's ever heard of you."