As a hotel developer, you want to strike the best financing deal possible. You have a healthy relationship with your local bank, so the possibility of securing a loan from it is good. Trouble is the terms may not be in line with your investment strategy.
Lenders will provide some cash out to further improve the asset being financed but it’s tough to get cash out of conventional lenders to use for other acquisitions or developments.
What’s the alternative?
Consider collateral mortgage backed securities, or CMBS loans. Not only are they particularly appropriate to the hotel developer with a track record, they offer attractive terms and the ability to access trapped equity. Getting one could pay off, particularly down the line.
At the same time, though they’re not for everybody, CMBS loans are gaining in popularity as the economy sputters back to life. Here’s why.
CMBS loans are structured to lock in current low interest rates and access your trapped equity. Such loans typically provide for equity recapitalization or cash out, leveraging the asset to current market value without providing a personal guaranty.
Say you carry a $5 million loan on an existing hotel. When you go to refinance that, you discover that today’s current market value and cash flows support a $10 million loan. All of a sudden, you’ve recovered $5 million in equity, allowing you to take advantage of your asset’s current value and invest that additional equity in other properties or otherwise expand your empire.
Of course, that depends on a good economy, but it also reflects how you’re doing as an operator. If you improve a property so it generates more income, you’ve earned it – after all, you’ve improved the performance.
The other advantage of a CMBS loan is that it’s non-recourse, meaning the asset is the collateral and there’s no personal guarantee required which is a standard requirement for banks.
When you do a deal with a conventional bank, the bank holds the loan on its balance sheet; it services it, receives the payments, monitors the collateral – and if a loan goes bad, it has to collect it. By contrast, once the investment origination houses that offer CMBS loans sell out, they’re done with them; a master servicer or third-party servicer handles the loans and is responsible for collecting the payments. The disadvantages of CMBS loans are that they can’t be modified, prepayment is very expensive, and once you structure that loan, you’re basically stuck with it.
Overall, there’s less flexibility to a CMBS loan.
The advantage of a bank loan is you’re dealing with a lender holding the note, so there are chances to modify it, add onto the loan or modify the loan terms.
All this means is that when you shop for a loan, look at both types, see which best fits both your short- and long-term needs – and then go for the one that’s the better bet.
By Greg Morris