Get creative with financing

NATIONAL REPORT—There is an old saying that nothing in life is easy. That saying can easily be applied to financing in the hospitality space. That is why it is sometimes necessary for lenders and borrowers both to get creative to make a deal happen.

“In any financing, even the simplest and ‘straight down the fairway’ transactions, issues will arise that will require creativity and flexibility from the borrower or, more likely, the lender,” said Ben Brovender CMBS director, Citigroup. “These issues can include solving for tax-related issues, borrower-related issues, dealing with changes in the insurance market or navigating an abrupt change in the capital markets.”

He continued, “For example, our loans typically require borrowers to form new borrowing entities. During the closing process, a borrower may find out that transferring the asset to the new entity triggers an unforeseen transfer tax. Our approach would be to find a way to reduce or eliminate the amount of this expense—maybe we take a few extra steps to use the current borrowing entity as opposed to creating a new one.”

During the current positive economic cycle, lenders have carefully structured loans and required more equity into projects. “This has helped sustain a long period of growth, but also helped force developers to get creative when stacking capital for projects,” said Dilip Petigara, COO, Access Point Financial. “In turn, this has also required some lenders to consider other flexibility in order to win business and gain a competitive advantage when proposing on transactions. With more lenders chasing the same project, lenders may need to consider interest-only, alternative capital providers, shorter or no prepayment penalties, or flexible recourse, to name a few.”

He said that more lenders are having to get creative when the franchise requires a property improvement plan (PIP). “These PIPs are coming in above budgeted amounts, causing issues with loan-to-value ratios and with the capital stack,” he said. “This results in borrowers being required to inject more equity and/or the capital stack having to be modified.”

Both borrowers and lenders have to get creative, according to Stephen O’Connor, principal/managing director, RobertDouglas. “Regardless of the specific fact pattern of the project to be financed, it is incumbent on borrowers to consider some of the creative sources of financing that are available in the capital markets,” he said. “Creative financing may simply be a means to lower a borrower’s weighted average cost of capital, which is key to maximizing their return on invested equity, or it could be the only feasible option available to close a gap in a capital stack.”

He continued, “Lenders need to have an open mind and be willing to make room in the capital stack for more efficient and flexible tranches of capital that may bridge a financing gap or otherwise better meet the needs of borrowers, whereas borrowers need to have a willingness to embrace the complexity of having tranches of funding for a project come from alternative/nontraditional capital sources.”

According to Eric Melendez, VP, Mirae Asset Securities & Investments (USA), investment teams are getting creative with how the capital stack is being procured, particularly in construction projects. “For example, in addition to EB-5 [the EB-5 Immigrant Investor Visa Program, created by the Immigration Act of 1990], we are seeing sponsors raise capital from a variety of alternative sources including opportunity zone funds,” he said. (See story on page 9.)

Borrowers are also seeking relatively new types of funding, like property assessed clean energy (PACE) financing, which, according to Joe Euphrat, managing director of CleanFund, is a public improvement finance mechanism that has been around for more than 100 years to fund public works projects. PACE was introduced in California in 2007 as a form of assessment financing to fund improvements to qualifying properties, namely projects that reduce energy and water usage, and which are deemed in the “public good” (like assessments for school bonds, fire districts, etc.)

“Although the term PACE might be new, its foundation is not new at all,” he said. “This foundation is assessment financing, which has been in place in most states for many, many years. What’s new is that it’s now available to commercial property owners for improvements specific to a building/property. Yes, there are some nuances, such as the respective improvements to the collateral and the introduction of an additional assessment payment on the property tax bill, but in and of itself, C-PACE is not introducing more risk, per se, or to put it more accurately, risks that cannot be underwritten.”

When it comes to risk, ideally borrowers are reducing some elements of risk at the same time they are solving for a lower weighted average cost of capital, according to O’Connor. “But if a creative financing solution makes the funding for a project more complex, there is definitely an additional element of risk that goes along with that,” he said. “It has been nearly a decade since the depths of the last recession and lenders have been very careful in their underwriting and loan structuring ever since, so it might not be until the next recession that we truly see what unanticipated risks are revealed when these creative capital structures come under pressure.” HB

Company listing from A-Z

Based on surveys submitted to Hotel Business
n/a — not available

Access Point Financial LLC
1 Ravinia Dr., Atlanta, GA 30346
[email protected]
Management: Dilip Petigara, COO
Hotel Loans 150
Volume ($M) 600
Loan Range ($M) .2-40
Avg. Size of Loans ($M) 4

Aries Capital LLC
216 W. Ohio St., 5th Fl., Chicago, IL 60654
[email protected]
Management: Neil Freeman, chairman/CEO
Hotel Loans n/a
Volume ($M) n/a
Loan Range ($M) 5-150
Avg. Size of Loans ($M) n/a

Arriba Capital
4400 N. Scottsdale Rd., Ste. 9-89, Scottsdale, AZ 85251
[email protected]
Management: Ryan Bosch, VP
Hotel Loans 18
Volume ($M) 185
Loan Range ($M) 2-40
Avg. Size of Loans ($M) 6.5

521 Fifth Ave., 20th Fl., New York, NY 10175
[email protected]
Management: Andy Coleman, senior managing director

Customers Bank
99 Bridge St. Phoenixville, PA 19460
[email protected]
Management: Tim Romig, market president
Hotel Loans n/a
Volume ($M) n/a
Loan Range ($M) 0.5-5.7
Avg. Size of Loans ($M) 3

Davis Hotel Capital
100 Fillmore St., 5th Fl., Denver, CO 80206
[email protected]
Management: Geoffrey Davis, senior principal
Hotel Loans 10
Volume ($M) 107.5
Loan Range ($M) 10-120
Avg. Size of Loans ($M) 15

Engel & Volkers West Hollywood
8430 Santa Monica Blvd., West Hollywoood, CA 90069
[email protected]
Management: Jeff Lloyd, owner
Hotel Loans 3
Volume ($M) 42
Loan Range ($M) 5-500
Avg. Size of Loans ($M) 19

First American Realty Associates LLC
60 Four Seasons Dr., North Caldwell, NJ 07006
[email protected]
Management: Joe Epstein, president/founder
Hotel Loans n/a
Volume ($M) n/a
Loan Range ($M) 10-100
Avg. Size of Loans ($M) 10

Hotel Managers Group LLC  (dba HMG Hospitality)
11590 W. Bernardo Ct., Ste. 211, San Diego, CA 92127
[email protected]
Management: James L. Oddo, president

HREC Investment Advisors
6400 S. Fiddlers Green Cir., Ste. 1730, Greenwood Village, CO 80111
[email protected]
Management: Mike Armstrong, principal
Hotel Loans n/a
Volume ($M) n/a
Loan Range ($M) 5-50
Avg. Size of Loans ($M) 15

Largo Capital
2420 N. Forest Rd., Buffalo, NY 14068
[email protected]
Management: John Svec, managing director
Hotel Loans 9
Volume ($M) 330
Loan Range ($M) 2.5-75
Avg. Size of Loans ($M) 15

MidCap Hotel Loans
2311 Alt. US 19, Ste. 5, Palm Harbor, FL 34683
[email protected]
Management: Taylor W. Grace, managing partner
Hotel Loans 14
Volume ($M) 114.8
Loan Range ($M) 4.7-20
Avg. Size of Loans ($M) 8.2

Pacifica Capital & Brokerage Inc.
34145 Pacific Coast Hwy., #173, Dana Point, CA 92629
[email protected]
Management: Chris Chiotis, principal/founder
Hotel Loans 20
Volume ($M) n/a
Loan Range ($M) 2-75
Avg. Size of Loans ($M) 6.5

Patriot Funding Inc.
1045 Fall Cir., Roselle, IL 60172
[email protected]
Management: David Antonelli, founder
Hotel Loans 5
Volume ($M) 65
Loan Range ($M) 3-50
Avg. Size of Loans ($M) 13-25

Pinnacle Hotel Finance
9620 Bridgebrook Dr., Boca Raton, FL 33496
[email protected]
Management: Tim Maher, president
Hotel Loans 19
Volume ($M) 154
Loan Range ($M) 2-27
Avg. Size of Loans ($M) 8.1

PMC Commercial Trust
17950 Preston Rd., Ste. 600, Dallas, TX 75252
[email protected]
Management: Jan Salit, president
Hotel Loans 34
Volume ($M) 72
Loan Range ($M) 0.5-5
Avg. Size of Loans ($M) 2.1

PMZ Realty Capital LLC
200 W. 41st St., Ste. 602, New York, NY 10036
[email protected]
Management: Michael Sonnabend, managing member
Hotel Loans 52
Volume ($M) 800
Loan Range ($M) 5-94
Avg. Size of Loans ($M) 15

Premier Capital Associates LLC
12600 SE 38th St., Ste. 207, Bellevue, WA 98006
[email protected]
Management: Greg Morris, managing director
Hotel Loans n/a
Volume ($M) n/a
Loan Range ($M) 5-50
Avg. Size of Loans ($M) 10

Roundstone Funding Corporation
17 State St., 40th Fl., New York, NY 10004
[email protected]
Management: Ivan Hernandez, principal
Hotel Loans n/a
Volume ($M) n/a
Loan Range ($M) 5-75
Avg. Size of Loans ($M) 12

Sonnenblick-Eichner Co.
449 S. Beverly Dr., Ste. 300, Beverly Hills, CA 90212
[email protected]
Management: Elliot Eichner and David Sonnenblick, principals
Hotel Loans n/a
Volume ($M) n/a
Loan Range ($M) 10-60
Avg. Size of Loans ($M) n/a

One Alliance Ctr., 3500 Lenox Rd., Ste. 625
Atlanta, GA 30326
[email protected]
Management: Mat Crosswy, president
Hotel Loans 26
Volume ($M) 350
Loan Range ($M) 5-50
Avg. Size of Loans ($M) 15

Summit Capital
2385 Camino Vida Roble, Ste. 113, Carlsbad, CA 92011
[email protected]
Management: John Stueber, president
Hotel Loans n/a
Volume ($M) n/a
Loan Range ($M) 5-150
Avg. Size of Loans ($M) 10

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