Clearly COVID-19 19 has wreaked havoc on our industry but perhaps most severely impacted is the Hospitality industry and Hotels more specifically. The capital markets are very fast to shut off the liquidity spicket but very slow to turn it back on. Hence, if you have a need for hotel financing your options are limited. I teach the Structured Finance course for the Georgetown Real Estate Master’s program and the first real estate myth that I dispel is that the most important thing to learn in real estate is NOT Location, Location, Location, but that it’s actually Relationship, Relationship, Relationship! Now more than ever our clients need to be able to count on us to give them good counsel through these turbulent times.
That said, there is a light at the end of the tunnel for our hotel borrowers. Capital formation in the space is moving fast as players are vying to provide “rescue” capital. Rescue capital is available for hotels but not for disrupted retail (the overwhelming view is retail has a permanent problem while hospitality has a temporary problem). This bodes well for the hotel owner in need of a bridge loan to get past this crisis. There is virtually no reasonably priced first mortgage debt as the banks are top heavy with the product and debt funds can’t access lines for hotel deals (which is how they financially engineer their returns). This lack of liquidity for a temporary issue creates a tremendous opportunity for capital sources with a risk appetite to gain market share. Much like when Ethan Penner, in his Nomura days recognized that he could build a finance company around providing reasonably priced loans at reasonable LTV’s for bundling into MBS product and thus he spawned a new industry called CMBS.
Hotel borrowers need to keep their eye on the ball and keep executing as well as the market will allow. Most lenders are fearful of foreclosing on a hotel vs other traditional real estate assets given the issues that come with running hotels, i.e., staffing, liquor licenses, etc. If a borrower is truly forced by its lender, and the asset has long term equity they can feel comfortable that there are bridge/rescue solutions available that will get them to the other end of this, albeit at an expensive price.
If you fit into the category of needing rescue capital call your RECA representative and I’m sure they will have options for you.
Cliff Mendelson | Metropolis Capital Advisors | 301-657-2022 | cliffm@metcapadvisors.com