Financing in an ‘Unfinanceable World’

Throughout the first three quarters of 2022, the capital markets, in general, have deteriorated, and the market for hospitality financing has cratered. While this sounds ominous, there is still historically attractive capital available for the right sponsors. Interest rates have risen from the artificially low levels created in response to the Great Recession but are still at levels where financing makes sense.

Sophisticated lenders have taken the opportunity to pick opportunities in today’s world of disintermediation. Borrowers need to think outside the box to fund deals; many have typically funded transactions through local and regional banks and have found these sources no longer interested in providing attractive financing. Life insurance companies, mortgage REITS, debt funds, credit unions, and other non-traditional hospitality lenders have supplanted bank capital. CMBS lenders are also in the market for strong deals.

What makes a deal attractive to lenders and investors?

There is nothing magical about what lenders are looking for today—the fundamentals of what makes an attractive deal has not changed. Experienced sponsors with realistic expectations are the types of clients that lenders are looking for, with hotels that are typically stronger branded—whether traditional franchises or soft brands—and are in markets with multiple demand generators.

Considering selling a hotel?

The Federal Reserve’s aggressive interest rate policy has created sticker shock among borrowers. Ten years of artificially low interest rates created tremendous upward pressure on pricing, and today’s increased loan costs have made some borrowers interested in selling their assets instead of refinancing. Lenders are unwilling to extend loans any further since they already have given borrowers extensions during the pandemic. No one knows what the future holds, but the capital markets will likely be more attractive in a couple of years. If considering selling now, one might be locked in today’s market conditions without any ability to benefit in the future.

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Shorter-term capital is available to get borrowers through this rough patch and to the “other side.” Bridge loans provide three to five-year capital that is often underwritten with the future upside considered. Five-year fixed-rate loans from both portfolio lenders and capital markets participants can offer lower transaction costs and be paired with preferred equity or other subordinated capital to raise the required funds without ownership writing a new check.

Now what?

Realistic expectations are critical. Borrowers need to change their thinking and realize they can no longer only want “what they used to get from their bank.” If those types of deals were still available, lenders would arrange loans with pre-2020 terms. However, today’s less favorable market does not mean that all deal terms will be unattractive. Borrowers need to focus on the plan for their business and act accordingly in seeking financing that allows them to successfully reach their goals for each asset. It is more important than ever to have experienced advisors to help navigate today’s uncertain lending environment.

About the Author

Michael Sonnabend is the managing member and a founder of PMZ Realty Capital LLC.

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Michael Sonnabend is the managing member and a founder of PMZ Realty Capital LLC. He has been active in the hospitality financing market for over 30 years.