Hotel-Friendly Debt Structures: Stonehill Principal on Financing Issues

At the recent Americas Lodging Investment Summit (ALIS) in Los Angeles, Mathew Crosswy, principal, Stonehill, shared with LODGING how this commercial real estate direct lender deployed $612 million across 64 transactions year-to-date and expects to deploy an approximate total of $1.25 billion in 2021—up 74 percent from last year. Crosswy also shared trends in hotel financing and the impact he expects the pandemic to have on the overall industry landscape as it recovers. Noting how commercial mortgage-backed securities (CMBS) loans in particular were not designed with the kind of access needed to provide relief for debt repayment during the pandemic, Crosswy stressed the need to create financial structures to enable liquidity and decision-making in times of trouble.

How is the general landscape evolving as the industry begins recovering from the pandemic, and what types of transactions have you been seeing?

It’s important to remember that what the borrowers needed most as the pandemic commenced and dragged on was time and relief. While it is the job of both borrowers and lenders to protect the asset, in this case, the asset itself was unchanged, but because hotels were operators whose operations abruptly ceased, they needed about six to 12 months for their business to again generate funds to meet their obligations.

In the early days, most people were willing to kind of kick the can and wait for the vaccinations so travel could return. In addition to the banks’ deferring repayment of mature loans, a lot of the brands were offering relief such as deferring property improvement plans.

But after nearly two years of everybody playing nice in the sandbox, the tide is turning, and we have experienced an increase in activity from hotel owners and investors as forbearance periods are ending and traditional lenders are becoming less flexible than they were a year ago.


There’s a lot more capital in this space for recapitalizing assets, refinancing assets, and buying hotels, now that owners are willing to sell—as they generally were not at deep discounts in the middle of 2020 because they then had some relief from the CARES Act. You’re therefore more likely to see an uptick in such activity We’re also slowly today starting to see more mergers and acquisition opportunities and more acquisitions and value creation.

There’s still a lot of capital—both debt and equity—it’s just a matter of the cost and your ability to access it in terms of what you’re going to end up paying and what your capital stacks will look like.

How does the makeup of the activity behind the approximately $1.25 billion you expect to deploy during 2021 compare to the period before and during the pandemic?

This $1.25 billion represents a 74 percent increase over what we spent in 2020, and these transactions include first mortgage permanent and construction loans; bridge and mezzanine loans; and hotel investments.

We weren’t buying any assets at all during the pandemic. While most banks were willing to work with their borrowers, who were protected to some degree by the CARES Act, we did work with some lenders and then ultimately the underlying borrower to buy different depositions and then restructure them and rework them with the underlying borrower who may have needed more funds or time that their banks couldn’t necessarily provide. We also saw the opportunity to provide some rescue capital as a bridge until business picked up, as well as more traditional bridge loans in the case of a maturing CMBS loan or where another lender was unwilling to provide an extension. We were also able to execute on a of couple recaps and refis.

So, in 2020 our activity level was up over 2019, but it was unique in that we were capitalizing on a specific trade. Now, in 2021, we’re going back into more of our traditional world, including construction loans. Although there is little capital available for new construction, there are a lot of good projects that were shelved. Those borrowers have sponsors and they own the land and license. They can’t just sit and carry these forever.

How did your company use the Commercial Property Assessed Clean Energy (CPACE) program financing during the worst of the pandemic?

We were super-aggressive in what we call retroactive CPACE with new assets built to code that may have opened before the pandemic. With this, probably 30 percent of line items are eligible for assessments, so we did a lot of deals retroactively, which enabled owners to receive dollars to recapitalize their asset, giving them a 12-to 24-month runway to get to the other side of COVID. So, we did about $140 million of retroactive loans, but now we’re going back to a lot of these same borrowers and doing PACE on day one, where we’ll marry a senior construction loan with the PACE loan and PACE financing for energy eligible line items within their budget.

What did the finance community in particular learn from the pandemic?

In our world, finance, it’s all about how we create better structures, put better deals together where there’s access to liquidity, where you can provide the borrower with relief when needed. As much as you try to underwrite on every scenario, there was no playbook for COVID. There are numerous loans that are very highly structured without a lot of asset management and servicing and hands-on ability to make decisions to navigate a loan when you have an issue like COVID. This was the case with commercial mortgage-backed securities (CMBS) loans.

It comes back to borrowers’ relationship with lenders, and how vulnerable hotels are in the face of crises because they are an operating business, which always falls off first, unlike other types of real estate, where leases require the holder to continue payment and thus cashflow. Now that we recognize what is broken, we lenders need to at least try to find a better type of capital within our debt structures for the hospitality industry.

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