This phenomenon can especially be seen in the case of CMBS loans, which are becoming increasingly difficult for hoteliers to secure. This is in part because of a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act—which was passed into law in July 2010—that takes effect in December 2016. This provision requires that banks keep a stake in any commercial property loans they package into security and then sell off. This discourages banks from partaking in risky lending practices, and makes them much more hesitant to approve a loan if it doesn’t seem favorable. “These increased underwriting standards, not to mention increased pricing, in the fixed-rate CMBS arena makes it harder to get those loans right now,” Ray explains. “The higher standards for these loans makes it more difficult to get any construction loans through.”
However, even if a loan is approved, sometimes PIPs simply aren’t cost-effective, Berk says. “Sometimes a transaction, whether it be hotels changing hands or refinancing, just doesn’t make sense because it is going to be too expensive to go through with a PIP and maintain the hotel’s existing flag,” he says. “It’s not uncommon to walk away from a deal if, after everyone does the math, the cost is too high.”
Ray adds that there are occasions where a hotelier won’t know that a project is out of his scope until the process is already well underway. “It’s really a case-by-case process,” he says.
Hoteliers looking to finance a PIP or other renovation project should take all of their options into account before going through with a major transaction of any kind, especially now that we have passed the apex of the cycle.
