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| Overview of issues and concerns for hotel financing in 2010 | |||||||||
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January 11, 2010
2009 was the shock and awe phase of this recession which seemingly is over and we are entering a new phase in 2010 where we can take a deep breath and think more clearly how to get around the last bend on the road to recovery. As jobs and credit are two pillars of our economy, I decided to check the status of the job market first hand. I contacted a number of friends and ex-colleagues in the IT and technology sector to check on the hiring outlook. It seems like these companies may have laid off too many employees in 09 and are now understaffed even with their low level of output. Their outlook is on the positive side and some departments have been authorized to hire one or two employees. Although after losing 15 to 20 million jobs this level of hiring is inadequate, the first priority is for the bleeding to stop. Any level of hiring may be the indication that lay offs are ending by the end of the spring or mid summer leaving the peak of the unemployment rate at low to mid 10 percent for this recession. The rest of the population still having jobs who has postponed vacations and the businesses who have put travel on hold for over a year will start travel again this summer and our industry will surely feel the subtle improvements immediately.
The February and March job report, if showing very low levels of job
losses, will be the harbinger of the turning point for us in the hotel
industry in which case hundreds of clients who have contacted me with
their serious concern for the coming winter months can have hope that the
worst will be over once they make it through the next few months. In general, other than few random modifications, banks have not been cooperative with the hoteliers on loan modifications. Few of my clients have been given lower interest rates for say 6 months some with interest only payments with the rate climbing back up after this period, hardly what one would call a modification. As opposed to what we hear from the media and our elected officials, regulators such as FDIC have not been encouraging banks to be flexible in offering modifications. My bank contacts are claiming that FDIC is even pushing them to implement loan covenants that are detrimental to the businesses in these tough times. The regulator’s goal seems to be protecting depositors of course thinking that taking back a hotel instead of dragging the situation may minimize the losses for the depositors. In cases where value has gone down and the cash flow is insufficient, the regulators would likely urge the bank to focus on recovery actions rather than workouts. This new regulation, among other things, requires regulated lenders to delay the income recognition of the sale of the notes in the secondary market by a quarter before they can reflect the revenue on their balance sheet. Within this period if the borrower defaults even once on a payment, the bank loses the premium it earned when it sold the note.
How would this impact us? In one quarter a lender can use a certain amount of funds to make multiple consecutive loans by closing each loan, selling it in the secondary market, recovering the funds almost immediately, and then funding another loan. With FAS 166 a lender can only offer one loan for that certain dollar amount in one quarter and if the borrower defaults even once, the bank will not realize the sale revenue it expected. I believe that nothing in 2010 will impact us more negatively and unpredictably than FAS 166.
Introduced in 2008, this program thawed the secondary market specially for SBA loans. It offered low interest loans to investors for buying various assets including SBA loan pools. Although it had a slow start, as the attractive returns of the other type of asset pools dropped, SBA pools became more attractive.
The program is set to expire at the end of this March. For the secondary
market to stay alive, the hope is that the program made investors aware of
and attracted to SBA pools and even without the TALF, the investors will
continue their acquisition of the SBA pools. In 2010, the ending of the
TALF program seems to be the second most negative factor right behind FAS
166. Read more on FAS 166
USDA Disqualifying Hotels with Pools
On Friday July
24, 2009 USDA issued Notice Vol. 74, No. 141 where in section III-D, it
disqualified hotels with pools from Stimulus funds. I have taken action
against this decision by corresponding with the Secretary Tom Vilsack of
the Dept of Agriculture explaining the negative impact on the hospitality
industry, have asked all of you to sign a petition online, have requested
the Senate Agriculture Committee to push the USDA for a response, and have
brought this matter to the attention of AAHOA and AHLA both of which
supported the issue and have corresponded with the USDA. As of today we
don’t have any resolution on this matter. However, with the SBA limit
increase to 5MM, the USDA loans may become less relevant in near future.
You may read further on this matter...
Hotel Values dropping further in 2010 ASSUMING that job losses will stop by the spring of this year, we should be able to see a slight uptick in occupancy starting the summer. Until then, hotel values may be facing another 5 to 10% decline in values but will bottom for the remainder of the year. Generally speaking the gross multiplier has dropped to 2.7% to 3.5% in most regions although some primary markets are still holding higher gross multiplier. A generic way of calculating the value at say 10 CAP is as follows:
This is assuming that you have a 35% NOI – Some hoteliers have NOIs far
above or far below their market, but the appraisers generally take the
market information into account when appraising a hotel including the
market trends on RevPar and demand which would reflect on the value as
well. A major refinancing issue at the moment is the devaluation of the
hotels due to the revenue drops making a refinance impossible at 100% or
even higher Loan to Value.
504 first TD Securitization by SBA
We all waited
patiently from February until October of 2009 when SBA finally implemented
the securitization of the first position loans of 504 loans. Unfortunately
SBA required the Secondary Market brokers to take a 5% risk in the assets
they trade. Almost the majority of the current brokers are not even set up
for either reserving capital or offering guarantee. Currently the SBA
offer is rendering itself useless.
You may read further
detail on this subject...
Deferment of SBA 504 2nd position loans
Still
many of my clients are contacting me requesting information for SBA
deferment on their 504 second loan. This recession took just too long and
went too deep and many clients are running out of savings having injected
those savings to make up for the negative cash flow. Those with 504 loans
should contact the SBA CDC office that originally processed the SBA 2nd
position loan and request a deferment.
You may read
further for the list of requirements for a deferment...
This bill was
introduced on December 10h by
Senator Landrieu
replacing SB.1832 and includes among other items, the increase of the SBA
limit to 5 million. You may follow the progress of this bill in the Senate
on the bottom of our
home page.
Currently the
bill is being reviewed in the Senate and has not been approved. Per Mr.
Edward Mills from the Senator Landrieu’s office, there is a push to
hopefully get the bill approved within the next month or two, albeit it
would probably take slightly longer for the bill to become an SBA formal
new procedure. Other important items on this bill:
Upon reviewing the bill, you may want to contact your senators and representatives and urge support for the S.2869 Senate bill.
We need to proactively take action. If you do contact your representatives, let me know by responding to this email. I will use the total statistics for the next update I will send you and will inform the office of Senator Landrieu of the overall support statistics. I am requesting AAHOA and AHLA to urge support of this bill through their lobbying division as well. Pls contact them as well through the web site and claim your support.
Status of
hotel Financing as of January 2010
Status of the
Hotel Capital Markets as of January 2010
Please feel free to provide us with your feedbacks and to review your specific circumstances as it relates to financing your hospitality project. I strongly believe that the credit market will have quiet a ways to recover especially as the White House will push the new financial regulations and China will lower the amount of steroid it is injecting into the GDP arm to keep it at 7%+ this year. Meanwhile, we should push hard to leverage any financing vehicle that is available for our project until market has settled in 2012 or later. I will have more on this subject in the upcoming updates.
Ramin Mostaan Principal Scientific Capital Group, Inc.
Disclosure |
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