LOS ANGELES—It’s harder, and more expensive, to find financing for hotel developments than even a matter a months ago, according to sources speaking at the recent Meet the Money conference.
Speakers on the “Capital for development and new construction” panel said the change has been clear.
“I’d say (availability has) pulled back,” said Chris Diffley, managing director at Rockbridge Capital. “We’ve seen a lot of banks pull back. Local banks are still out there. I think it’s gotten a little tougher, but the right deals are still getting done.”
Tom Whitesell, managing director of construction real estate for CapitalSource, said the pinch has largely been at the senior lending level.
“There’s still a lot of competition at the (mezzanine) position on these deals,” he said. “There may be six or seven mezz lenders that are all extremely legitimate. They could all step in, and they want to do the deal. That’s where the competition is.”
Michael Fleischer, SVP of Related Fund Management, agreed with that assessment of the current marketplace. He said that led to mezzanine lenders, like his company, getting a bigger piece of the pie.
“Senior (lending) is definitely the most difficult,” he said. “A flood of equity guys have now moved into the mezz space. Because senior financing has gotten less aggressive, in theory that’s a great opportunity for us.”
Preferred projects
Each of the lenders on the panel said their terms have gotten more expensive in recent history as the capital markets grapple with current market risks. But that doesn’t necessarily boil down to lenders trying to wait out the cycle.
“All we do is hotels, so we’re not trying to be market timers,” Diffley said. “We’ve done 350 hotel deals in our history, and we see common threats that exist in good deals. We’re willing to do something from the ground up when the cycle turns and open on the backside when things recover. It’s really about the opportunities that present themselves. … Even if there’s a fundamental shift and a downturn, we’ll continue to be opportunistic.”
One thing the lenders on the panel did seem to agree on is there seems to be a preference for new-build projects over renovation work and adaptive reuse because of the unpredictability in the actual costs for the latter.
“When you’re working with an old building … things come up that you were not aware of on the outset,” said Matt Mitchell, SVP at Hall Structured Finance. “We always require a hefty contingency, but sometimes even that’s not enough. That’s our main fear.”
Lenders noted that in this period of booming supply growth, it’s ever more important that lenders, and by extension developers, do their homework on individual markets, and even more importantly submarkets and neighborhoods. That doesn’t necessarily mean some of the markets that have grown bad reputations for supply issues are completely off the table, though.
“I read something the other day about the (supply issues) in New York, Miami and Houston,” Mitchell said. “We have deals going in all three markets. We look at things on a long-term basis. A lot of people are shying away from Houston, but it’s in our backyard, and we’re bullish on the city long term.”
For that exact reason, some panelists said it’s overall good news that financing is becoming more difficult to secure.
“It’s good for the industry fundamentally because supply is constrained,” Diffley said. “It’s making deals harder and harder to underwrite, hence it’s keeping supply a bit more in check.”
New funding possibilities
Joe Euphrat, managing director at CleanFund Commercial PACE Capital, discussed how property-assessed clean energy, or PACE, financing is becoming increasingly viable across real estate development.
The financing, currently available in only certain states, is designed to reward developers for including energy efficiency and renewable energy improvements as parts of projects. The debt attaches to the property tax bill, therefore taking priority even over a project’s senior financing.
Even though this is his company’s area of expertise, he said, a lot of work needs to be done to establish how the funding fits into the overall picture across the world of real estate.
“Truth be told, the PACE market on the commercial side is new enough that there’s not standards and reference points developed yet to show how it’s classified,” Euphrat said. “Lenders in (states that currently allow it) are getting to their own conclusions.”
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