Magazine article Mortgage Banking

Scarce Debt Raises Red Flags for Luxury Hotels

Magazine article Mortgage Banking

Scarce Debt Raises Red Flags for Luxury Hotels

Article excerpt

Nearly 75 percent of lenders said they reduced underwriting hospitality loans for the hotel sector, according to a report by Hotel Brokers International (HBI), Kansas City, Missouri.

HBI's report, TransActions Recap 2009, said sales dropped nearly 25 percent during the second half of 2008 compared with a 44 percent decline in upscale and luxury hotel sales.

Jeff Westgor, president of Westgor & Associates, Minneapolis, said the credit crunch's biggest impact came last year for larger-dollar transactions--$10 million or more. Upscale and luxury hotel sales at more than $10 million dropped 57 percent while economy and mid-market properties fell 11.2 percent, he said.

With debt scarce and hotels' growth cycle ending, upscale hotel sales dropped nearly 70 percent.

"The one-two punch of a severe economic recession and a dysfunctional credit market, suffering from the disappearance of CMBS debt, has had a major impact on our industry, which previously had experienced five years of significant increases fueled by easy access to capital and the growth of RevPAR [revenue per available room] and earnings," Westgor said.

"Because sales in many markets have fallen so dramatically, operating profit becomes negative and making payroll--the nuclear bomb problem in hotel operations--will require a capital infusion," said Steve Van, president and chief executive officer of Prism Hotels and Resorts, Dallas, and author of Hotel Default Blog.

Real Capital Analytics (RCA), New York, said 710 hotels in the United States, primarily in the southeast, Midwest, west and southwest regions, will likely go into foreclosure for reasons that include owner bankruptcies. "Lenders can no longer count on borrowers to pay up," Van said. "Most owners know they have no equity left. Payroll will become a lender problem, and a nasty one with little warning. …

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