Hotel lending resumes, but could the window for max proceeds be slamming shut? - Hotel Business

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By Taylor W. Grace 

Could we be in the hotel financing Goldilocks zone? This may sound like a crazy statement given everything that hotel owners have been through and the turbulent times that still endure.  However, what if the best time to secure capital for a refinance or acquisition is now and that window is quickly closing?

Let’s break COVID hotel financing into four distinct phases:

Phase 1: Pre-COVID Hotel Financing. Hotel underwriting sizes a loan based upon the trailing 12 months.

COVID feels like it has been around for 20 years. However, we don’t have to go back that far to remember a time with packed indoor concerts and active business travel. In fact, the Super Bowl was held on Feb. 2, 2020, in front of a maximum capacity crowd. During these pre-COVID times, hotels were underwritten as they had been for years, by looking at profitability over the immediately preceding 12 months (a trailing 12).

Phase 2: The Shut-down. Hotel lending stops.

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Two days later, President Trump declared a national emergency. The country virtually shuts down in order to “slow the spread.” Travel grinds to a halt, businesses close or shift solely to work-from-home arrangements. On April 13, 2020, the TSA reports only 87,534 air travelers compared to 2,208,688 on the same day a year before. The COVID shutdown deals a devastating blow to the hospitality industry. Hotel lending stops entirely.

Phase 3:  The Re-Opening. Hotel underwriting ignores the COVID period and sizes a loan by looking back to 2019 numbers.

This phase is what we refer to as the potential Goldilocks zone and is the phase in which we currently reside. Vaccination is becoming more widespread, travel is increasing and bookings look really promising. Business travel has still not completely returned and many hotel owners are still struggling. So, how do we have the gall to refer to this period in a favorable light?

Lenders understand the unique, and hopefully temporary, nature of the stress placed upon the hospitality industry. They also understand that the future is bright for most hotel properties. For this reason, lenders have started lending to hotel owners again. In fact, most are willing to ignore the COVID period and underwrite hotel loans using 2019 numbers rather than a true trailing 12. Using 2019 performance to underwrite a loan often leads to increased loan proceeds. The question is, how long can lenders continue to reach back to 2019 to size-up a hotel loan?

Phase 4:  Post-COVID Hotel Financing. Hotel underwriting returns to a true trailing 12 months.

We all want to see COVID in the rearview mirror. Thankfully, it appears that we are quickly headed in this direction. Just recently, the CDC published relaxed guidance on mask wearing and social distancing for vaccinated individuals. This guidance will likely prompt even more leisure travel. Business travel looks to be ramping up as in-person conferences and meetings resume. Hospitality will begin to recover in real time.

What happens to hotel lending as we emerge from COVID? Most likely, hotel owners will no longer be able to rely on 2019 numbers for underwriting purposes. It’s simply too long ago. Lenders and rating agencies will want to see how the subject property is actually recovering and will revert back to underwriting on a true trailing 12. If recovery started ramping up in summer 2021, it may be fall 2022 before you have 12 months of performance that are adequate to produce the proceeds you need.

For properties that have started to show improvement as we head into the post-COVID phase, right now might be the best time to secure the maximum proceeds for a hotel refinance or acquisition. The ability to underwrite a loan using pre-pandemic 2019 numbers can have a substantial effect on the size of the loan for which a property qualifies. Once we return to underwriting based on a true trailing 12, hotel owners may have to wait many months before they are able to produce a consecutive 12-month period that would secure the same amount of proceeds as a 12-month period in 2019. Right now may truly be the hotel financing Goldilocks zone.

Taylor W. Grace is the managing partner of MidCap Hotel Loans, which arranges financing for hotel refinance, acquisition and construction.

This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.

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