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Hospitality Lawyer — How will you finance your hotel project in 2007? Part I

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4 January 2007
Hospitality Lawyer on hotel finance in 2007. Debt and equity financing of hotels and hotel mixed-use projects is critical and can be very challenging. Our clients take hotel financing seriously, and so do we. That’s why we host the annual JMBM Industry Outlook Roundtable every January and our Meet the Money® conference every May.

With the legacy of Meet the Money® propelling us forward, I was delighted to join with leading hotel industry experts for JMBM’s “Outlook 2007, Hospitality Roundtable.” They reflected on a very interesting year just passed and pulled out their crystal balls to see what would happen in 2007. I am pleased to share their take on what’s going on with hotel finance with the readers of Some of it might surprise you.

Outlook 2007 Roundtable: Hotel Finance

If you are either a provider or consumer of debt or equity capital for hotel-related financing, you will want to pay attention to the comments of the experts that share their views below. In addition to their participation in the Outlook Roundtable, all of them participate in our annual Meet the Money® conference in May. In fact, representatives of almost 100 capital providers are committed to the conference and many delegates are taking advantage of the early bird registration to secure a seat for the 17th annual Meet the Money® conference on May 3, 2007:

I am grateful to the following panel of experts who participated in this dialogue.

Frank Anderson, Senior Vice President, HSH Nordbank AG, New York Branch

Bruce Baltin, Senior Vice President, PKF Consulting

Monty Bennett, President and CEO, Ashford Hospitality Trust, Inc.

Peter Connolly, President & CEO, Palladian Development

Alex Gilbert, Director, JER Partners

Patrick O’Neal, PNC Real Estate Finance

Jonathan Roth, Principal, Canyon Capital Realty Advisors, LLC

Robert Stern, Managing Director, Perry Real Estate Partners

Steve Van, President and CEO, Prism Hotels

The Outlook for financing your hotel project in 2007

Jim Butler: What is happening with capital pricing and capital providers in general? What’s going on in the marketplace?
Robert Stern: Liquidity, liquidity, liquidity. That’s been the name of the game and it shows no signs of changing anytime soon.

Alex Gilbert: Overall, the opportunity that owners have had to either sell or refinance is unprecedented.

Bruce Baltin: There are a large number of hotels being put onto the market so that sellers can get peak prices. Buyers and owners have also taken advantage of the low supply growth to reposition existing hotels “upmarket.”

Robert Stern: There are more capital providers than ever. Some cycle out, but others backfill. Pricing is rich, and in many cases the buyer is basically paying for some of the projected NOI growth up front. That is not a comfortable position to be in as a buyer, but it will likely continue at least until we see a meaningful increase in new full-service hotel supply in many markets.

Jonathan Roth: Real estate has been one area where yield-hungry hedge funds have found a place to deploy capital over the past few years. Many transactions would not have been accomplished if not for these new providers of capital and their willingness to take on higher levels of risk. That said, we have already started to see some of these funds liquidate their real estate positions as their inexperience in the valuation of real estate assets has already led to losses. For stabilized assets, I believe capital will remain relatively inexpensive and plentiful.

Steve Van: The providers of capital are beginning to resemble the Creosote Man in Monty Python’s The Meaning of Life. They are so immensely full of capital (Blackstone over $25 billion!) that they are in danger of exploding and making a mess of things. Already almost any normal stabilized and healthy hotel for sale gets priced at numbers we feel are bloated.

Jonathan Roth: Yes, prices are being bid up to extraordinary levels. For stabilized assets, the markets are very efficient and, as a result, cap rates should remain at today’s historic low levels. There is also a strong movement for large funds to aggregate assets with an eye towards a public offering as an exit strategy. As long as the appetite for these IPOs remains strong, the aggressive purchasing should continue as well.

Peter Connolly: Real demand growth coupled with limited supply growth has continued to leverage pricing increases for what has certainly been the longest period in my 25 years in this business. That strength in the market is attracting some of the capital, which is fleeing the mid-market residential products that are getting flogged in the press.

Frank Anderson: From a capital standpoint, the influx of residential real estate players that are adding hotels to residential mixed-use projects on the equity side of the equation, has been a very interesting development.

Alex Gilbert: Plus, the securitization market has dramatically changed the real estate landscape. For 2006, the amount of conduit new issuance will exceed $150 billion, which is double what it was just two years ago. There will be over 25 different lenders that will each originate over $2 billion in new loans, in comparison to 14 lenders at that same level two years ago.

Robert Stern: If you can’t access capital now, there must be something seriously wrong with your project. We don’t do plain vanilla deals and we still expect a risk premium for hotels — but let’s not forget how volatile these cash flow streams can be, so it’s tough to find deals we really like on a risk-adjusted basis. Depending on whether it’s a straight full-service domestic hotel deal involving perhaps a re-flagging/ better management story, or an international resort development with a for-sale component, we’re expecting levered equity returns from anywhere in the high-teens to substantially higher, and profit multiples of around 2 times and up. It’s really case-specific, but our domestic expectations are perhaps a couple hundred basis points lower than we underwrote, say, 3 years ago. Our international expectations are unchanged.

Monty Bennett: It’s a time of great opportunity — but it is also a time to be cautious and wise because when there is a glut of money, bad deals cannot be far behind.

Frank Anderson: I agree. Construction lenders are increasing in number. Some are trying to “buy” market share through either reduced pricing or eliminating essential structuring protections.

Patrick O’Neal: And we are also seeing a handful of renegade lenders within the CMBS industry who are creating deals that should be recourse bank deals — but they are posturing them into the CMBS industry based on unsubstantiated performance and projections. The mortgage banking community is shaking their heads.

Jonathan Roth: In the pursuit of yield and of putting large sums of capital to work, many capital providers have departed from sound underwriting principals. Many acquisitions and repositioning transactions have been capitalized utilizing short term bridge loans, often times marrying a senior and a mezzanine loan, or creating a highly leveraged senior loan which is later syndicated into tranches carving up the various layers of risk, all in order to increase the overall amount of leverage on the asset.

Patrick O’Neal: While we may not be absolutely at the top of the market, the combination of low cap rates, low interest rates, huge values and loans per room figures — in combination with high LTV and low DSCR — is scary at best. The scariest deals are the ones that actually offer full interest only at huge LTV and maybe have mezz debt stacked on top of that. In a perfect world, it doesn’t matter because in that comic strip, the world always gets better! But history tells us otherwise. The question is: will these properties improve enough in performance to sustain a level of value and DSC that allows them to be high enough above the minimum standards to support future refinancings when the downturn occurs? And it’s not a matter of whether the downturn occurs, but when.

Jim Butler: Thank you, everyone. Those are some valuable insights. I must say that although there are a few wispy clouds on the horizon, and some say that things can’t continue this well for much longer, I am very optimistic. I think we have a number of great years ahead of us in the hospitality industry. There may be a few rough spots (we were recently engaged to help on one of the first significant, failed condo hotel projects — a high-profile deal and player), but generally speaking, the environment will be supportive and strong. There will be a lot of deals and a lot of need for matching up capital requirements.

One of the most interesting challenges I have as a hotel lawyer is helping clients get their deals done — at every stage of the “hotel cycle.” That means working with top people like you. It means providing a gateway of hotel finance — the bridge between providers and consumers of capital. We facilitate the flow of capital with our legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. I look forward to continuing to work with you all in 2007 and beyond!

Getting consumers and providers of capital together.

It is so ironic. Consumers of capital think that they have a problem. And they do. They have to find a suitable capital source or their deal will not go forward and be successful. But providers of capital have a problem too! They have all this capital from investors that they need to deploy on good projects, or they won’t be able to provide the returns they need.

The quandary is: How do consumers and providers of capital meet and find the appropriate partner? More often than not, it is fairly random, particularly in specialty financing as for hotel product. Sometimes it is a referral process, which can be good, but often referrals are not much better than random selection. You can hire a mortgage broker, and that can be very helpful if you find the right one who will take your deal and treat it with the importance you attribute to it. But how do you meet and explore any of these opportunities?

If you would like to meet the expert panelists from the Outlook Roundtable – plus representatives from another 100 capital providers — please join us in Los Angeles on May 3, 2007 for the 17th annual Meet the Money® conference.

If you are an ACTIVE provider of debt or equity financing for hotel-related projects, or a consumer of capital, mark the date in your calendar and sign up now. This conference is custom tailored to help providers and consumers of capital find the right match. Many delegates are signing up already to take advantage of the early bird registration and to secure a seat.

Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $50 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at or 310.201.3526.

Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.

Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of 50 seasoned professionals with more than $50 billion of hotel transactional experience, involving more than 1,000 properties located around the globe.

Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.

Jim is frequently quoted as an expert on hotel issues by national and industry publications such as The New York Times, The Wall Street Journal, Los Angeles Times, Forbes, BusinessWeek, and Hotel Business. A frequent author and speaker, Jim’s books, articles and many expert panel presentations cover topics reflecting his practice, including hotel and hotel-mixed use investment and development, negotiating, re-negotiating or terminating hotel management agreements, acquisition and sale of hospitality properties, hotel finance, complex joint venture and entity structure matters, workouts, as well as many operating and strategic issues.

Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm’s Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at or 310.201.3526. For his views on current industry issues, visit