WE EXPECT TO SEE MORE INSTANCES OF SELLER FINANCING AND OTHER CREATIVE STRUCTURES TO LET PEOPLE STEP INTO EXISTING DEBT . EXAMPLES INCLUDE THE ASSUMPTION OF EXISTING LOANS IN PLACE , ALONG WITH SOME SELLER PAPER . WE ARE ALREADY WITNESSING SALE-LEASEBACK STRUCTURES ,
– MATT DOWER
However , supply chain and labor concerns linger on through recovery , with all hoteliers experiencing continued , significant expense increases , which is adding to the uneasiness in markets today as the Fed keeps boosting interest rates .
LET ’ S WORK OUT WITH THOSE BARBELLS Taking a broad view of the hospitality industry , we can consider divergent underwriting scenarios or two opposite ends of a barbell .
Owners who have strong cash flow and remaining term , say three years and more on their loans , will either hold on to their properties ; or , if they do transact , will be able to employ the in-place debt and its existing terms to drive value . In these cases , refinancing , which was attractive for many owners during the pandemic , might be on the horizon here . On the other hand , owners facing short debt maturities and / or large CapEx events may have to transact . This latter group will have some tough decisions to make as properties are brought to market . Clearly , current performance will have a huge impact on underwriting , in addition to overall property class and specific market dynamics , especially the farther out that 2019 appears in our rear-view mirrors . For example , the leisure market is still doing well , and it will be easier to underwrite strong properties , albeit at higher debt costs , versus properties that are still underperforming far into 2022 .
How do we make up debt gaps for transactions that portend unacceptable leverage and conditions and , presumably , a market tilted to the buyer ’ s advantage ? We expect to see more instances of seller financing and other creative structures to let people step into existing debt . Examples include the assumption of existing loans in place , along with some seller paper . We are already witnessing sale-leaseback structures .
Mezzanine lending will feature prominently in many of these deals , as well as other forms of bridge lending . Overall , the motivated buyer will accept a higher cost of capital shorter-term , with the expectation of being able to refinance at lower rates sometime in the future .
Realistically , we are hearing the sentiment that lenders will not be as lenient with forbearance agreements this time around . In response , buyers , sellers , and their financial consultants will come up with creative solutions , as suggested . In our experience , if the property fundamentals ( location , condition , competitive posture , revenue , etc .) are attractive , transactions can take place in a time of inflation .
OVERALL , THE MOTIVATED BUYER WILL ACCEPT HIGHER COST OF CAPITAL SHORTER-TERM , WITH THE EXPECTATION OF BEING ABLE TO REFINANCE AT LOWER RATES SOMETIME IN THE FUTURE .
– ANDREW BROAD
56 hotelsmag . com Jan / Feb 2023