valuations . Few transactions transpired , as per Real Capital Analytics , “ between March of 2020 and February of 2021 , 8 % of hotel sales involved a distressed asset .”
By August , several groups were sitting on significant amounts of capital waiting to be deployed , and with a recovery for hotels in sight , the opportunity to purchase assets at significant discounts had dwindled . There will be some potential for distressed acquisitions or note sales , primarily in urban markets ; however , with limited transactions and several buyers ready with capital at hand , discounted pricing relative to 2019 levels will likely be limited .
As a result of a dearth of investment opportunities and the ramping-up of more traditional forms of financing , several opportunistic or distressed funds have shifted to a lending strategy . These funds are a new source of capital to address deferred maintenance / PIP requirements , acquisitions , and maturing debt , as well as recovery capital as forbearance periods end on loan payments and debt covenants . In commercial real estate , it is always important to understand what financing options are on the table , how to best structure the capital stack , and the trade-offs of each source of capital .
The new funds raised following the onset of the pandemic were typically backed by opportunistic investors who expected a higher return . This translates to higher coupon rates that force these funds primarily into mezzanine or preferred equity positions . These types of groups typically benefit from their ability to transact on complex deals with expedited timelines , which often leads to lending on distressed hotels .
Additionally , this subordinated debt commonly comes into play at the end of a project when construction cost materially exceeds the budget . These loans are currently being structured with an 18-month term or longer , and are designed to be refinanced with a permanent loan once cash flow reaches stabilization or after construction is completed . However , the track record of these newly formed groups and their ability to execute is a factor borrowers should strongly consider .
Existing lending groups that have experience and exposure to the hospitality industry have new investment vehicles designed primarily to assist in distressed situations due to the timing constraints of a transaction or a cash flow problem at the asset level . Additionally , these groups are on the table for bridge lending related to acquisitions or renovations , as well as new construction financing . Financing products vary greatly and run the capital stack . These loans typically have a shorter horizon between two and three years , with options for extensions . These groups are favorable given their historic track record and high likelihood of execution ; however , their pricing is still well above conventional and CMBS loans . Furthermore , given these funds ’ capital resources , they typically have a large check size with a minimum around US $ 15 million on a 60 % to 75 % LTV , which narrows the deals that qualify .
Lastly , we have seen new partnerships that were historically either owners or developers that have expanded their capabilities to encompass a lending arm . These groups typically have a history of success and are able to understand the challenges and opportunities from an operational and development perspective , which is a benefit to borrowers . These partnerships play in a variety of positions along the capital . However , given the scale of these partnerships , their cost of capital is much higher , and the extra expense is typically passed onto the borrower . Additionally , these groups may limit their deal supply to a specific region or area where they already have a presence .
As we have advised , the provision of new capital options through new targeted funds , repurposing of existing funds to pursue a more opportunistic investment strategy , spin-off debt funds from owner / operators , and new partnerships have made the market more competitive for borrowers looking to build , buy , refinance , or renovate . Although the blended cost of capital at similar LTV / LTCs is higher in most cases when compared to prepandemic levels , bullish hotel investors are making deals now in hopes of future asset appreciation , at which time they will refinance at a lower cost of capital .
As the traditional forms of hotel financing continue to return , these new funds and strategies offer additional options to owners and will underpin the recovery in the hospitality market .
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