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The Hotel Financing Environment in Canada
.By: Paul Varteression - HVS Global Hospitality Services - Canada

CANADIAN LODGING OUTLOOK
January 2007


The Canadian Lodging Outlook is a joint monthly publication 
of Smith Travel Research and HVS International, 
Vancouver and Toronto, Canada
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By: Paul Varteression - HVS Global Hospitality Services - Canada

To compose a picture of the current lending landscape in Canada we interviewed mortgage brokers and representatives from a variety of financial institutions, including major banks, credit unions, and development banks. Our research uncovered an upbeat market with ready financing available for hotel deals.  This is a result of the current desirability of the real estate sector and an improvement in Canadian lodging fundamentals.

The following table summarizes the information collected in our interviews.  Note that these figures represent general guidelines only. The actual terms used vary depending on the project, the location, the type of property, and the relationship established between the client and the lender.
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Canadian Institutions - Lending Parameters for Hotels
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The general financing parameters that Canadian lenders use for a typical hotel, based on our survey presented in the preceding table, are a loan-to-value ratio of 65%, a debt-coverage ratio of 1.4, a 21-year amortization, a 6-year term, and an interest rate of 6.3%. Roughly, this interest rate represents a 230-basis-point spread over the 10-year bond yield, which was listed at 3.99% on March 5, 2007 according to the Bank of Canada.

Many factors play into the structure of financing obtained by a borrower. Asset driven factors include the quality of the property, the franchise affiliation, the location as well as the age and renovation history. Non asset related factors include the existing relationship between the borrower and the lender, the client’s ability to use additional assets to secure the loan, to the client’s hotel management abilities, previous loans, and the potential for the lender to gain additional business from the same client also plays an important part in the decision to lend funds.

Our research indicated that there are more players in the hotel financing arena, including US lenders and the Canadian institutions that do partake in hotel debt financing have become more sophisticated in their approach. As an example, working together, Royal Bank and GE Capital, two active hotel lenders, recently fashioned a loan product combining construction financing from one entity and take-out financing from the other. This merging of debt sources seems to represent a creative response to hotel financing as development markets continue to prosper.

We have also found that Canada’s financing market continues to be more conservative that their US counterparts, where the financing arena is much more competitive and lenders are often bidding against one another to originate loans. In the US, loan-to-value ratios on first mortgages are as high as 80%, with amortization periods of up to 30-years.  The interest rate is usually 120 to 140 basis points above the 10-year Treasury bond yield, which was set at 4.51% on March 5, 2007 according to the United States Department of the Treasury.

As a result of this relatively conservative lending environment in Canada and the prosperity of many lodging markets in Canada, many US institutions have sought to capitalize on opportunities in the Canadian market. The Bank of America, Citigroup, and JP Morgan are among the US players that were recently involved in major hotel acquisitions and refinancing projects in Canada.

The outlook for hotel financing in Canada in 2007 will continue to be favourable for borrowers. Interest rates are low and the availability of debt is at an all time high.  This competition among lenders should allow borrowers to continue to push for smaller spreads, higher loan to value ratios, and longer amortization periods.

On the flip side, Canada is not ever anticipated to be as competitive the US, which will benefit the hotel industry by keeping supply in check. 


CANADIAN LODGING OUTLOOK
HVS INTERNATIONAL - CANADA
January  2007

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© Smith Travel Research, 2005. Reproduction or quotation in whole or in part without permission is forbidden. *INS - Insufficient Data
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Contact:

Selina Lai
HVS International – Canada
2120 Queen St. East, Suite 202
Toronto, ON M42 1E2
(416) 686-2260, ext 21
(416) 686-2264 FAX
slai@hvsinternational.com
www.hvsinternational.com

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Also See: Low Cap Rates Drive Gains in Hotel Values / Suzanne R. Mellen / Canadian Lodging Outlook - December 2005 Year-to-Date
2003 an Unbelievably Strong Year for US Hotel Sales / Canadian Lodging Outlook - December 2003 Year-to-Date / February 2004
Canadian First Half of the Year Winners Are Calgary, Edmonton, Alberta North, and Downtown Vancouver with Occupancies Over 70% and Average Room Rates Exceeding $100 / Canadian Lodging Outlook / June 2006
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