Colliers International Hotel Realty is pleased to present the first newsletter in a planned quarterly series providing updates on the Northwest hotel investment market. The INNvestment Quarterly Newsletter will report on recent hotel transactions, supply and demand, market performance trends and stock performance.

The Washington hotel investment climate during the third quarter of 2000 represented a �wait and see� attitude. The quarter ended with only one hotel transaction over five million. The vast majority of trades that occurred represented single asset sales of less than five million dollars. The largest transaction during the third quarter was the sale of the 155-room Meany Tower Hotel, located in Seattle near the University of Washington, to private investors for $11.5 million in July (to be reflagged a Best Western). The new owners have signed agreements with Tully�s Coffee to operate a retail store on-site and plan to renovate the lobby, meeting space and restaurant. The 16-story Meany Tower Hotel was originally built in 1931.

The biggest news in hotel transactions so far in 2000 was the acquisition of WestCoast Hotels by Cavanaugh�s Hospitality Corpo-ration. The transaction, which closed in the first quarter of 2000, had a value of $61.4 million, which was a combination of cash and assumption of debt. As of March 1, 2000 Cavanaugh�s officially changed its name to WestCoast Hospitality Corporation. With the addition of the WestCoast Hotels, the company now owns, manages and markets 46 hotels in nine western states.

The presence of public companies in the investment market continues to be quiet. All transactions for the third quarter of 2000 were completed by private investors with the exception of the 308-room Radisson Hotel acquired by the Port of Seattle for $31 million. REITs continue to sell non-performing assets and those properties that do not conform with re-established investment parameters.

Although inventory continues to grow, most of the product is limited-service, rooms-only facilities under 100 rooms. The underlying issues for both buyers and sellers is the availability of financing and current capitalization rates. Funding for hotel transactions in Washington continues to be very difficult as a result of oversupply in certain markets, as well as an across-the-board tightening of lending parameters. This coupled with a steady rise in cap rates over the last nine months has made traditional financing very difficult. However, we do see traditional financing being replaced by more aggressive SBA financing, regional and local bank loans as well as some owner financing. 

Certain markets throughout Washington continue to display healthy occupancies and rates. On a year-to date July 2000 basis, downtown Seattle, Tacoma and Bellevue experienced occupancies of 72%, 64% and 71%, with average room rates of $130, $79 and $111, respectively. Although the cities of Seattle, Tacoma and Bellevue remain strong, many of the secondary and tertiary markets have been inundated with new supply over the last 12 to 24 months, resulting in significantly lower occupancies in those markets. Partially as a result of this over-supply, most transactions continue to take place in those secondary and tertiary markets.

As sellers continue to wait and see what the winter brings in terms of occupancy and rates, buyers are patient in their belief that many markets will continue to trend down in RevPAR, resulting in a decrease in asset values given current cap rates. Buyers continue to look for those under-performing assets, and expect to see more product available and priced to sell by year end.
 

by Jeff McKee, Account Executive, GE Capital

The lending environment for limited service hotels (and all hotel classes, for that matter) has changed dramatically during the past 2 years. Today, lenders, developers, buyers and investors are taking a much closer look at each deal. Equity requirements are higher, brand affiliations are scrutinized and market supply/demand has to make complete sense. That being said, deals are still getting done.

Most of what we see available in today�s lending environment for hotels under $10 million consists of franchised, limited service hotels. Unfortunately, this segment is often overlooked because these properties are not previewed on covers of travel magazines and not always found in �exotic� locations. Yet, from an investment standpoint, hotels sold for less than $10 million have the biggest impact on the success and/or failure of the domestic hotel market.

Much to the chagrin of many quality, independent hotel owners, the focus of most lenders is on franchised properties. However, having a franchise flag on a property does not guarantee easy financing.

Branding has become more of an important element of the deal. Due to the continued proliferation of brands in the market, many lenders have limited their interest to only a handful of brands. Those brands generating most of the attention are ones with proven track records for RevPar and brand growth. Lenders consider other factors including whether occupancies for that brand exceed their competitive set, quality scores of the brand, and brands that are affiliated with financially stable and highly recognizable franchisors.

Not to be overlooked, an additional key element that helps make a project ultimately successful is location. All lenders would love to do the deal where there is high demand and absolute barriers to entry.

The reality is, not many (if any) of those deals exist. A solid market supply/demand analysis by a hospitality consulting professional is a must for any hotel property. This not only helps the lender understand the local lodging market for a particular property, it goes to reaffirm the owner�s/investor�s convictions about the location and/or provides potential areas of concern the owner/investor should be aware of.

Equity is always a key word when financing any real estate. For hotel loans today, leverage ranges from 85% on down, with government guaranteed programs provid-ing the higher leverage deals. From a more conventional lending standpoint, up to 70% loan-to-cost or up to 75% loan-to-value should be available in the current marketplace. Leverage is not only dependent on brand affiliation and location, but also relies on other factors such as the number of rooms and hotel experience of the borrower.

Borrowers and franchisors have been pro-moting more interest from lenders, especially on development transactions, through credit enhancements from franchisors themselves. Not only has this encouraged continued development and financing of certain brands, it has shown Lending and Wall Street communities another level of commitment to the success of the industry overall.

Some key underwriting ratios to be aware of are management reserves, fees, furniture, fixtures and equipment (FF&E) reserves, and debt coverage ratios. Another element to be aware of when refinancing or acquiring an existing property is the occupancy level. Many lenders allow 70% to 75% as the maximum occupancy they will underwrite to, irrespective of past performance or what the market is supporting.

Recourse has become more of an issue in today�s lending environment. The collateralized mortgage backed securities (�CMBS�) market of a few short years ago brought about the �non-recourse� hotel loan. As a result of the well-publicized issues during the late 1980�s and early 1990�s, borrowers quickly sought �non-recourse� as a feature they considered necessary. Due to non-recourse, borrowers, for the most part, now expect to be free of any personal liability. Unfortunately, most conventional and small business lenders still require personal liability on their hotel transactions (�non-recourse� is still available for the CMBS transactions).

There are basically six different alternatives for financing in today�s market:

• credit companies (such as GE Capital),
• CMBS �conduit� lenders,
• life companies,
• pension funds,
• local banks and
• small business lenders.

Packaging of a loan request is still a critical element in completing a deal. Deals that are analyzed from all angles including feasibility, ownership, management and are professionally packaged tend to get more attention than those that are unorganized. Most lenders are looking at several transactions at once and don�t have extra time to wade through 6 inches of paper. Most hotel-lending professionals can assist with organizing your loan package so that it gets the attention it deserves.

In summary, deals less than $10 million are successfully being completed. Lend-ers are focusing on branded properties with locations supporting a healthy demand. Although lending criteria today is much tighter than in years past, the right deal that encompasses many of the elements discussed can still be accomplished.

By focusing on these key elements those with strong operational backgrounds, access to equity and documented feasible projects continue to do deals with the capital markets.