Colliers International Hotels
INNvestment Canada
Third Quarter 2004

Hotel Financing - 
Oxymoron or Reality?
Q3 2004 Canadian Hotel Transaction Summary

by Robert Shiller, Vice President Capital Markets, Colliers International

Hotel financing continues to be difficult to obtain and is largely driven by relationship lending and the quality of the project/sponsor. Loan amounts typically do not exceed 50% to 55% of the underlying value of the property.  Most lenders view hotel financing to be more business than real estate financing.  As such, the capabilities of the sponsor/ management team, as well as their financial wherewithal, are key components in obtaining attractive financing. Most lenders will require some recourse to the sponsor.

Also important is the track record of the hotel. Typically up to three years of healthy financial results will be required.  Financing of a new development becomes more difficult and will likely require separate lenders for the construction and long term financing of the hotel.

Hotels located in a major metropolitan area will also be advantageous. Hotels in secondary markets pose challenges unless they are part of a larger portfolio of hotels/motels. In addition, hotels flying a well-established flag are often a prerequisite.

The amount of leverage available for hotel financing is usually less than what is available for traditional commercial real estate. Many lenders that are comfortable with hotels would limit leverage to 50%-55% of the value of the property. Pricing will usually be 225-250 basis points (“bps”) over the corresponding Bank of Canada Rate for a fixed rate, term of five to ten years.

This is 75 bps to 100 bps greater than spreads for other real estate. Pricing can be thinner, possibly as low as 200 basis points over the Bank of Canada Rates on hotels flagged by a major chain and with strong operating results for the past three to five years. Debt service coverage (“DSC”) needs to be at least 1.4 times.

Mortgage Backed players (Conduit Lenders), which include CMO, Merrill Lynch, Column Financial, GMAC and GE Capital have been fairly active with hotel financing. Conduit Lenders pool a series of real estate mortgages which are then sold to the public and private markets in different tranches, based on risk, as determined by Loan to Value.

They are basically selling cash flow generated by these pools of mortgages.  Often Conduit Lenders cater to the “B Piece” buyers (buyer of the most risky tranche), which determines the parameters of these loans. The lending parameters for most Conduit Lenders are fairly similar and with little flexibility in the structure offered. They will finance single asset properties, however most of these lenders like the diversification of portfolio deals.

Other lenders offer floating rate options and more flexibility. Again leverage will peak at the 50%-55% range, with a 25-year amortization. Interest-only financing during the initial years is sometimes offered for turnaround situations. The other contributing factors such as sponsorship and track record would still apply, and are more relevant in these situations. Pricing is usually a spread over 30-day Banker’s Acceptances (BAs), which are currently approximately 2.25%. Spreads can range from 300-400 bps over BAs for an indicative current all in rate of 5.25%-6.25%.

These lenders generally provide financing on a non-recourse basis.  This type of structure works particularly well in a situation where repositioning or extensive capital expenditures are required.

An example on this type of structure is presented below. The name of the project and lender has been intentionally omitted:


Year Built/Renovated - 1983

Location - Airport Market

Design - 236-room, 6-story atrium hotel of 196,000 sf with concrete and stucco façade situated on 4.8 acres.

Amenities - Restaurants (2); lounge; health club; indoor pool; business center; gift shop; and, 8,900 sf of meeting space. Complimentary transportation to and from airport.

Ingress/Egress - 2 entry/exit drives located along the property’s southern and eastern perimeters.

Parking - 365 asphalt paved spaces at-grade

Est. Replacement Cost - $100,000/room

Market Segmentation - 38% corporate; 29% group; 8% individuals, 11% discount/transient, 14% contract.

Market Orientation - Hotel’s occupancy was 3.1 points higher than its competitive set and the subject
ADR exceeded the competitive set by $8.70.


BA Cap - Borrower will purchase a BA at a strike price of 7% prior to closing.

BA Floor - 2% (current BAs, approximately 2.25%)

Spread - 3.5% over BAs

Holdback - Lender will holdback greater of $4 million or 100% of the Lender-approved renovation budget to complete renovations required by the franchisor. To be disbursed within 24 months of closing.

Term - Three years with two one year extensions at Borrowers option.

Repayment Fee - 0.50% of Lender commitment to be paid whenever loan is repaid.

Amortization - Interest only for the initial 3-year term. During extension period, an amortization will be paid monthly, based on a 25-year schedule.

Extension - One, 12-month extension subject to: (i) no existing defaults; (ii) 0.25% extension fee; (iii) BA extension; and (iv) minimum DSC of 1.5x based on the greater of the actual debt service (including amortization due during extension) or the debt service that would be due based on a 9.25% constant.

Assumption - Loan may be assumed subject to: (i) no existing defaults; (ii) 1% fee; and (iii) approval by Lender.

Replacement Reserves - Borrower will reserve 3% of total revenues during the 1 st two years of the loan term and 4% thereafter, on a spend or accrue basis. None of the Lender approved renovation scope shall be funded from reserves.

Construction Guarantee - A person or entity acceptable to the Lender will provide a completion guarantee for the proposed renovations.

Management Fees - Borrower will subordinate all management fees to the Lender’s debt service.

This is only one example of the type of financing that is available. Hopefully it provides some insight on how lenders perceive hotel loans and how they are structured. It is important to remember that hotels are not viewed as typical real estate but as businesses. To be successful in obtaining alternative financing, one needs to formulate a strong business plan.  Once you have developed this and the numbers make sense, you will be in a good position to obtain the financing that suits the project.

Robert Shiller is Vice President of Capital Markets, Colliers International. Robert has worked extensively with GE Capital and Citibank in various capacities including, but not limited to, Senior Loan Originator and Manager of Asset Management Services. Prior to joining Colliers, Robert was Director of Mezzanine Debt at Caber Capital Inc. where he started a mezzanine debt fund for Cargill Inc. Robert continues to represent Cargill’s Mezzanine Debt Program at Colliers, in addition to working on other Capital Market endeavours.

Transaction Activity

Despite the strong appetite to invest in hotels by a variety of investors, transaction activity for the first three quarters of 2004 was slower than the prior year period, with only 28 hotels sold compared to 40. With approximately $194 million ($57,100 per room) of transaction volume reported nationally, total volume was down some 40.5% year-to-date September 2004 compared to the same period in 2003 when volume reached approximately $326 million.  The two most significant trades this quarter were the sale of the Travelodge Vancouver Airport, a 159-room, full-service, airport hotel, which sold in July 2004 to a private investor for $7.15 million and the Best Western Athabasca Inn, which sold for $4.36 million to a private investor in August 2004.

Hotel Transaction Summary - YTD September 2004

Colliers International Hotels

INNvestment is published quarterly by Colliers International Hotels. Comments and suggestions are welcome


Colliers International Hotels
Hotel Investment Advisory Services
Bill Stone
Alam Pirani
Deborah Borotsik
Sylvia Occhiuzzi
One Queen Street East Suite 2200
Toronto, Ontario M5C 2Z2
Phone: (416) 777-2200
Fax: (416) 777-9232

Also See: Hotel Growth Strategies; Value Creation and Preservation / Colliers International / September 2004
Mid Year Canadian Hotel Investment Industry Summary / Colliers International Hotels / July 2003
Slow, Steady and Strong Wins the Race / Colliers International Hotels / INNvestment Canada Fourth Quarter 2003 / January 2003
Canadian Hotel Investment Report 2002 - Colliers International Hotels / Feb 2002
Canadian Hotel Investment Report 2000 - Colliers International Hotel Realty / Feb 2000

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