Getting creative with hotel financing.
What a difference a year makes. At this time last year we were looking at year over year of RevPar growth that was either flat or slightly down from the previous year.
With the end of the war and all of the uncertainties gone in the spring of 2003, the summer of 2003 saw a turnaround Turnaround
A situation where a company that has had poor performance for an extended period of time experiences a positive reversal.
A speculator may profit from a turnaround if he or she accurately anticipates the improvement of a poorly performing company. in our industry that has not only given encouragement to owners who have been through a few tough years, but also to those in the capital markets who provide the debt and equity capital so vital to keeping the industry moving forward.
One of the most important barometers that capital providers evaluate when looking at prospective hotel financing transactions, is the hotel's performance over the prior 12 month period.
In 2004, as each month progresses and the new '04 month replaces the same weaker month for '03, a hotel's prospects for achieving the most competitive financing rate and term available in the market improves.
With the improved performance, we have seen many new providers of capital to the lodging sector.
These providers are not the traditional first mortgage providers, but are "mezzanine loan A mezzanine loan is a relatively large loan, typically unsecured (ie., not backed by a pledging of assets) or with a deeply subordinated security structure (e.g., third lien on the property but non-recourse vis-a-vis the borrower). providers" who bridge the gap between what a traditional first mortgage provider is willing to lend and the proceeds the owner needs in order to complete their financing. Mezzanine loans can be used for both new construction and for refinancing Refinancing
An extension and/or increase in amount of existing debt. .
The mezzanine mez·za·nine
1. A partial story between two main stories of a building.
2. The lowest balcony in a theater or the first few rows of that balcony. provider is betting on the continued improved performance of both the hotel and the overall hotel market continuing to rise.
The mezzanine provider gets paid well for providing this service and providing greater financial leverage. Where the typical first mortgage provider only provides up to 70% loan-to-value financing, the mezzanine provider is willing to increase those proceeds to 85% or 90%. The cost for the incremental Additional or increased growth, bulk, quantity, number, or value; enlarged.
Incremental cost is additional or increased cost of an item or service apart from its actual cost. 15% to 20% of leverage costs the borrower an interest rate of 9% to 15% on the additional proceeds above the first mortgage.
At the expiration EXPIRATION. Cessation; end. As, the expiration of, a lease, of a contract, or statute.
2. In general, the expiration of a contract puts an end to all the engagements of the parties, except to those which arise from the non- fulfillment of obligations created of the loan in 3 to 5 years, with the improved performance of the hotel and the market, the mezzanine provider is counting on their initial 85% to 90% loan-to-value loan, now being only a 60% loan, easily financeable with new first mortgage proceeds. The mezzanine loan is not structured as a second mortgage, but rather as a pledge of the ownership equity as the form of collateral for the investment, with the mezzanine provider having the ability to step into the owner's shoes if they are not repaid.
An example of a recent transaction which the AFC (1) (Application Foundation Classes) A class library from Microsoft that provides an application framework and graphics, graphical user interface (GUI) and multimedia routines for Java programmers. Hotel Finance Group completed which had a first mortgage and a mezzanine financing Mezzanine Financing
A hybrid of debt and equity financing. Mezzanine financing is typically used to finance the expansion of existing companies, and it is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the component to it was the financing of a portfolio of 8 hotels for a western hotel owner/operator. The owner had a $27 million loan coming due on the properties and was only able to achieve traditional first mortgage financing proceeds of $24 million at an interest rate of 6. 10%. This was all the risk the first mortgage lender was willing to take, as they viewed this $24 million loan as 71% loan-to-value.
AFC then went out to their capital sources who provide mezzanine financing, and was able to raise an additional $3 million in proceeds priced at 9.5% for the loan term. The result to the owner was that they were able to raise $27 million--enough proceeds to refinance Refinance
1. When a business or person revises their payment schedule for repaying debt.
2. Replacing an older loan with a new loan offering better terms.
When a business refinances they typically extend the maturity date. their original loan at a blended interest rate of 6.48% which includes both the $24 million first mortgage and the $3 million mezzanine piece.