Banks often offer more refinancing options than CMBS lenders

Hotel & Motel Management, June 7, 2004 by Jeff Wilder

During the past few months, I've been busy refinancing real-estate and have done all of it through banks, passing on commercial mortgage-backed security loan opportunities.

Why? There are advantages to hotel borrowers of investigating the first mortgage financing options available through local and regional banks. Here are a few:

1. Franchise affiliations. Banks generally will be more flexible in funding a wider variety of brands, while CMBS lenders often have a more restrictive list of affiliations they will consider underwriting.

2. Term and rate options. Banks traditionally have been five-year term lenders, but today, it is not unusual for a banker to write loans with 20- to 25-year amortization schedules, including rate resets after five or 10 years, and terms of 10 to 25 years. As to interest rates, I've recently closed loans with banks that offered the use of a variety of benchmarks, including regional Federal Home Loan Bank Board indexes, and provided for spreads of 175 to 250 basis points, resulting in highly competitive rates. Banks also will consider floating-rate loans that can be converted to a fixed rate during the term.

3. Prepayments. Borrowers with CMBS loans know how prohibitively costly it can be to prepay them because they historically have included yield maintenance clauses that make prepayment unfeasible. In contrast, banks often are comfortable with a 4/3/2/1 formula (paying 4 percent of the principal balance as a prepayment penalty the first year, 3 percent the second, and so forth.) This is a major financing advantage to the borrower.

4. Debt service coverage ratios. Bankers often are comfortable using a DSC ratio pegged at 1.25, meaning that the property's profitability must be 125 percent of the debt service, which contrasts with a 1.4 level often used by the CMBS lender. DSC levels come into play when a lender looks at the initial loan request, and is also an important criterion applied during the life of the loan.

5. Replacement reserve clauses. CMBS loans usually require a 4 percent set-aside, meaning that 4 percent of gross sales must be paid each month to the lender and be held in an (often) non-interest-bearing account pending use for property upgrading. Banks often are more flexible in devising acceptable clauses covering property upkeep. They often will consider waiving the reserve set-aside if the borrower's franchise quality-assurance scores show that the hotel is in good standing with the franchisor. The amount is open to negotiation.

6. Personal guarantees. CMBS loans almost always are nonrecourse, while banks traditionally have required personal guarantees. But many banks now will write nonrecourse or limited-recourse loans with personal guarantees falling away once the DSC ratio is met for a 12-month period.

7. Loan servicing. CMBS loans are packaged and resold to investors, with the servicing responsibility assigned/sold to a third party that has little incentive or ability to change any of the mortgage terms midstream. Achieving even the most mundane of changes is frustrating and often impossible.

Jeff Wilder is president of Wilder Ventures LLP, a New York City-based asset management company, and an adjunct professor at New York University. E-mail him at jswilder1@aol.com.

hmm@advanstar.com