With memories of disaster still fresh, banks are tentatively reentering the hotel-financing business.
The activity so far is mostly confined to loans of $4 million or less by community banks. Lodging industry officials say these banks regard the local hotels as small business loans and as a way to invest in the local business community, rather than as real estate loans.
But with the lodging industry claiming a boom is in the offing because occupancy is rising faster than the supply of new rooms, some already see the next bust looming on the horizon.
"Here we go again," said Morris Lasky, chief executive officer of Lodging Unlimited, which had an growing business managing foreclosed hotels in the late 1980s and early 1990s.
Mr. Lasky pointed out that the lodging industry is coming out of a business cycle in which 70% of hotels were unable to meet debt service and banks were foreclosing on 1,000 hotels per year. Mr. Lasky attributed his premonition about another bust to a recent assignment by a commercial bank to evaluate a hotel construction loan -- his first such assignment in years.
He advised against the loan. "From our point of view, the property would have lead the lenders as well a investors to a financial disaster," he said, citing a poor location and shoddy financial planning by the would-be hotelier.
Right now, the clearest sign of a resurgence in hotel financing is a spurt in hotel real estate investment trusts, or REITs.
Chase Burritt, national director of hospitality services for Kenneth Leventhal & Co. pointed to $157 million of hotel REITs that have come to market since November, including: RFS Hotel Investors, for $34 million; Jameson Inns, $24 million; Equity Inns, $44.5 million; and Winston Hotels, $55 million, May. He estimated that as many as 10 more REIT's could soon come to market.
Factors in REIT Rise
The sudden advent of REIT activity signals two things, he said: a perception that hotels may be good investments, especially at their current prices; and the fact that an alternative to bank financing is needed with bankers feeling soured on the loans.
Indeed, much of the REIT money has been used to pay off bank loans, he said.
But others say the freeze on bank financing won't last much longer.
"Hotels will be approaching banks for a number of different services," said Bjorn Hanson, who recently left Coopers & Lybrand to take a new post at Kidder Peabody as worldwide managing director in the hospitality sector.
Need for Renovations
During 12 consecutive years of losses, hotels have had to defer maintenance, he said. "Now that hotels are starting to generate cash flow, there is an industrywide need for renovations. Some of that can be done with second-mortgage financing."
Banks also will be asked to refinance medium-term loans that were made to build hotels in the late 1980s, Mr. Hanson said.
Why would a banker in his right mind make such loans?
For one thing, Mr. Hanson said, statistics point to an industry on the mend. Coopers & Lybrand has projected hotel-room occupancy will reach its highest level ever by 1997, surging past the 71% mark. The former high was 70.8% in 1979, he said.
Another reason banks will return to hotel lending is profit, said Pat Ford, the editor of Transactions by HMDA, a statistical survey by the Hotel and Motel Brokers of America that is due out next month.
"The size of those loans will grow," Mr. Ford said. "The equation for banks is that a hotel loan, properly underwritten, is one of the highest yields in real estate.
"The risk is truly in fact going down over the next few years," he said, citing similar occupancy statistics.