To the Editor:

As a source of mezzanine and senior debt, Stonehenge Real Estate Investors has provided significant debt capital to the hotel industry over the last eight years.

Based upon our experience as lenders and, prior to that, as developers and managers of hotels, we think the pricing gap between hotels and the other asset types mentioned in your July 27 article, "Market Seen Exaggerating Risk in Hotels," [page 1] is warranted and healthy.

Like other real estate types, the availability and cost of capital has been the primary driver of new supply and, as a consequence, the culprit in overbuilding.

Despite the strength of demand growth for hotel rooms resulting from our extended economic expansion, the hotel industry has witnessed falling occupancies on a national level and some significant overbuilding in certain markets in the last two years.

While the currently tight lending situation is projected to bring supply and demand growth back into near equilibrium by 2002 or 2003, this balance has historically been difficult to maintain. Cheaper debt capital will not improve the prospects for balance in the future.

Unlike most other real estate types, managing a hotel as a profitable business through good and bad business cycles is a complex proposition that relatively few companies ever master. As a result, the hotel business is much more risky for most borrowers and lenders as compared to their counterparts in other real estate types, and a pricing premium is warranted.

The hotel industry has matured and gotten very healthy since the dark days of 1991. With the prospect of slowing demand growth, it is the right time for prudent lending.

Stephen C. Denz
managing director,
Stonehenge Real Estate Investors Inc.
Columbus, Ohio

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