Developers are turning to community banks to finance construction of motesl and small, limited-service hotels.

With the major markets saturated with four-star properties, hoteliers are focusing on smaller projects in secondary and tertiary markets. In those markets, they think demand justifies the estimated $3 million in construction costs.

"We've moved to a whole different plateau in the banking community," said George R. Justus, senior vice president of Microtel Franchise and Development Corp., Rochester, N.Y.

"Virtually all te banks you have heard of just are not lending. So we have gone to more community-oriented banks that may be smaller in scope, and we have found those bankers to be receptive to doing our projects."

The |Super-Budget' Niche

Microtel's idea is to exploit the need for no-frills, 100-room hotels in such markets as Corbin, Ky., and Troy, Ohio, as welll as midsize markets such as Columbus, Ohio, and Buffalo.

Microtel is a new chain that is carving out a niche in what is coming to be known as the "super-budget" category.

The company's design can be built for less than $30,000 a room, enabling owners to charge under $30 a night. Microtel claims a 97% occupancy, at a time when 60% is the norm. The average budget hotel costs $40,000 or more per room to build. A full-service hotel costs about $100,000 a room.

This year, about 30,000 hotel rooms will be built nationwide, about two-thirds of them being limited-service, according to Mark Lomanno, research manager, Smith Travel Research.

In contrast, he said, in the late 1980s, 150,000 rooms a year were built, with the ratio of limited-service to full-service "more like 50-50."

Hometown Lending

Hotel executives said most financing comes from banks situated where the hotel or the franchisee is located.

S. Kirk Kinsell, vice president of franchise sales and development for Holiday Inn Worldwide, said that in addition to the small banks, a few pension funds finance small hotels. No life insurance companies or thrifts are providing loans, he said.

Limited-services hotels earned about $206 per room last year, compared to a $1,531 loss at full-service hotel rooms, according to Host Report, a publication to Smith Travel and the Arthur Andersen Real Estate Services Group.

The major hotel chains are gearing their budget and limited-service lines to smaller markets.

"If you look at the performance over the last 18 months, the segment that has held up the best is the middle-market, limited-service types," said Margo Vignola, hotel industry analyst for Salomon Brothers. "As a result, I don't think this is a passing fancy."

Holiday Inn, for example, plans to have 100 of its Holiday Inn Express hotels opened by the end of the first quarter of next year, up from the 54 that were open as of last week.

The Express hotels, with an averzge of about 80 rooms, "permit us to go into markets where you couldn't put in a [full-service] Holiday Inn because of the cost structure," said Mr. Kinsell.

Marriott Corp. hopes to bring its extended-stay Residence Inns to smaller markets by launching a smaller 66-suite design.

"By going with a smaller prototype, we are able to secure loans relatively easily," said Gary Theraldson, developer of a 66-unit Residence Inn due to open in November in Appleton, Wis.

"The most attractive thing about the budget operations is those houses will fill up first," said Sidney D. Richter, vice president of the Hudson City Savings Institution, a Hudson, N.Y., lender with about a half a billion dollars in assets. It has made two motel loans so far.

"The higher-end appeals to a different group of people," he said. "But companies which have people on the road, wher they would have gone to a middle of the line [hotel] are now focusing on the budget hotel to maintain the same level of expenses."

"Microtel is unique in that they've actually downsized the room," added Mr. Richter, who helped finance a Microtel near Schenectady, N.Y.

Mixed Financing

Microtel licensees have financed nine hotels, using a combination of small business administration loans, investor equity, and secured real estate loans from banks.

The developers of Microtels and other franchises try to overcome the stigma of realty loans by pitching projects as commercial loans. They argue that a hotel can be an asset to the local business community, including corporate clients of the bank.

Counting cash equity in the projects and Small Business Administration guarantees, the banks are on the hook for 50% or less of the construction costs.

Moreover, because they are being built where there is little or no competition, the smaller properties are designed to produce cash flow sufficient to meet debt service almost immediately.

That contrasts with larger hotels built in the 1980s, which often failed to meet expectations that they would break even after three years.

But what about the risk of overbuilding the remaining markets? The banker and developers says it is slight.

Conservative Approach

In contrast to big banks that ran with the herd in the 1980s, "these are typically banks that historically have been very conservative," Mr. Justus of Microtel said. "They focused on their own needs and made loans accordingly."

"It's well known by everybody at this point that the hotel industry is suffering," said Jerold L. Newlon, vice president and manager of commercial real estate at Commonwealth Bank. Williamsport, Pa., which is considering a loan for a Microtel. "It has to be proven to us that this type of product that they're proposing would fit."

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