Public Private Partnerships…What are They Good For?

By Duke Dennis Over its 25-year operating history, Metropolitan Capital Advisors (MCA) has worked on numerous Public Private Partnership (PPP) transaction financings. PPPs have increasingly Read more

The Power of RECA (Real Estate Capital Alliance)

By: Scott Lynn and Andrew Hanzl Metropolitan Capital Advisors (“MCA”) is a member of the Real Estate Capital Alliance ("RECA"), a professional association of 18 Read more

Getting Creative: HUD 221 (D) (4)

By: Andrew Hanzl Take notice! The landscape is shifting: In anticipation of a market slow-down, commercial real estate lenders are dialing back their leverage and Read more

Private Lenders: Filling the Void

by Roger Wyche There will be approximately $96 billion of CMBS loan expirations during 2017. CMBS lenders, therefore, have been counting on refinancing  Borrowers to Read more

A Bridge (Loan) to Everywhere

By Charley Babb Do you remember John McCain’s famous “Bridge to Nowhere” speech from 2005? As the Arizona Senator, and then later as the Republican Read more

Limited Service Hotels are, well…limited!

By Todd McNeill In recent times, the Limited Service Hotel sector’s reputation has steadily declined in the eyes of the finance industry. Once the darling Read more

TrumpCare and the Effect on Healthcare Commercial Real Estate Market

By Kevan McCormack Since Donald Trump has taken office as President of the United States, he has been very busy “making good” on his campaign Read more

What is the TRUMP Effect on Commercial Real Estate? 4 Key Points

— By Sunny Sajnani There is no doubt that Donald J. Trump in the White House is a game changer for the real estate industry. Read more

Whither CRE Construction Lending?

By: Justin Laub The mantra of commercial real estate developers around the country when speaking of the state of construction lending these days might be: Read more

The Good, the Bad, the Texas High-Speed Rail Line

By Duke Dennis Brady Redwine of Texas Central Partners (TCP) recently addressed a group of Texas A&M real estate professionals about the high-speed rail line Read more

UT Ranked #1 in Commercial Real Estate Yardage

-By Scott Lynn Every fall season, the University of Texas at Austin McCombs Real Estate Finance & Investment Center (REFIC) sponsors the National Real Estate Read more

2017: Not a Forecast (Just Some Thoughts to Ponder) for the CRE Market

By Brandon Wilhite Accurately forecasting the commercial real estate market’s performance is a nearly impossible task. There are far too many variables to assess and Read more

What is PACE Financing?

By Andrew Hanzl Global warming is now a widely accepted concern. As real estate professionals, what role can we play to ensure environmental sustainability? One Read more

Banks Reign in Leverage in Effort to Curb Apartment Construction

By Charley Babb My real estate career spans over three decades. Yet for the very first time, I have witnessed lenders exercise prudence and consequently Read more

Risk Retention in CMBS Starting to “Sink” in

By Todd McNeill The early signals of Risk Retention are reverberating through the commercial real estate capital markets.  Several conduit shops, including MC Five Mile Read more

Risk Retention, Risky Business?

By Scott Lynn Basel III, HVCRE…all these new lending regulations that mean lenders are loaning me less and charging me more. Good grief!!! And now, Read more

It’s Senior Living Not Senior Dying

By Kevan McCormack Everything in life and real estate evolves.  Static retail shopping centers evolved into vibrant entertainment venues where a family could spend an Read more

Metropolitan Capital Advisors Arranges $5,512,000 Acquisition Loan For A 9.77- Acre Lot In Frisco

Metropolitan Capital Advisors, Ltd. (“MCA”) has arranged a land acquisition loan for a 9.77-acre tract located in Frisco, Texas at the northeast corner of Read more

Metropolitan Capital Advisors Arranges A $4,700,000 Construction Loan For UC Health Emergency Room (Arvada)

Metropolitan Capital Advisors, Ltd. (“MCA”) has arranged a $4,700,000 construction loan for UC Health Emergency Room, located in Arvada, Colorado. The 0.69-acre site is Read more

Ground Leases-Friend or Foe?

On the surface, a ground lease seems like a simple concept: a landowner grants permission for a tenant to use their land in exchange Read more

What Do Baby Boomers and Millennials Have In Common & Why It's Important in Commercial Real Estate

By Charley Babb What do Baby Boomers and Millennials have in common? They both like to spend money. While they may spend their money on Read more

The Economic Benefits of Walkability

By: Brandon Wilhite Starting with the Federal-Aid Highway Act of 1956, the way cities were developed in the United States began changing. Although it was Read more

Brexit – Immediate Effect on Commercial Real Estate?

— By Sunny Sajnani In late June 2016, a historic referendum was voted on approving the British withdrawal from the European Union (EU).  The immediate Read more

Hotels: What Inning Are We In?

By: Justin Laub I recently returned from the Urban Land Institute’s national conference on hotels and resorts. The last time ULI held this event was Read more

Choppy CMBS Market Hoping For Resurgence

By Charley Babb CMBS issuance for the first quarter of 2016 was roughly half of the production for the same period in 2015. This has Read more

limited service hotels

Limited Service Hotels are, well…limited!

By Todd McNeill

In recent times, the Limited Service Hotel sector’s reputation has steadily declined in the eyes of the finance industry. Once the darling of the hotel sector for lenders, limited service hotels are, for the time being, a less desirable class of assets.

Firstly, construction lenders have reduced the leverage on all construction requests, specifically impacting limited service hotels, due mainly to overbearing regulation put in place after the Great Recession of 2008.  In most cases, construction lenders are reducing the loan-to-cost ratio of hotel development to a maximum of 55%.  Gone are the days of 65% and 75% leverage on ‘to-be-built’ limited service hotels, which was the typical leverage for regional banks signing with experienced hotel developers.  However, there are several banks that simply will not consider any development in the current environment, let alone an asset class where: (a) your rent-roll “rolls” every night; (b) real estate is closely attached to an operating business; or, (c) a high fixed-cost structure offers a narrow margin.  However, despite the negative perception, seasoned and well-capitalized hotel developers are still able to secure construction financing, albeit at lower leverage levels (maxing out at 55% loan-to-cost ratio).

limited service hotels

Secondly, the market has scaled back on permanent financing for any newly completed hotels with no operating history.  There are many new hotel property projects that are still sitting in construction loans because the permanent lenders require seasoned operating results.  Several of our Wall Street CMBS shops have disclosed that the rating agencies saw 2013 as the peak performance year for the limited service hotel sector. However, lenders are underwriting loan metrics from 2013 P & L’s for loan sizing purposes and Wall Street has been hammered by the rating agencies, most notably Fitch.  If a the hotel has, therefore, continued to increase its bottom line from operations since 2013, it will have a difficult time getting any lender to give it credit for the increased cash flow.  To reiterate the point, a typical Wall Street shop sizing for limited service hotels will consider the 2013 P & L sized to an 11% debt yield, which should not exceed a 65% loan to value.  A recent permanent loan request in our shop was sized to these metrics and resulted in a 14% debt yield, as well a 45% LTV on actual trailing-12 operating statements! Additionally, the conservative loan sizing metrics used by the Wall Street lender did not allow for this particular loan request to even cover the construction loan payoff without an equity infusion to account for the delta!

One may think that this scaling back is an excellent opportunity for preferred equity and mezzanine lenders to swoop in and fill up the void in the market created by the banks and permanent lenders – however, the sheer volume of limited service hotel request in the market has caused both group to “fill up” on hotel collateral.  Lenders are now “cherry picking” the hotel deals they want to do and leaving the less desirable deals at the bottom of the stack.

Given that there has been a tremendous amount of limited service hotel construction since the recession, the capital markets are reacting with their version of supply control. By dialing back leverage across the board, they make the sector less attractive for investment.  This fundamental pull-back is based on the most basic economic principals of supply and demand. In the last 2 to 3 years, there have been significant construction and permanent loans written in the limited hotel sector. Now the capital markets are hitting the pause button to allow the new supply to stabilize.  On one hand, it doesn’t take a PhD to figure out that if the sector maintains its solid fundamentals the capital will slowly start to trickle in.  On the other, if the capital markets’ perceptions are accurate, there could be a correction in the fundamentals of limited service hotels on the horizon.

To secure financing on limited service hotels in today’s market takes careful and exhaustive outreach to a deep bench of lending institutions. Many times, multiple lenders are required for one deal and this is not something that can be achieved with a “few phone calls”.  MCA has numerous clients in the development and acquisition business of the hotel sector. We have developed a deep understanding of how to assess and efficiently place successful requests.  For inquiries on your next hotel deal, MCA can be a valuable ally in securing the most efficient funding sources for your deal.

The author, Todd McNeill, is a Principal & Director in the Dallas office of Metropolitan Capital Advisors and can be reached at

Posted on by admin in Commercial Real Estate Finance, Hotel Comments Off on Limited Service Hotels are, well…limited!