Who says new construction isn’t getting financed?
A joint-venture partnership between real estate investment manager Palladius Capital Management and Marquee Funding Group has originated an $11.5-million loan to finance the construction of the Cambria Hotel Hillsboro, an upcoming four-story, 115-room hotel located in Hillsboro, Ore. The fixed-rate loan carries a term of 24 months and is being provided to sponsors Washington-based hotel developer Evergreen Hospitality Development and Fine Hotel Group, a hotel management company based in Orange County, Calif.
The 22,000-square-foot upscale hotel will be constructed on land that is owned by Majestic Realty Co., which is adjacent to Majestic Brookwood Business Park, a master-planned 118-acre commercial development in Hillsboro’s business sector. Hillsboro is the fifth largest city in Oregon and has been dubbed “Silicon Forest” due to the area’s heavy tech presence, which includes companies such as Intel, Adobe, McAfee, Salesforce and Nvidia.
“We are excited to provide this financing to two high quality sponsors who understand the local market exceptionally well and have a sound business plan to own and operate a high performing hotel supported by multiple demand generators,” said Afshin Kateb, CFO and Head of Hospitality Investments. “This transaction illustrates that during these volatile capital markets times, while most regional banks have materially reduced their lending capacity, we remain present and ready to lend to qualified projects. Our decades of experience owning, operating and financing hotels gave us great confidence in making this loan, and we look forward to contributing our knowledge to support the project’s success. This origination demonstrates our unique ability to structure bespoke financing solutions that are beyond the capabilities of other lenders.”
Added Palladius CEO Nitin Chexal: “We are firm believers in the long-term fundamentals supporting well-located hotels. We pay close attention to hospitality real estate and have been investing in it for years; we plan to be an active lender on a national scale on projects that meet our investment criteria. Recovery within the hospitality sector has been extremely market—and in some cases submarket—specific, as widely varying demand drivers create disparate impacts on regional and local hospitality ecosystems. In this case, the Hillsboro market demonstrates robust leisure demand and is beginning to show signs of recovery in business travel.”
The deal shows that new-construction debt is putting out for well-sponsored and strong-located projects and particularly outside the norm of large or regional banks.
HOTELS spoke to Palladius’ Kateb about the deal considering today’s capital markets that have made financing more difficult to attain.
HOTELS: The Fed has indicated that there is likely to be another 25 bps hike, but a potential retrenchment thereafter. How might that impact hospitality financing?
Kateb: Another rate hike will exacerbate an already constrained debt market and make hotel financing more expensive. Additionally, a higher rate can create loan proceeds deficiency issues. Higher rates will result in higher debt service payments and in many instances the NOI cannot meet the lender’s prescribed Debt Service Coverage Ratio (DSCR) and, accordingly, the borrower is required to pay down the debt, which could impact borrower’s liquidity.
HOTELS: Another regional bank, First Republic, has now failed. How does that support Palladius’ position as a debt alternative?
Kateb: Many regional banks have temporarily halted lending to lodging; this void has materially increased our pipeline as a direct lender. We are offering fixed and floating options and have become a true solution provider to many owners and operators that heavily relied on their long-term relationships with banks, which, unfortunately, can no longer assist them during these challenging times. We are disciplined, employ institutional grade underwriting and we know the space very well, especially on the operations side, allowing us to understand the challenges and issues sponsors and borrowers face. As a result, we can tailor a financing solution to the needs of the borrower as opposed to what many banks do, which offer far less flexibility. Additionally, Palladius Capital is structured as a perpetual life vehicle and as a result we do not have the duration mismatch that regional banks have with their capital base.
HOTELS: What are you seeing in new-construction loans versus acquisition type?
Kateb: We are seeing more brand support either through key-money or even loan guarantees. In general, most debt funds have become more selective and guarded by lowering their LTC requirements to below 60%. Lenders are closely scrutinizing project costs to immediately identify any imbalance. Borrower liquidity is paramount and multi-projects guarantees is viewed as possible risk and added liability. Additionally, on select projects, we are seeing sponsor completion guaranty to extend beyond project opening and into stabilization.
HOTELS: Why was this deal attractive for you?
Kateb: A successful construction deal must be located in a great market and have an experienced developer, strong capital sponsors, a battle-tested management company and a credible and desirable brand/flag. This project meets all these criteria. The project is supported by two high-quality sponsors who understand the local market exceptionally well and have been operating in it for a long time. They have a sound business plan to own and operate a high performing hotel supported by multiple demand generators. Our decades of experience owning, operating and financing hotels gave us great confidence in making this loan, and we look forward to contributing our knowledge to support the project’s success. This origination demonstrates our unique ability to structure bespoke financing solutions that are beyond the capabilities of many other lenders.