Lending Standards Should Help Hotel Industry

Lending Standards Should Help Hotel Industry

Reprinted from Advanstar
Hotel & Motel Management Magazine
November 2, 1992
By Jeff Wilder
Wilder Group, L.L.C.

The U.S. banking system has been in "loan paralysis" for more than a year, in good measure because banks have been operating without clear policy direction from the federal banking regulators. A law meant to provide bankers and borrowers with predictable and universal lending parameters may have been a major cause of the credit crunch we've experienced.

Briefly, the little known FDIC Improvement Act of 1991 requires that the federal banking regulators establish uniform real-estate-lending standards for the extension of credit and implement them by March 1993. The law does not call for the establishment of specific loan-to-value (LTV) maximums, but bank regulators have adopted an LTV-focused approach. Since the banking community didn't know what LTV loan levels were acceptable to federal regulators for each class of real estate, the banks have generally shied away from most commercial-real-estate lending activity. Even the most conservative real-estate loans have been discouraged.

Instead of providing commercial loans, banks have been merrily buying Triple A government paper. This low-risk lending, combined with a reluctance to provide commercial loans in the face of uncertainty regarding acceptable legal loan levels, is certainly understandable. However, it sure exacerbated the deflation of real-estate values and has unquestionably hampered our national economic recovery.

A Positive Change

The regulatory certainty that will be in place by the end of 1992 will be cathartic to real-estate lending. It will serve to help end the lending paralysis that has become known as the credit crunch.

Now, within what LTV loan ranges will the bank regulators advise bankers to consider funding? It look like exciting income-producing properties will be considered for 65 percent to 80 percent loans to value. In practice, however, the lower end of this range will be considered to be an appropriate benchmark lending limit. An institution may establish an LTV level above the lower limit only if certain internal and external factors clearly justify such a higher limit.

The regulators' final decision, which will have been reached after considerable input from the real-estate industry, will have a salutary effect on the hotel business.

First of all, the availability of debt capital, at any reasonable level, will give the overall economy a boost.

Secondly, the liquidity that mortgage financing provides to real estate improves its asset value, thereby also benefiting hotel prices. This improvement will bring price more in line with intrinsic worth.

Thirdly, the conservative lending limits that are certain to be put in place by the FDIC will serve to retard excessive future new development. That is a blessing for the lodging industry and one which should be appreciated by all of us, save the franchisors. The regulators, and therefore the bankers, intend to send a loud and clear message to anyone thinking of new development. That message is, "if you believe in your project, then put 25 percent to 35 percent of the equity yourself - then, we'll consider lending you the balance."

In summary, the institution of new LTV real-estate lending standards, as called for in the FDIC Improvement Act of 1991, will soon replace the uncertainty that has put commercial lending in a deep freeze. For the lodging industry, the brake on new development will allow demand to fill supply (our hotel rooms), thus increasing profitability.