New capital sources emerge for smaller hotel deals

Hotel Investment Today is writing a series featuring interviews with hospitality experts about the current state of the hotel refinance market. Today, we interviewed Ryan Bosch, principal at Arriba Capital. For Part 1 with JLL’s Kevin Davis, click here. For Part 2 with Peachtree Group’s Jared Schlosser, click here. For Part 3 with Berkadia’s Michael Weinberg, click here. For Part 4 with CBRE’s Michael Straw, click here.

NATIONAL REPORT — Compared to companies who broker larger hotel loans, Ryan Bosch said his company is “probably seeing drastically different things.”

Bosch is principal for Scottsdale, Arizona-based Arriba Capital, a debt equity advisory firm which deals almost exclusively with hotels. He said Arriba typically does about $1 billion in financing annually; traditionally, that’s been about half in new construction loans, 25% in acquisitions and 25% in refinancing.

Bosch said Arriba is in the middle market of the hotel deal space (below $100 million — its average deal size is between $25 to $35 million). He said some of the rules and outcomes are different in that space. So is the amount of activity.

“I’d say the sub-$20 million check size, that’s where we’re seeing the most activity from lenders across the board, but specifically, your bank/credit union lenders,” he said. “It’s risk more than anything; lenders that historically might have done a $100 million check say they would rather spread that risk across three $30 million deals today.”

Slowdown in bank lending

Bosch said lending from banks is still available but has slowed down. He points to regional bank lenders and the fact that they represented 40% of the overall hotel debt market in 2022 (that dropped to 36% last year, and he thinks it will drop even more significantly this year).

Arriba recently closed a cash-out refinance for a Hampton Inn in Folsom, California. The $17 million loan came from a regional bank.

Bosch said banking has also pulled away from limited-service/select-service assets, which have historically received about 60% of its financing from regional banks. However, the market has changed, especially after Silicon Valley Bank’s collapse in March 2023.

“Now that we’re having this liquidity issue and heightened regulatory issues with local regional lenders, that’s causing the biggest dislocation in the market right now,” he said.

Bosch said he’s hearing a common story these days: hotel owners have always banked with the same three to four lenders (usually local or regional banks) historically over the past 10 years, and now they have a new refinance deal coming up and expect the same. But they are getting a surprise. “They’re finding that’s not the case in a lot of instances right now, and they’re having to go out of the market and find banks they haven’t done business with or looking into the CMBS or the private debt fund market,” he said.

At the same time, Bosch said the private debt funds are probably more liquid right now than they have ever been, and that is being used for bridge or short-term floating-rate loans. “There are some different forces at play… We’re seeing on a pure investor level a lot of capital going away from equity. [The capital] might have entered a hotel deal as a limited partner, but now is funneling into the private debt markets.”

Bosch said traditional banking lenders are looking to lighten their portfolio. “The liquidity issues are making them less inclined to be out there actively growing their loan portfolio,” he said.

Bosch said other fundamentals like elevated interest rates and less cash flow available for debt service aren’t helping the market either. “There’s still some fear from banks on where hotel valuation shakes out,” he said. “Because of that, they’re decreasing leverage.”

Fully funded PIPs

For bigger refinance deals, financial experts have said owners now often need to use more equity to partially fund PIPs, but Bosch said that isn’t necessarily the case for smaller-sized deals. “I’m not seeing as much of an issue in bringing new equity to the table as others that I’ve heard… It’s very market-specific,” he said. “Especially in markets where it has recovered to pre-COVID levels and beyond, we can finance that in, and we’re not seeing a lot of new cash being brought in to cover that PIP.”

We’re seeing on a pure investor level a lot of capital going away from equity. [The capital] might have entered a hotel deal as a limited partner, but now is funneling into the private debt markets.

Ryan Bosch

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But Bosch said in markets that haven’t fully recovered, “those are tougher situations where we’re saying that cash has to be brought to the table.”

And whereas preferred equity has become a bigger player in the capital stack for larger refinance deals, Bosch said he doesn’t see that trend as much in smaller deals. “I see more preferred equity chasing deals than I do executing on deals in our space,” he said.

More refinancing activity

Bosch said Arriba is definitely on a pace to do more refinances in 2024 compared to the past few years. “Over the last 18 months, [owners] that didn’t have a gun to their head on a maturity coming up were able to extend with their existing lender,” he said.

But Bosch thinks more forced refinances are coming. “We’ve seen an uptick in that already, where we’re refinancing deals that might have extended once, maybe twice,” he said. “Now, the lender wants that off their balance sheets, and now we’re in the market, and we’re going to refinance it elsewhere.”

Bosch said new construction loans are “definitely a tougher bucket of capital to place for even bank lenders right now.” But he also said some banks are still actively doing those deals.

Different types of capital

Life insurance funds are playing an increased role as a capital source, according to Bosch, primarily as a senior lender but now also doing permanent debt and bridge loans.

Historically, we’ve seen the most appetite from life insurance companies on larger institutional check sizes and lower-leverage deals. Right now, we’re seeing an increase in appetite from life insurance companies… they’re able to get more yield on hotel loans than they are in other assets.

Ryan Bosch

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“Historically, we’ve seen the most appetite from life insurance companies on larger institutional check sizes and lower-leverage deals,” he said. “Right now, we’re seeing an increase in appetite from life insurance companies… They’re able to get more yield on hotel loans than they are in other assets.”

Bosch said there’s more activity from debt funds, too, which are taking a bigger share of the market than they did previously and are easier to work with than banks. “But they’re a short-term solution. They’re not out there offering fixed-rate long-term permanent debt,” he said. “Typically, if we’re going the debt fund route, it’s a bridge loan; it’s a short-term gap while we execute a business strategy on the asset.”

Bosch said where debt funds are taking a bigger share of the market is for new construction loans where leverage is down, and interest rates are causing a lot of deals not to pencil. “As far as capital availability, we’re seeing a bigger dislocation, where debt funds are taking the lion’s share of that business,” he said. “As muted as lending is today, it’s probably even more muted on the construction side than the permanent debt side. We’re seeing the lion’s share of those deals go towards debt funds.”

Bosch said tertiary market deals are seeing new lenders, too. “We’re seeing some increase in allocation towards those deals where the submarket makes sense, and there hasn’t been new supply in a while,” he said. “We’re seeing lenders that wouldn’t typically lend in tertiary markets start lending, especially on the debt fund side. Those deals are getting slightly easier to execute than in years past.”

Bosch also said lenders are getting more creative, especially with private debt lenders getting capital in the EB-5 capital market for construction loans in markets that hit the guidelines.  

On the whole, Bosch said most financing deals are still competitive with lenders, although, on average, a smaller amount (three to five offers) than a few years ago (maybe 10-15 offers).