Peachtree
Group’s Jared Schlosser says the firm is currently working on multiple deals,
including with borrowers who don’t traditionally work with private lenders.
Hotel Investment Today is writing a
series featuring interviews with hospitality experts about the current state of
the hotel refinance market. Today, we interviewed Jared Schlosser, EVP of hotel
lending & head of CPACE, credit for Atlanta-based Peachtree Group. For Part 1 with JLL's Kevin Davis, click here.
ATLANTA — In
the current hotel refinance market, Jared Schlosser sees two types of players:
the “haves” and the “have nots.”
“If you have a good asset with cash flow, there’s a bunch of lenders competing to
refinance this project projects,” said Schlosser, executive vice president of hotel lending and head of CPACE, credit for Atlanta-based Peachtree Group. “If you have an asset
that is struggling, doesn’t have cash flow, or has other challenges like a
pretty big deferred PIP, your options are very slim.”
Schlosser
said Peachtree, which is a vertically integrated investment management firm
that provides hospitality funding for refinances, construction and acquisitions
(it’s also a developer and hospitality manager), did just under $500 million in
hotel loans in 2023 and has already surpassed that number this year (with most
of those being refinances).
The bulk of these refis have to be filled by private lenders. When I look at the last 10 deals we’ve closed, the asset and borrower quality is really strong.
Jared Schlosser
He said the
company would like to effectively double that number for the rest of 2024, but
it’s hard to predict in this market. With bid-ask spreads still out of whack,
he said Peachtree isn’t seeing as much acquisition activity right now.
“We might be
right back to 2023 where the market was thawed because people didn’t know what
was right around the corner, or we may be in a situation where banks are
forcing movement off their books because they’ve been holding these things and
kicking the can so long,” Schlosser said.
Schlosser
said Peachtree has been working lately with borrowers who don’t generally work
with private lenders, but the lack of banking options sends owners their way. “The bulk of
these refis have to be filled by private lenders,” he said. “When I look at the
last 10 deals we’ve closed, the asset and borrower quality is really strong.”
Dealing
with deferred PIPs
Schlosser
said a “good chunk” of the refinances Peachtree is seeing involve deferred
performance improvement plans (PIPs) that haven’t been completed in the “extend
and pretend” period after COVID. He said those PIPs can make deals tough to
finance and often only cover part of the required improvements.
“Quite honestly, with
a lot of the stuff that we see, the PIP [financing] is probably half of what
it’s going to cost,” he said. “Those deals are challenging and, depending on
the age of the asset, they can be even more challenging.”
He said when
those deals don’t cover the true cost of the PIP, owners need to put cash in to
cover the rest. “There
hasn’t been that need for cash in a lot of these deals over the last five
years, but I think you’re at a point now where if you’ve got an older asset
that needs a PIP, you’re going to have to put cash in on the refi to probably make it
work… The solve is the borrower is going to have to put more equity
into the deal.”
Making
CPACE deals work
Peachtree
also specializes in Commercial Property Assessed Clean Energy (CPACE) financing
for new construction loans and hit a milestone by securing $150 million of
those loans in December 2023 (it did 23 CPACE deals last year for approximately
$250 million). Peachtree is approaching $750 million in CPACE financing since
its inception.
Schlosser
said the ability to add CPACE financing to the capital stack can sometimes make
a project work. “We have the
unique ability here to do both the senior loan and CPACE, and that blended cost
of capital can make the project pencil, whereas, without the CPACE, it may or
may not, depending on what market it’s in.”
That blended cost of capital can make the project pencil, whereas, without the CPACE, it may or may not.
Jared Schlosser
He said
Peachtree will do the CPACE with another lender or themselves. “We may have
a deal that either doesn’t get to the right leverage point, or the borrower
feels like it’s too expensive to move forward, and if you can implement some
CPACE and blend that cost down, the deal may pencil.”
Still,
Schlosser said construction loans are challenging in this environment. “People have
to have real equity in the deal,” he said.
The
interest on rates
Schlosser
said owners are either in tune with where interest rates are or aren’t. “You have two things: first you have borrowers that are still stuck on 2021 pricing and don’t
realize that interest rates have gone up where they are,” he
said. “Then you have borrowers with bank loans… and they will stay on those
loans as long as possible because that’s the cheapest form of financing. So, until those banks force the issue, they can’t recycle out of it.”
Schlosser
said the best thing borrowers can do today is acknowledge that rates will
probably remain unchanged in the near future. “If
you’re solving a business plan and banking on rates going down, then that’s
probably not a great place to be,” he said.