Sheraton Hotel Redding At Sundial Bridge - Redding Record ...

The ACLI hotel mortgage interest rate (based on actual loans) was 8.43% in the
fourth quarter of 2009, while Moody's Corporate A Bond Yield for the same period
was only 5.66%. There was insufficient ACLI hotel loan activity in the first quarter
of 2010 to report hotel loan terms. Hotel real estate financing was more severely
impacted in the lending arena than corporate financing; thus, there was a lower
correlation between these two data points in 2009 than we have witnessed
historically. Lenders began to return to the market in the second quarter of 2010.
Once it was apparent that the hotel market had bottomed out and was in recovery,
both lenders and investors began to view hotel assets more favorably, as earnings
could only recover from the nadir recorded in the recent past. Commercial banks
and insurance companies have re-entered the market, and we are also seeing the
re-emergence of the commercial mortgage-backed securities market. Lenders are
currently sizing mortgages at debt yields of 13% to 15%, which, when applied to
values determined at capitalization rates based on the trailing-twelve-month net
operating income levels of 5% to 9%, equate to loan-to-value ratios ranging from
roughly 40% to 70%. Debt is most commonly being priced at a 300 to 700 basis
point spread over the 30 day LIBOR, with both fixed rate and floating rate
becoming increasingly available. Interest rates for single hotel assets are currently
ranging from 5.5% to 8.0%, depending on the type of debt, loan-to-value ratio, and
the quality of the asset and its market.
In addition to the mortgage interest rate estimate derived from this regression
analysis, HVS constantly monitors the terms of hotel mortgage loans made by our
institutional lending clients. Fixed-rate debt is being priced at roughly 400 to 600
basis points over the corresponding yield on treasury notes. As of January 19,
2011, the yield on the ten-year T-bill was 3.4%, indicating an interest rate range
from 7.4% to 9.4%. The current pricing of hotel mortgages is well above the
normal historical spread of 300 to 500 basis points that existed prior to both the
financial crisis and the more aggressive lending environment of the recent past.
At present, we find that lenders who are active in the market are using loan-tovalue
ratios of 40% to 70% and amortization periods of 20 to 30 years. The
overall lending environment is becoming increasingly more active, with
commercial banks, mortgage REITS, insurance companies, and CMBS starting to
return to the market. While debt is becoming more available, underwriting
standards have become stricter and loan-to-value ratios continue to be
conservative.
While some debt financing is available in today’s market, lenders are applying
stringent underwriting standards to any new loans. Based on our analysis of the
current lodging industry mortgage market and adjustments for specific factors,
such as the property’s site, proposed facility, and conditions in the Redding hotel
market, it is our opinion that a 6.50% interest, 25-year amortization mortgage
February-2011 Income Capitalization Approach
Sheraton Hotel Redding At Sundial Bridge – Redding, California 82