The Hotel Liquidity Market - An Interview with Mark Kay, President, CFO Capital

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August 21, 2020

During the Covid 19 pandemic, hoteliers have faced an unprecedented period of challenged cash flows amid restricted operations. The American Hotel and Lodging Association is now saying 1 in 4 hoteliers in the U.S. cannot make their monthly mortgage payments. While there is some relief from government programs here in Canada, the situation is not much better.

Western Hotelier caught up with Mark Kay, president of CFO Capital to discuss what options are out there for hoteliers in today’s challenging climate.

CFO Capital, incorporated in 2004, is a national commercial mortgage brokerage firm with head office in Markham Ontario housing housing a team of former Commercial Real Estate Bankers comprising of analysts and business developers.The company also has an office in Vancouver led by Trevor Scott and has a presence in East Coast led by Ian Hurst.

“CFO's mission” says Kay, “has always been providing a consistent flow of competitive capital to all industry sectors with a focus and passion to the Hotel sector. In early 2000 there were under 10 lenders supporting hotel industry and prior to Pandemic we have reached over 50 active institutional partners”.

The key problem hoteliers face today, says Kay, is that two-thirds of hospitality lending is on a moratorium while only one third of lenders are still active providing financing for construction, term and refinance.

Right now, hoteliers can get construction loans up to 65% Loan to Cost (LTC), the loan amount divided by the construction cost, with values stabilizing over a 3-4yr period to get over the COVID bump.

For new loans, Term/Refinance up to 65% loan-to-value (LTV), the loan amount compared to the expected market value of the completed project (values defined as 3-4 yrs stabilized) with inclusion of working capital to cover the burn rate.

“There's lot of frustration to the lack of access to working capital from EDC/BDC programs which hoteliers nation wide desperately need due to the forced shut down of provincial and international travel that has an obvious direct correlation to revenue. The wage subsidy programs definitely assist but not nearly sufficient enough to cover bank principal and interest payments, taxes and so on... once the bank deferrals come to a halt”.

This liquidity crisis is an industry wide issue for a broad segment of owners.  “2020 demand is not anticipated to return to levels where owners can sustain a cash flow positive position. In the absence of financial support from government sponsored programs through the financial institutions, hotel owners will not be able to sustain operations”. 

Hopefully, says Kay, as an alternative or in collaboration with the fed program, institutional regulators may allow for the further extension of principal and interest until the provinces fully open which will assist in the liquidity.

There are some other measures, however, that hoteliers can take such as the temporary solution of a bridge loan.

“In anticipation for a demand of bridge capital required for the hotel industry we have been working with lending partners to provide first and second mortgages, 6-18 months as well as alternative security structures in lieu of registered 2nd mortgages for those that require immediate relief. It comes at a higher cost of capital but it's an avenue to help bridge the working capital”.

Despite the liquidity crisis brought on by the Covid 19 pandemic, CFO Capital has been very active securing new financing deals in the hotel sector. So while these are clearly challenging times, there is some light on the horizon.