By Zak Selbert
Los Angeles – Vista Capital Company recently arranged and closed $17,300,000 of CMBS financing for the Crowne Plaza Union Station, located in the heart of downtown Indianapolis, within America’s first Union Station. The hotel is listed in the National Register of Historic Places. The property is adjacent to the Indiana Convention Center and is connected via over-air walkway to Lucas Oil Stadium. The full-service, upscale Crowne Plaza features 273 rooms, including 26 original Pullman Traincar sleeping rooms named and decorated after famous personalities from the early 1900s.
The financing was funded by an affiliate of a European-based investment bank. The loan was competitively bid by several lenders, who were drawn to the market, the strong sponsorship, and the historic nature of the asset. The 10-year, fixed-rate financing will be used to fund a large renovation project to redesign the hotel interior with a modern, clean, and chic aesthetic. The financing will also be used to retire the existing financing, while concurrently reducing debt service payments by approximately one-third.
Vista Capital was able to negotiate highly favorable, non-recourse, fixed-rate financing with very low pricing. Ownership was able accomplish a number of key goals through the transaction. The borrower benefited from long-term, fixed-rate financing that would typically be structured as a floating-rate bridge loan.
That the CMBS market was able to absorb this financing, which would typically be a bridge loan, is reflective of a positive shift in the CMBS market. From August 2007 until early 2012, the CMBS market did not consistently function in a manner that resembled the CMBS 1.0 market, which existed prior to August 2007. The CMBS 1.0 market could absorb a wide array of assets, loan sizes, locations, borrowers, and structures. CMBS 2.0, thus far, required assets to fit into narrowly defined boxes. Loans needed to be in certain major markets, with top echelon borrowers, and the properties themselves needed to be flawless. And even if a deal did fit into the required criteria, rates were too high and structures far too onerous for CMBS to compete with other more advantageous sources of debt capital.
It is because the narrowly defined boxes didn’t allow 90% of financings to close that CMBS volume dropped to 10% of the 2007 high. Now the market is seeing CMBS 3.0, or maybe it should be called CMBS 1.5, since the market is moving back towards the 1.0 model rather than further away from it. Whatever it is termed, the market is able to absorb a greater array of variables in each deal. Spreads over swaps are low, placing current rates in the 4% range. This finally allows the CMBS market to compete with life insurance companies and banks, who despite also pulling back during the downtown, have been winning the majority of stable financing assignments since late 2007.
Leverage and structuring is also coming back into ranges that allow deals to close. Though not accepting of the too aggressive underwriting standards of 2005-2007, CMBS bond buyers are comfortable with current levels of leverage, which can reach 75% LTV. The buyers of all tranches of commercial mortgage bonds, especially the B-note buyers, dictate the terms that eventually flow to borrowers. At the moment, all tranches are seeing healthy liquidity and demand.
Whether and/or how hospitality product is being financed is a good indicator of the overall health of the CMBS market. Hotels are typically the least favored among the major institutional asset classes and thus, are either left out of investment criteria, or receive a spread premium for being financed. Since early 2012, however, there has been a healthy increase in the number of hospitality projects financed and a decrease in their associated financing premiums. Given the recent closing by Vista Capital Company, confirmation of CMBS market strength is clear.
Commercial real estate owners, lenders, and investors should all be pleased with the direction of the market, especially if it sits still for a while. But stability is not what the CMBS market is known for, and given that the market is constantly shifting in essentially every aspect, borrowers generally need to remain vigilant when obtaining CMBS debt. This explains the importance of the role played by real estate investment banks, such as Vista Capital Company, who help clients navigate through the maze of capital options and the shifts within and among them.