Lender Survey - 2nd Quarter 2009

Introduction
HVS conducted a confidential survey of 373 influential lenders from around the world to gather their input about the current conditions of lending in the hospitality sector. A total of 35 responded for a response rate of roughly 9.4%.

Summary of Findings
The survey asked lenders to identify: "for which of the following projects would you currently consider making loans?"

As indicated in the preceding chart, most of the lenders are considering loans for either existing chain-branded hotel acquisitions or refinancing existing hotels. More than 60% of active hotel lenders are targeting these two project types. Under current economic conditions, lenders perceive new construction, renovations of existing hotels, and acquisitions of existing independent hotels as more risky.

The survey asked lenders to identify: "the maximum loan size you would currently consider for lodging property loans?"

As illustrated in the preceding chart, the majority of lenders will not consider loans for more than $20 million at this time. However, despite the current economic environment, some lenders are considering relatively larger deals over $40 million. According to feedback provided by lenders, smaller regional banks continue to be more active in underwriting new loans than most large banks.

Next, several questions in the survey asked lenders to identify current lending parameters such as the most appropriate loan-to-value ratio, debt-coverage ratio, amortization period, loan term, and spread they are willing to consider under current conditions. The findings are summarized as follows.

• LTV = 50% to 65% (ranged between 40% and 80%)
• DCR = 1.3 to 1.5 (ranged between 1.2 and 2.0)
• Amortization period = 20 to 25 years
• Loan term = 3 to 10 years
• Most appropriate spread¹ = 3-month LIBOR plus 400-600 bps
• Interest rate² = 5.5% to 6.5%

The findings above represent the most frequent responses of lenders who participated in the survey.

The survey concluded with three questions which asked the survey respondents to identify "what collateral is required for a typical hotel loan," "what are the most important characteristics that lenders seek in a borrower," and "what are the most important characteristics that lenders seek in a hotel project." The key findings are summarized in following points.

Required Collateral for a Hotel Loan

• The hotel, personal guarantees, letters of credit, ground lease
• First mortgage, first position on subject and FF&E
• High cash equity, lien on shares and all assets, rights on flag agreements
• General security agreement

Important Characteristics for a Borrower

• Operator or owner has lodging experience
• Multiple property owner with cash
• Capital and long-term commitment
• Integrity, education, credit history, brand support, sponsor experience

Important Characteristics for a Hotel Project

• Equity injection of non-borrowed funds
• Demographics, experience
• Flagged, newer, under 120-room
• Profitable on 2008 and 2007 tax returns
• Appropriate leverage, estimated valuation based on a cap rate in the 9's
• Long term appearance, not trendy, access to transportation, quality, green application
• Solid history of cash flow, DCR’s above 1.3x, increasing RevPAR, strong balance sheet

Conclusion
As the economic recession continued into the first half of 2009 with more severity than many analysts had predicted, the availability of loans in the hospitality sector continued to be limited. With loan-to-value ratios around 60%, interest rates near 6.0%, and some equity yield rates above 20%, conventional mortgage-equity financing is difficult to achieve in the current environment. Despite falling interest rates that resulted from the Federal Reserve’s decision to cut its key rate to a range of zero percent to 0.25%, most banks and non-bank lenders have become much more selective in their loan underwriting and many are preserving capital for other uses. The fact that lenders are requiring more equity and collateral from the borrowers is likely to lead to a significant decline in supply growth in the near-term. Moreover, many existing hotels will need to be refinanced in the next three to five years. If loan-to-value ratios remain at current levels, this implies that a large number of owners will need to contribute additional equity to their hotels or convince lenders to extend the terms on existing loans.

According to one survey respondents, his main concern for the hospitality sector today was expressed as "the biggest challenge is getting an appraisal you can rely on." More resources for obtaining accurate valuations on your property can be made by contacting HVS directly.

¹ Spread based on LIBOR = 0.61% as of 6/16/09
² Rate based on floating rate; add 100-200bps for fixed rate