SF hotels face capital famine
Hi!
Hope you had a GREAT summer!
Did you have a GREAT summer?
Hope so!
Because now the money is gone!
Yup!
Gone!
Probably not a big deal. The money went away for the month of August, and may return in September, or October, or sometime in the fall, or maybe next year, or maybe not quite ever, but everyone expects it will probably come back.
But for now it's taken a little vacation. Or an extended sabbatical. Whatever.
Don't want to overstate things. By "the money," I just mean the commercial paper that underwrote 80 percent of all hotel finance. And by "gone," I just mean not being given out to anyone, anywhere, anymore.
This really is not a big deal, unless you're a hotelier. Or a restaurateur. Or in the construction industry.
Or a broker, or in interior design, or an architect.
Or in the hospitality industry. Or in a business impacted by the hospitality industry. Or in a business that touches in some way on real estate.
Or in a business that needs, like, capital.
In a nutshell, the problem is that most commercial lending was done through supposedly very safe "commercial paper," or short-term loans to reliable businesses.
But Jim Cramer's hedge fund buddies took some of these loans and invested them in subprime mortgages, junk bonds and probably high-grade Columbian cocaine, no is really sure at this point because we're only talking about hundreds of billions of dollars and who really tracks that sort of pocket change.
Mainstream banks like the one that runs your checking account thought this all sounded swell and started borrowing and lending money this way too.
No one worried too much because as soon as someone made one of these insane loans he could then chop it up into a million pieces and sell the pieces to other investors who didn't know or care much about what they were buying.
They just cared that the loan had been stamped "AAA" by the ratings agencies, who of course valued the loans using computers, esoteric math no one understood and inputs no one could agree on.
About a month ago, everyone finally realized that some of this paper was not backed by operationally sound businesses but instead by people lending money to typical American homeowners which, as you might imagine, is a batshit crazy business to be in. Then they realized they couldn't tell which commercial paper was being used badly and which was sound. Then they stopped issuing commercial paper, which is a way of saying they stopped loaning anyone any money.
Commercial paper underwrites 80 percent of hotel deals, according to Jones Lang LaSalle. Ha ha, pretty hilarious madcap situation, right?
So now hotels, who by the way were sort of supposed to be the saviors of the hard-pressed local restaurant industry, can't get cash and have lost about 20 percent of their total value in like a month or two.
A small fraction of the top hotels can still get money from what are known as "balance sheet lenders," aka people who actually have cash money to lend and aren't counting on reselling the debt to others to offload the risk and aren't like panicking or whatever. Also, if you had a deal closed -- truly closed, not just nonrefundable -- before the meltdown, it will generally still go through, which is why you will still see deals being announced.
The whole capital crunch nearly derailed the recent Hotel Palomar sale a couple of times, all the principals told me, but luckily it was far enough along to make it to the finish line.
More in the ...
Business Times: Credit crunch leaves S.F. hoteliers hungry (free link)
Hope you had a GREAT summer!
Did you have a GREAT summer?
Hope so!
Because now the money is gone!
Yup!
Gone!
Probably not a big deal. The money went away for the month of August, and may return in September, or October, or sometime in the fall, or maybe next year, or maybe not quite ever, but everyone expects it will probably come back.
But for now it's taken a little vacation. Or an extended sabbatical. Whatever.
Don't want to overstate things. By "the money," I just mean the commercial paper that underwrote 80 percent of all hotel finance. And by "gone," I just mean not being given out to anyone, anywhere, anymore.
This really is not a big deal, unless you're a hotelier. Or a restaurateur. Or in the construction industry.
Or a broker, or in interior design, or an architect.
Or in the hospitality industry. Or in a business impacted by the hospitality industry. Or in a business that touches in some way on real estate.
Or in a business that needs, like, capital.
In a nutshell, the problem is that most commercial lending was done through supposedly very safe "commercial paper," or short-term loans to reliable businesses.
But Jim Cramer's hedge fund buddies took some of these loans and invested them in subprime mortgages, junk bonds and probably high-grade Columbian cocaine, no is really sure at this point because we're only talking about hundreds of billions of dollars and who really tracks that sort of pocket change.
Mainstream banks like the one that runs your checking account thought this all sounded swell and started borrowing and lending money this way too.
No one worried too much because as soon as someone made one of these insane loans he could then chop it up into a million pieces and sell the pieces to other investors who didn't know or care much about what they were buying.
They just cared that the loan had been stamped "AAA" by the ratings agencies, who of course valued the loans using computers, esoteric math no one understood and inputs no one could agree on.
About a month ago, everyone finally realized that some of this paper was not backed by operationally sound businesses but instead by people lending money to typical American homeowners which, as you might imagine, is a batshit crazy business to be in. Then they realized they couldn't tell which commercial paper was being used badly and which was sound. Then they stopped issuing commercial paper, which is a way of saying they stopped loaning anyone any money.
Commercial paper underwrites 80 percent of hotel deals, according to Jones Lang LaSalle. Ha ha, pretty hilarious madcap situation, right?
So now hotels, who by the way were sort of supposed to be the saviors of the hard-pressed local restaurant industry, can't get cash and have lost about 20 percent of their total value in like a month or two.
A small fraction of the top hotels can still get money from what are known as "balance sheet lenders," aka people who actually have cash money to lend and aren't counting on reselling the debt to others to offload the risk and aren't like panicking or whatever. Also, if you had a deal closed -- truly closed, not just nonrefundable -- before the meltdown, it will generally still go through, which is why you will still see deals being announced.
The whole capital crunch nearly derailed the recent Hotel Palomar sale a couple of times, all the principals told me, but luckily it was far enough along to make it to the finish line.
More in the ...
Business Times: Credit crunch leaves S.F. hoteliers hungry (free link)
Labels: business times, hotels, real estate, restaurants, scoop
posted by Ryan at 9/04/2007 09:54:00 PM Link
3 Comments:
You know I'm not a fan of assertions like "industry players say." Nonetheless, it's nice to have someone finally acknowledging the crisis at hand in the industry. Nice story.
I agree, actually, but in my own defense I do go on to quote a few by name, and there are two more who I don't quote.
I basically mean brokers, owners, operators, consultants and money guys.
But I see your point.
Also, for having the patience to read that story and for indulging my Michael Pollan posts, you hereby win COMMENTER OF THE YEAR AWARD WOOOHOOO!!
Seriously, though. Commenter. Of. The. Year. Also, you get the coveted Covers Editor At Large title, or whatever the exact phrasing was when I awarded it to the people who wrote biodynamics letters to the Chronicle.
Just found your blog. Great information. You have an rss feed for just the hotel articles?
http://www.gregorygarver.com
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