Credit mess hits some hotel projects

NORTH BAY – Tightening in the credit markets is causing delays for some developers in the North Bay’s booming market for new hotels, although smaller projects and those with sizeable owner equity continue to move forward.

“As long as you have a project that has good economic fundamentals and is well conceived as a business model and is well designed for its location … there is still financing available, but it takes longer than before to get loans finalized,” said David Wickline, president of Alchemy Ventures Trust, which is planning a new luxury hotel and spa – Terrano Napa Valley – in Calistoga.

According to Mr. Wickline, the projects most affected by the credit shortage are ones needing larger loans with several participating banks. Alchemy hasn’t lined up financing or calculated the cost yet for Terrano, but the 36-unit project should be small enough that it will be easily funded, Mr. Wickline said.

“Fortunately, we can get our loan done with two participants, so I think we’ll be OK,” Mr. Wickline said. “Projects than are requiring whole syndicates of lenders, they’re finding that it is very difficult to put together a syndicated loan.”

One of the North Bay’s largest hotels in the pipeline is the Montalcino Resort and Spa, a $240 million project planned near the Napa County Airport. The resort, which includes 379 hotel rooms, an 18-hole golf course and a conference center, will need money from a number of lenders, according to Thomas Krehbiel, vice president of construction for the developer, HCV Pacific Partners. The project is approved and ready to build but is in a holding pattern until the loans are finalized, Mr. Krehbiel said.

“It could be six weeks, it could be six months. We just don’t know,” Mr. Krehbiel said.

Mr. Krehbiel said his company – an affiliate of a Hong Kong investment firm – already has enough equity lined up and a lending commitment from the international bank HSBC. But other banks have been reluctant to commit to the deal.

“There is a real backlash in the world market for financing large projects,” Mr. Krehbiel said. “It’s an unusual upheaval in the market, and it truly has nothing do with the quality of the project or the quality of the applicant or the track record. They’re just not making loans, period.”

One reason for the delays may be that as some lenders have dropped out of the market, those that are left have a backlog of loan requests, according to Donald Wise, who runs the Napa-based hospitality practice Johnson Capital, a commercial real estate investment banking firm.

“Lenders are pretty busy right now,” said Dr. Wise. “The number of submissions they are getting right now exceeds their ability to respond.”

Dr. Wise said loans have been readily available for the projects he has recently closed – including the renovation of a hotel in Sebastopol and a new hotel in American Canyon – but banks are more selective than in the past about which projects they will finance.

“Lenders are being very picky as far as sponsorship, and everyone is going to have a substantial amount of liquidity and a substantial amount of equity in a project,” he said.

Developers of many North Bay projects say they will be able to sidestep the credit market troubles because they are lining up significant equity investments before applying for loans.

Robert Green, co-developer of the proposed Saggio Hills resort near Healdsburg, predicts his group, Sonoma Luxury Resort LLC, will fund 35 percent to 45 percent of the 258-acre resort in cash.

Stan Boyd, co-developer of a planned $11 million Holiday Inn Express in American Canyon said his group, Napa Junction Hotel Venture LLC, will have about 40 percent cash in the deal. And Cheryl Doll, a vice president with Kansas-based LodgeWorks, said her company will likely raise more than half of the $41 million for its planned Avia hotel in Napa from private-equity investors.

“Most of the private-equity partners are German private-equity partners who have been involved in previous projects,” Ms. Doll said. “We really just went back to those very strong, cultivated relationships to finance our Napa project.”

Meanwhile, projects small enough to borrow from local banks will also be able to avoid getting mired in the credit crisis, according to Mark Garwood, president and CEO of San Rafael-based Tamalpais Bank.

“We have, for the last 12 months and beyond, still been active in the hotel and hospitality world,” Mr. Garwood said.

Mr. Garwood said Tamalpais has financed a number of hotel sales and construction projects, nearly all of them under $20 million and the majority under $5 million in value. The bank looks for projects “in good markets that can absorb rooms,” and hasn’t drastically changed its underwriting standards, he said.

“Most of all, we are looking for a history of management and expertise,” he said.