Are Floating-Rate Mortgages Best for Hotels? Observations from the Recent Cyclical Peak-To-Trough

Abstract

[Excerpt] During January of 2004, we attended the American Lodging Investment Summit (ALIS), a large hotel industry investment conference held each year in Los Angeles. We sat through several sessions about financing hotel companies and properties at the conference. During literally every one of these sessions, fairly lengthy, and sometimes active, discussions erupted about the effective use of fixed-rate versus floating-rate debt for financing hotel investments. Our take away from the experience—floating-rate debt makes sense as a general proposition because hotels, unlike other commercial real estate, have pro-cyclical income streams unbridled by lease frictions that should resemble the time-series patterns of interest rates. However, we, like the panelists and other participants involved in these sessions, had views grounded in considerable ignorance because empirical work has never been done to confirm or refute the validity of financing strategies based on mixing fixed-rate and floating-rate mortgage debt.