Private-equity lenders to the lodging industry generally are interested in funding hotel expansion and remodeling projects more than new construction. And, at least for the near-term, many of these private lenders don't feel they'll need to compete against commercial lenders for the balance of available projects out there.

Nardozza - ReH Capital Partners

"Commercial lenders will loan on an existing property with appropriate sponsorship," said Frank Nardozza, chairman and c.e.o. of REH Capital Partners LLC, a hospitality investment and business-advisory services firm in Fort Lauderdale, Fla.

However, companies such as REH will limit their new construction paper to unique marketing opportunities, such as a new convention center, where there might be an immediate market need for a headquarters hotel.

"As a general statement, most of the equity funds out there aren't into putting money into to-be developed hotels," said Peter Krause, managing director of merchant bank Greenhill & Co. LLC in New York. "Because we think there are enough hotels in most markets, we don't want to be writing checks for private equity."

While commercial and private-equity lenders aren't enthusiastic about new hotel construction, the private-equity funds are quite upbeat about working with existing properties.

Krause - greenhill & Co.

Krause said renovation opportunities are extremely attractive during this time of low interest rates. By repositioning and renovating hotels, he said his firm can help improve a property's rate and revenue per available room.

The ideal deal in the current marketplace is one in which a group of hotels can be bought at a discount, are renovated and subsequently achieve a 20-percent to 25-percent internal rate of return on equity, according to Krause.

Gordon - Sonnenblick- Goldman

Mark Gordon, managing director of the real-estate banking firm Sonnenblick-Goldman in New York, agreed with Krause that the best private-equity deals are for existing properties.

"As far as finance markets for existing hotels, we have seen significant capital availability throughout [2002]," Gordon said. "The combination of that capital availability and historically low interest rates has created a very attractive environment."

So attractive that Sonnenblick-Goldman spent much of November and December closing a six-hotel, $350-million portfolio, as well as a $30-million resort property deal. Gordon also was pursuing a five-hotel, $415-million deal in December.

Some of the deals likely to come across Gordon's desk are refinancing-oriented, he said. A hotel might have debt that's due, and his firm helps arrange the refinancing of a loan as it matures. In such scenarios, the debt is replaced and restructured, allowing owners to improve their debt obligation structure.

"This allows owners to do needed renovations or expansions," said Gordon, who added that in some other cases, private equity will provide money to expand existing debt, creating a line that the property owner can draw down from.

The continued sub-par performance of the stock market is another factor boosting the available cash for private equity hotel funds, Nardozza said. He said he believes this holds true for institutional investors as well as some wealthy individuals.

"Alternative investment options are so scarce, while at the same time, interest rates are so low, that we really have the power of leverage now," he said. "Whereas in 2001, we might have had senior debt at 8.5 percent, it's now at 6 percent. That's an increased yield for the investor."

A gloomy near-term scenario might involve a slump in business travel driven by a protracted war in Iraq, combined with increased oil prices and a fear of more terrorist acts. But while such eventualities might make commercial lenders nervous, private-equity firms are looking at current market and geopolitical conditions and sensing opportunities.

"With Iraq, the airline bankruptcies, the hotel recession and rate wars, you are trying to buy opportunistically," Krause said. "Some investments are easier to make when they are more opportunistic."

In Krause's view, these conditions don't make the outright acquisition of a given property a requirement.

"We'd want to control the major decisions, but we can keep the current owner in as a local partner," he said.

Whether the spigot of institutional and individual participation will continue to flow to private-equity funds will depend somewhat on interest rates. Gordon said he sees this new year as one in which interest rates should stay where they are. If that happens, he envisions continued conditions that are favorable to borrowers and generate a large amount of capital.

In the longer term, private-equity lenders see an enhanced level of lodging-industry interest on the part of commercial lenders. Gordon said he's seeing definite interest on the part of banks to write loans for existing hotels. If his vision plays out, the re-entry of commercial lenders for new hotel construction will happen as a result of a cause-and-effect scenario that's started.

"Many major markets aren't overbuilt, but as a result of the events of the last few years, there is little [current] construction for full-service, upscale properties," Gordon said. "Because of the strong availability of capital for lodging today, that capital is chasing a limited number of deals. This will ultimately result in capital available for new construction."

The lodging sector most likely to benefit from this revived interest might be convention hotels, where revenue-enhancing room demand is tied to conventions several years in the future, rather than currently.

"Over the medium term, strong lodging industry fundamentals will cause [commercial] lenders to lend again," Gordon said.