Dissecting the Deal With Drew Anderman: Sheraton Denver

EXPERIENCE WITH COMPLEXITIES

Werner again turned to Meridian to negotiate the financing, knowing they had the experience and understanding to execute this intricate transaction.

Drew Anderman – a 20-year veteran of real estate finance including time at Walker & Dunlop, Deutsche Bank, Credit Suisse, and CIBC World Markets responsible for over $15 billion in commercial financing throughout his career – joined Meridian in 2013 to grow its commercial business, and to reinforce Meridian’s position as one of the industry’s strongest firms for deals of great size and complexity.

Anderman has worked with Werner on numerous large and unique transactions similar to the Sheraton Denver, leaving Meridian and Anderman as the obvious choice.

A STRUCTURE WITH LIMITED PRECEDENT

Werner sought to purchase the fee position underneath the hotel from the Goldman Sachs (GS) Whitehall 2007 fund, which owned the fee and the leasehold. This would provide him with an income stream without involvement in the hotel’s operation.

Given the variable nature of the hospitality industry, this was not a deal with a lot of precedent.

“Hotels can be volatile, because somebody checks in one day and checks out the next day, versus having an office building with a long term rent roll with long term leases,” says Anderman. “There haven’t been that many deals done where they separated the ground from the operation of the hotel.”

Adding to the challenge, Werner sought $180 million in 10-year, fixed-rate, interest-only financing. Anderman and his Meridian team had their work cut out for them.

Given the parameters, Meridian understood that a CMBS deal would be best for Werner’s requirements.

Easing the way, Citigroup (C) had been vying for a chance to do business with Werner prior to this opportunity. Rather than vet the transaction with numerous CMBS lenders, Meridian and Werner decided to strategically approach Citigroup to structure the deal based on Werner’s explicit parameters. Meridian prepared an extensive financing memorandum and analysis of the transaction to convince them of the unusual deal’s value, and to remove concerns about the transient nature of the hospitality business.

Even though Werner was not taking on the hotel’s operation, the ground lease payments would still depend on its performance. Anderman and his team did thorough research on securitized CMBS deals in the hospitality space, as well as on the hotel itself, the hospitality industry overall, and the Denver economy, in order to convince Citigroup of the investment’s worthiness.

“We put together a very detailed presentation,” says Anderman. “We had to show that through good times and bad, the income stream after expenses and the operation of the hotel would pay him rent that would be more than sufficient to pay the debt service on the loan.”

THE VALUE OF THE RIGHT RELATIONSHIPS

Thanks to their extensive knowledge of all the relevant factors, Meridian was able to identify the myriad advantages for Citigroup.

“We made a very compelling case that although the loan-to-purchase price was 77 or 78 percent, in the event something went bad and the hotel was not able to make the ground rent payments, Werner would effectively have a path to ownership of the hotel. Then we showed that the hotel’s value was far in excess of what Citigroup’s loan amount was,” says Anderman.

“One point we negotiated heavily was that the loan should not be more than fifty percent loan-to-value. So our argument was – and this was one of the conditions of the deal – that Citigroup’s loan-to-value calculation would reflect the aggregate value of the fee and leasehold – and these together would not be more than fifty percent.”

Just as the deal was in the thick of negotiation, an additional complication emerged. Late 2015 saw the CMBS market go through a corrective phase, and the value of Meridian’s market experience became clearer than ever.

“It got very choppy and we hadn’t closed the deal yet,” Anderman says. “So the second part of the negotiation is where Meridian’s strength came in, and where we added further value. We had intense negotiations with the client and the lender about what the final structure and pricing of the deal would be. Because of our size, experience and relationships, we were able to preserve the deal terms for our client.”

In the end, Meridian got Werner everything he needed for the deal to work: a $180 million, 10-year, full-term interest-only loan at a competitive rate.

“We were able to find the optimal balance that yielded Werner very attractive pricing, and also very attractive leverage,” says Anderman. “Meridian fulfilled the client’s every expectation. The lender was happy with the deal, and so was the client.”