Ten Things Every Hotel Owner Should Know Before Financing a Hotel | Hotel Marketing

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Ten Things Every Hotel Owner Should Know Before Financing a Hotel | Hotel Marketing
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Ten Things Every Hotel Owner Should Know Before Financing a Hotel

Despite global economic issues, the travel and hospitality industry has continued to survive and even flourish, in contrast with other investments. This trend is making it attractive for many to take the leap and get into the hotel business.
Hotels have always been financed as real estate for lending purposes, despite them being an operating business. With this, prime lenders also take into account hotel operational aspects in their documentation.
But even if you’re a large established company that can make cash purchases, you would still want financing to pay for the acquisition. Here are a few things that you must keep in mind.

1. Franchise agreements and comfort letters

In mortgage foreclosure, the lender usually gets critical contracts such as leases and management agreements but not hotel franchise agreements.
The foreclosure purchaser cannot take over and assume the agreement either. If there is no special agreement between the lender and franchisor in the event of a foreclosure, the lender might lose the franchise. He may also face a possible increase in new franchise fees, PIPs, and franchise terms. To avoid this, the franchisor and the lender usually enter an agreement called a „comfort letter“ stating that the lender keeps the franchise after foreclosure.

2. Hotel management agreement and SNDAs

For additional loan security or collateral, hotel lenders require the assignment of hotel management agreements. If financial contracts are not met, the lender may necessitate the hotel manager’s replacement. It is also possible to negotiate the standard for new manager qualifications and terms of the management agreement. A separate agreement (a subordination non-disturbance and attorney agreement or SNDA) may be required by management companies so that the management agreement would bind the lender in the event following a foreclosure.

3. Negotiating details of the cash management system

In most major hotel loans, cash management is a must for loan security. Often, owners negotiate the details of the cash management system and consider the requirements of its hotel manager, especially since they are in charge of operating expenses, including employee benefits and wages. We highly recommend hotel owners to be flexible enough when negotiating the management agreement.

4. PIP reserve and capital reserve

The franchisor may require a PIP to be completed, especially for branded hotel purchases. The borrower is usually required to deposit enough funds to cover the PIP in

a reserve account, or an amount set aside from the loan proceeds is used to pay the costs of the improvements. The capital reserve is ordinarily funded regularly, as the lender requires. Typically, 4% of the hotel’s gross revenues are deposited in a lender- controlled account.

5. Annual operating budgets

The level of cash management control implemented will partly determine how much the hotel lender will control the hotel’s annual operating budget. In cases where cash management controls are not very strict, the lender may require control over the yearly operating budget, and the lender may do without budget approval. If lender approval is needed, the borrower may try to negotiate and request that the lender approval process and the schedule of budget delivery and approval be coordinated in the management agreement.

6. Limits on Other Indebtedness

The borrower may be restricted from any indebtedness by loan documents, not counting the mortgage loan and excluding the accounts payable covering the regular payment period. Things such as equipment leases must be allowed for because they are included in ‚Other debt‘. An additional 1-2% may be permitted for airport shuttles, office equipment, or other vehicles.

7. Trademarks

The hotel name or the names of facilities inside the hotel may be trademarks or service marks. The lender may require that trademarks or service marks be registered. It protects the hotel owner’s interests, and consequently the lender, in the event of a foreclosure. With trademarks involved, the hotel owner must be careful if it uses or plans to use the trademarks in other locations.

8. Liquor licenses

Because of the strict guidelines…