Before purchasing or financing a new hotel, it’s important to know that we do research that every borrower should do.
Hotels are traditionally financed as real estate for lending purposes, although they are operating businesses. Many lenders consider operational aspects when reviewing hotel loan underwriting and documentation. There are unique aspects of hotel lending that borrowers ought to be aware of, particularly when negotiating hotel loans.
Cash Management is one of the most important things that you need to know about hotel financing. Money management mechanisms are needed for nearly all major hotel loans, especially those that are securitized. Hotel revenues are deposited into the accounts that are known as a lockbox, or a clearing account, which is blocked to borrower withdrawals. Borrowers are required to send instructional letters to card processors, as well as other revenue sources.
Revenue sources include, but aren’t limited to, retail tenants, airlines, group travel organizers, and travel agents. Cash management systems are essential are important to borrowers, as well as how it impacts hotel operations. The Clearing account receipts are distributed into lender-controlled accounts for distributing them into sub-accounts, including property taxes, insurance premiums, debt service, operating expenses, and capital reserves, as well as excess cash flow subaccounts.
Sub-accounts are filled using available, excess cash from a clearing account or lockbox, using a “cash flow waterfall” document. With this, expenses can be based upon a lender-approved operating budget. The funds in excess cash flow available through a sub-account is provided to the borrower’s operating account, and it’s used for operating costs. However, if the loan defaults the borrower’s right to their excess funds may become suspended.
When systems are a bit less restrictive, the odds tend to be more favorable for borrowers. The funds available in clearing accounts are automatically moved to a borrower’s operating account, so they can use it at their discretion. Additionally, the lender can terminate borrower operations if there’s a loan default or other events identified in the loan agreement transpire, such as a debt yield. In the case of a fund default, sweeps are terminated, that currency is redirected to cash collateral accounts. When negotiations take place, hotel owners should consider the requirements of hotel managers, cash management systems, operating expenses or liabilities, employee benefits and wages, and the hotel management agreements.
Franchise Agreement: When gauging the economic performance of a hotel, it’s important to take a look at comfort letters and franchise agreements. Contracts are valuable to real property collateral for a hotel loan, and it can be assigned to a lender and preserved following a mortgage foreclosure. A hotel lender can be exposed to the risk of a borrower under the franchise agreement. To improve a lender position, lenders can typically require that a franchisor enter a separate agreement discussing lender rights and termination rights.
Hotel Management Agreement: Hotel lenders usually require the assignment of a hotel management agreement. The borrower affiliate might be a hotel manager, and if that’s the case, the hotel manager might be responsible for hotel loan repayments. Borrowers can negotiate for the rights for rights to end manager default.
If you want to learn more about financing a hotel, you may want to visit the Global Hospitality Group website or the Hospital Net website.