Major hotel management companies entering into long term hotel management agreements may require that as a condition of the hotel owner obtaining a hotel loan, the general legal principles regarding hotel management agreement survival be reversed. Has the hotel owner deferred payments to vendors?
Demonstrating historical trends is key. The Approval Mechanism should also be applicable to lender decisions concerning capital reserve use. Unless you are in a supply-restricted market, even if your hotel is dominating the market, you will not be given credit for exceedingly high occupancy.
Either way, there are some things your mother may not have told you, but as a buyer and a borrower in a hotel purchase, you really should know these 10 things that my partner, hotel lawyer Jeffrey Steiner, lays out for us in his article. But financing hotel purchases has some twists every borrower should understand.
The borrower is required to send payment direction letters to credit card processors and other major hotel revenue sourcessuch as travel agencies, group travel organizers, airlines, and retail tenants, requiring them to make payments into the clearing account. But most buyers will want financing to pay for their acquisition.
Franchise Agreements; Comfort Letters. How frequently are reports provided? Some of the big REITs or other cash rich players will buy for all cash and then find financing at their leisure.
In terms of other additional line items of revenue, as long as there is historical support and no threat to that income going forward, the how to underwrite a motel loan will count the income.
We expect to see this trend continue as hotel loans that were underwritten at the peak of the real estate market mature.
Otherwise, a reserve may be required either upfront or ongoing, or a combination of both. Many contracts valuable to the real property collateral for a hotel loan, such as leases and management agreements, can be collaterally assigned to the lender and preserved after a mortgage foreclosure.
The loan documents will generally require that the hotel continuously be managed by a qualified hotel manager, while any new hotel manager and new hotel management agreement must be approved by the lender, which can take time. Provisions addressing the temporary budget to be used if the final annual operating budget has not been approved in time, and dispute resolution provisions in the hotel management agreement, also need to be consistent with the loan documents.
In those cases, whether at the loan inception or following a triggering event, where the disbursements to the borrower to pay operating expenses are subject to lender control, it follows that the lender will have to approve the annual operating budget.
Hotel lending is far more involved. A thorough analysis will let a lender know what potential weaknesses exist, and provide assurances that the lender has adequate protections and solutions in the event of default. The lender has to dig and investigate issues. When those sweeps terminate, the funds will be redirected to the cash collateral account and handled in a similar fashion as in the hard cash management system.
Lenders also may have want an SNDA with the hotel manager confirming the subordination principle, providing for the lender to receive notices of default and cure rights before the hotel management agreement can be terminated, and imposing restrictions on amendments and terminations without lender consent.
This is because lenders are looking at how a typical operator might operate the property and what stabilized operations looks like versus a few good years on the books. If you would like a refresher as to why hotel lending is different from other kinds of real estate lending, you may want to refer to see, Why hotel lending is different and 8 pitfalls of hotel lending and how to avoid them.
Many think that this is the time to jump in, before it is too late. In addition to the due diligence a lender would do for a real estate loan, an experienced hotel lender will want to ensure it understands everything about the hotel, its operations, occupancy, rate history, market penetration, finances, employment conditions, management, compliance with applicable laws and brand requirements.
The hotel lender will typically also require the assignment of any hotel management agreement to it as additional loan security. Knowing what questions to ask at each juncture comes from specific hotel lending experience. However, major brand hotel franchise agreements typically are not assignable to hotel lenders and are not assumable by a foreclosure purchaser.
A cash management mechanism is required in almost all major hotel loans, particularly for loans to be securitized.
One aspect of refinancing that many borrowers do not anticipate is the adjustments underwriters make to operating expenses. Here are some sample questions the hotel lender ought to be asking: This change is accomplished through a separate agreement of the lender to be bound by the hotel management agreement following a foreclosure, which is commonly known as a Subordination, Nondisturbance and Attornment Agreement SNDAa name taken from the real estate leasing world.
If the hotel workers are not unionized, has the hotel implemented the right planning and training to ensure that unionization does not become an unnecessary reality? To continue to part 2, click here.
Market and brand compatibility As mentioned in an earlier part of this "What every hotel lender needs to know" series, the hotel lender must be confident that the hotel owner is selecting the right hotel brand and operator.
The due diligence required in hotel lending is far more intensive than for any other kind of real estate lending and requires far more expertise.
Exceptions to the requirement that capital expenses be on the approved budget may also be qualified for improvements to meet brand standards, improvements costing less than an agreed upon maximum, code-required improvements, and tenant improvements. Is the hotel lender looking beyond the reports?Oct 10, · What every hotel lender needs to know about HMAs and hotel franchise agreements.
What every hotel lender needs to know about SNDAs. What every hotel lender needs to know about cash controls. What every hotel lender needs to know about hotel due diligence. The content of this article is intended to provide a general guide to. A hotel franchise may be important in the lender’s underwriting of a hotel’s economic performance.
Many contracts valuable to the real property collateral for a hotel loan, such as leases and management agreements, can be collaterally assigned to the lender and preserved after a mortgage foreclosure.
Property Information - a. Hotel summary (Brand, Brand History, # of Rooms, Year Built, Construction, etc.) a. Site plans or survey b. Franchise Agreement (include latest punchlist or inspection report) c.
background / bio for each partner and for the ownership entity emphasizing hotel / hospitality industry / real estate experience. backround / information on. 3. Mortgage financing, which is how most hotels are financed.
Topics covered include: —Types of mortgage loans; and —Obtaining a hotel mortgage.» COMMERCIAL BANKS Commercial banks have historically played the most significant role in providing financing for the hotel industry.
May 05, · How to Underwrite Loans When attempting to underwrite loans, the key to success is gathering the right information. Loan underwriters must use data from a myriad of sources, including bank statements, credit reporting agencies, utility assessments, tax assessments, and additional financial documentation%(27).Download