By
Jim
Butler & Guy
Maisnik
of the Global Hospitality
Group®,
Author of www.HotelLawBlog.com
September 1, 2011
Hotel
Lenders: Do you know how due diligence for hotel lending differs from
due
diligence for other commercial real estate lending? More expertise, more time, more
resources.
We
have seen far too many hotel lenders "who don't know what they don't
know" when underwriting a hotel loan, but then get a very expensive
education post foreclosure. 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. The article below by my partner Guy Maisnik gives a few
examples.
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).
Please
see the links at the end of this article for other articles in the
"What
every hotel lender needs to know" series.
What every hotel lender needs to know
about hotel due diligence
by
Guy Maisnik |
Hotel Lending Lawyer, JMBM Global
Hospitality Group®
Why hotel loans are different than
other
real estate loans -- A quick review
Underwriting
a hotel loan is different than underwriting a real estate loan. Hotel
lending
is far more involved. 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 lender has
to dig
and investigate issues.
Standard
reports
- Are the reports provided comprehensive and detailed?
- How frequently are reports provided? (More than the typical
real estate loan, updates should be provided regularly.)
- Are the reports consistent with the hotel operator's
reporting requirements under its management agreement?
- Do the reports satisfy specific accounting, recordkeeping,
and computerization requirements?
- In the case of a franchise, are copies of the franchisor's
own inspection reports available for review?
Operating
statements
Are
the income and loss statements reflecting the real costs of running the
hotel?
Is the hotel lender looking beyond the reports? Here are some sample
questions
the hotel lender ought to be asking:
- Has the hotel owner deferred payments to vendors?
- Has the hotel sponsors received loans from the hotel
operator, vendors or third parties, or taken other actions, to make
hotel operating costs appear less than they actually are?
- Does the hotel owner own other hotels, bars or restaurants?
If so, are OS&E, food and beverage and other purchases being
purchased with this hotel's revenues or revenues from other hotels or
sources? Or, are OS&E, food and beverage and other purchases for
this hotel being made through its other hotels?
The
hotel lender needs to look beyond the reports it is receiving, and look
at the
facts and circumstances carefully - then require that the reports be
tailored
accordingly.
Appraisal
analysis
- Did the appraiser take into account forecasts, market
volatility, and occupancy demand for this hotel's market segment?
- What is the competition in this market segment?
- What is the
likelihood of rate compression from
higher-end hotels that could steal this hotel's business or new hotels
coming
on line in the market area?
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. Experienced hotel lenders
and
advisors will have a good idea, after the analysis is complete, if the
operator, the market, the owner and the property are compatible. The
wrong
decision means the hotel may have to rebranded, which is exceptionally
costly,
particularly if the hotel owner signs a long-term, no-cut contract
which the
lender is required to honor through an SNDA.
Additional
areas for review
- What major repairs or upgrades are needed, if any? Will the
lender have sufficient reserves as part of its collateral?
- Are the hotel's workers unionized? If so, are there
considerations that affect the value of the hotel or the obligations of
the lender?
- 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?
- Is the hotel ADA compliant? Is the hotel subject or
vulnerable to an ADA investigation or lawsuit?
No
short cuts to due diligence and no replacement for hotel expertise
While
this series of articles on "What every hotel lender needs to know"
does not cover every issue lenders have to consider when making hotel
loans, it
covers some of the most basic areas of concern.
In
practice, there are hundreds of questions a hotel lender, its
consultants and
lawyers will ask when analyzing a prospective hotel loan. One thread is
pulled
to find it is securely knotted. Another is pulled and the fabric begins
to
unravel, revealing weaknesses that lead to further questions.
Knowing
what questions to ask at each juncture comes from specific hotel
lending
experience. 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 analysis can
also reveal
serious discrepancies or festering problems that will cause a lender to
reject
the loan. In both cases, it is time and money well spent.
Due
diligence for hotel lending requires expertise, time, and resources.
While
there is a cost associated with doing things right up front, the costs
of a bad
decision can exceed millions of dollars, especially after loan default
when
remedies need to be exercised and solutions to problem areas are most
needed.
Hotel
lending lawyer series - What every hotel lender needs to know
There
are a lot of hotel-specific issues that hotel loan documents have to
deal with.
This series is designed to provide the essentials:
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
________________________
Guy Maisnik is a
hotel
lawyer with nearly three decades in commercial real estate
transactions. He is
a partner and Vice Chair of JMBM's Global Hospitality Group®, a
member of the
JMBM Chinese Investment Group™ and a partner in the JMBM's real estate
department. Guy advises clients on hotel transactions, representing
lenders,
opportunity funds, banks, special servicers, owners, REITs and
developers in
hotel transactions, including senior and mezzanine financing, workout
and debt
restructure, strategic portfolio acquisitions, co-lender, participation
and
securitization arrangements, joint ventures, management agreements,
buying,
selling and ground leasing of hotels, complex mixed used resort
development,
fractional and timeshare. For troubled hotels, Guy develops and
executes
strategies for CMBS and whole loans, and REOs. He also assists
investors with
recapitalization of distressed borrowers and purchases of troubled
assets. Guy
has assisted major lenders in revising and structuring their hotel
lending
programs and documentation, including their hotel construction lending.
Guy's
practice is both domestic and foreign; he has advised on hotel and real
estate
matters throughout the United States, Canada, Mexico, South America,
Middle
East, Caribbean, Western and Eastern Europe, Asia and Scandinavia. For
more
information, please contact Guy Maisnik at 310.201.3588 or [email protected].
________________________
This
is Jim Butler, author of www.HotelLawBlog.com
and hotel lawyer, signing off. We've done more than $60 billion of
hotel
transactions and have developed innovative solutions to unlock value
from
hotels. Who's your hotel lawyer?
________________________
Our
Perspective. We
represent hotel lenders,
owners and investors. We have helped our clients find business and
legal
solutions for more than $60 billion of hotel transactions, involving
more than
1,300 properties all over the world. For more information, please
contact Jim
Butler at [email protected]
or +1
(310) 201-3526.
Jim
Butler is a founding partner of JMBM, and Chairman of its Global
Hospitality
Group® and Chinese Investment Group™. Jim is one of the top
hospitality
attorneys in the world. GOOGLE "hotel lawyer" and you will see why.
Jim
and his team are more than "just" great hotel lawyers. They are also
hospitality consultants and business advisors. They are deal makers.
They can
help find the right operator or capital provider. They know who to call
and how
to reach them.
JMBM’s
Global Hospitality Group®
The
hotel lawyers in the Global Hospitality Group® of
Jeffer Mangels Butler & Mitchell (JMBM) comprise the premier
hospitality
practice in a full-service law firm and are the authors of the Hotel Law Blog. We
represent hotel owners, developers, investors and lenders and have
helped our
clients find business and legal solutions for more than $60 billion of
hotel
transactions, involving more than 1,000 properties worldwide. For more
information
about the Global Hospitality Group®, go to www.HotelLawBlog.com.
For more information about full range of legal services provided by
JMBM, go to www.JMBM.com.
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