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By
Jim
Butler and the Global
Hospitality
Group®
Hotel Lawyers | Authors
of www.HotelLawBlog.com
December 17, 2012
Financing or
refinancing a hotel. Some issues every borrower should understand.
As we said in introducing part
1 of this
article, most hotel
buyers will want financing.
Some of the big REITs or other cash rich players will buy for all cash
and then
find financing at their leisure. That gives them an advantage in
bidding on hot
properties. But most buyers will want financing to pay for their
acquisition.
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.
Because of the length of this article, it is
presented in 2 parts. Here is part 2.
Buying a hotel and
financing a hotel purchase
10 things every borrower should know
Part 2
by
Jeffrey E. Steiner | Hotel Lawyer
[Click here for part
1 of this
article.]
6.
Limits on Other Indebtedness.
The loan documents may restrict the borrower from
having any indebtedness other than the mortgage loan, with an exception
for a
limited amount of accounts payable that may be outstanding for a short
time
(consistent with the normal payment cycle -- such as 60 days), as long
as the
indebtedness is not evidenced by a promissory note. The aggregate
amount of
other indebtedness that may be outstanding at any time will ordinarily
be
expressed as a percentage of the mortgage loan amount (such as 2%). The
borrower should review the historical accounts payable levels and
payment cycle
to make sure it can comply with the loan document limits. Also,
equipment
leases are considered to be other indebtedness, so the amount and time
limits
may need to be adjusted to take them into account. For instance, an
additional
1% or 2% may be permitted (or the total other indebtedness cap
increased) for
leases of equipment that are normally leased in the hospitality
industry, such
as airport shuttles, other vehicles, and office equipment.
7. Trademarks.
A trademark or service mark is a word, symbol, or
design that identifies and distinguishes a source of goods or services.
If a
hotel is not using branded names licensed from others, the hotel name
and names
of facilities within the hotel, such as restaurants, bars, and spas may
be
trade marks or service marks, the rights to which the hotel owner may
protect
by registration in the United States Patent and Trademark Office. If in
its
underwriting, a lender determines that the trademarks or service marks
add
value to the hotel, it may require that the trademarks or service marks
be
registered to protect the hotel owner's interest (unless already
registered),
so that the lender can have the registration protection benefits
following a
foreclosure. The pledge of the trademarks and service marks may also
then be
registered in the Patent Office. Based upon the pledge, the trademark
and
service mark rights can be foreclosed upon in the case of a default, so
that
the lender or other successor owner has the protected use rights
afforded by
the registration. In granting such a pledge, a hotel owner has to be
careful if
it uses, or may use in the future, its trademarks or service marks at
other
locations. If unlimited rights are pledged to its lender on one hotel,
the
lender could receive the rights to the tradenames and service marks for
all
locations in which they are or may be used, and that may not be the
hotel
owner's intention. In such a case, the hotel owner should establish a
licensing
arrangement and only grant the lender a security interest in the
relevant
license (for the property being financed), so that upon a foreclosure
the
lender does not receive by foreclosing ownership of the trademarks or
service
marks in use at other hotels or potential use rights at other
locations.
8. Liquor Licenses.
If alcoholic beverage sales represent an important part
of a hotel's business, a hotel lender will want to ensure the orderly
transfer
of the rights to sell alcoholic beverages following a foreclosure.
State laws
generally have strict qualifications for persons permitted to be issued
liquor
licenses or to acquire through a transfer existing liquor licenses.
Also, the
number of liquor licenses available in a particular jurisdiction may be
limited. Under California law, a lender cannot take a security interest
in a
liquor license, and agreements to sell liquor licenses made more than 6
months
in advance of the transfer date will not be accepted by the state
authorities.
Lenders will evaluate the applicable state law requirements and limits
to
determine what viable steps must be taken to assure that the lender or
other
successor owner following a foreclosure may take control of the liquor
license
and continue alcoholic beverage sales at the hotel. As an example,
assuming the
hotel loan is nonrecourse to the borrower, the lender may require that
the
borrower's failure to effect the orderly transfer of the liquor license
and
alcoholic beverage operations upon a foreclosure be a carve-out for
which the
borrower and guarantor would be liable either for losses attributable
to the
failure or for the entire loan deficiency. Another way to allow the
hotel
lender to gain control of the liquor license following foreclosure is
to have
the license held by a separate entity initially controlled by the
borrower in
which a party friendly to the lender has a minority interest. Upon a
foreclosure, the minority interest is granted control rights over the
liquor
license. Borrowers should expect to encounter these and other creative
means
from their lenders to gain control over liquor licenses following a
foreclosure, depending upon the restrictions on liquor license
transfers in the
applicable state laws.
9. Timing of
Lender Remedies.
Under California law and typically under other
state laws, the timing and procedures for a lender to foreclose on the
real
property collateral securing a hotel loan may be different than those
under the
Uniform Commercial Code for foreclosing on personal property. The
collateral
assignment of the hotel management agreement may provide for the
immediate
exercise of lender remedies respecting that agreement following a loan
default.
Also, under California law, in the case of periodic payment defaults,
the
borrower has reinstatement rights that give it an extended cure period
by law
before the lender may complete a real property foreclosure. This law
does not
restrict the lender's remedies against personal property collateral,
even
though the borrower's reinstatement period is still pending.
Although the hotel lender will ordinarily conduct
a unified foreclosure sale of real and personal property and not have
an
incentive to exercise its remedies against the personal property or
hotel
management agreement before completing the real property foreclosure,
it might
do so to place maximum pressure on the borrower. Consequently, the
borrower may
want to negotiate a requirement that the lender use the unified sale
procedure
to foreclose on real and personal property collateral concurrently.
10. Lender
Approval Mechanism.
As noted in a number of the points above, the
issue of timing of a lender response to borrower requests for its
approval is
important in many contexts given the immediate impact on hotel
operations that
a delay in obtaining lender approval may have. Loan document provisions
are
sometimes written in a way that suggests the lender is committed to
communicating its decision within a specified time period while it
actually is
not. For instance, a loan document provision might say the borrower
must request
the lender's approval of a change in management at least 30 days before
the
borrower wants the change to take effect. That provision does not
commit the
lender to act in 30 days. Also, borrowers have become more sensitive to
timing
issues in connection with securitized loans because the loan will be
administered by a servicer with which the borrower
does not have a prior lending relationship. For these reasons, the
borrower
should negotiate loan document provisions applicable to all lender
approval rights
concerning important hotel operational issues requiring the lender to
respond
with its approval or disapproval within a specified reasonable period
and
addressing the effect of the lender's failure to give or withhold its
approval
in the stated time. Ideally, the borrower would like a provision
stating that
the lender's approval is deemed to be given if the lender does not
respond on a
timely basis. However, lenders are reluctant to allow the borrower to
proceed
with what may be a significant change affecting the hotel based upon a
lender
failure to respond to a notice, which may have been overlooked
inadvertently.
The compromise is known as the second notice provision. If the lender
does not
respond to the first notice, before "deemed approval" applies, the
borrower has to deliver a second notice containing language warning the
lender
that the failure to respond within the time specified after the second
notice
will be a "deemed approval." Ordinarily, the time period for the
lender to respond to the second notice will be shorter than the time
period for
responding to the first notice.
HOW TO BUY A HOTEL --
Free handbook
Until the free handbook on HOW TO BUY A HOTEL is
published (expected in Summer 2014), you can access all the materials
on this
subject at www.HotelLawyer.com.
Look on the right hand side of the home page and click on "Buying &
Selling a Hotel."
Here are a few of the articles on the subject
under this topic:
__________________________
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.
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