Hotel Online
News for the Hospitality Executive


advertisement
.


Buying a Hotel? Financing a Hotel?
10 Things Every Borrower Should Know. (Part 2)


 
For the most recent update on this topic, click here

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.


 

Contact:

Jim Butler
[email protected]
310.201.3526


.
Receive Your Hospitality Industry Headlines via Email for Free! Subscribe Here

To Learn More About Your News Being Published on Hotel-Online Inquire Here
.
Also See: Buying a Hotel? Financing a Hotel? 10 Things Every Borrower Should Know. (Part 1) / Jim Butler / December 2012

Hotel Lawyer with the New Guide for International Hotel Transactions -- Doing Business Abroad or With Foreigners / Jim Butler and Bob Braun / November 2012

The Hotel Purchase and Sale Agreement -- What is the Value of the Seller's Representations and Warranties to a Hotel Buyer? / Jim Butler & David Sudeck / November 2012

Seller Representations and Warranties in a Hotel Purchase Agreement -- What are the big issues today? / Jim Butler & David Sudeck / November 2012

Hotel Lawyer Alert: U.S. Hotel Owners could lose $2.1 billion in hotel value with new Expedia program / Jim Butler / November 2012

David Loeb Shares the Robert W. Baird Industry Analysis on C-Corps and REIT's / Jim Butler / October 2012

Hotel Lawyer with PKF's 'U.S. Lodging Market Outlook' - What if we hit the Fiscal Cliff? What if we postpone it? Recession in 2013? / Jim Butler / October 2012

How to Buy a Hotel - What you don't know about undocumented workers could really hurt you! / Jim Butler & Guy Maisnik / October 2012

3 Nuggets of Information from Vail Brown of STR on Hotel Industry Prospects for 2013 and Beyond / Jim Butler / October 2012

JMBM's Hotel Lawyers Post 500th Blog; HotelLawyer.com and Hotel Law Blog are resources for hotel owners and lenders / Jim Butler / October 2012

Phoenix Rising - Insights from the Phoenix Lodging Conference / Jim Butler / October 2012

Hotel Liability for Guest Information - What you need to know and how to avoid liability. / Jim Butler & Robert Braun / October 2012

JMBM's Global Hospitality Group® releases 2nd Edition of The HMA Handbook, Hotel Management Agreements for hotel owners, developers, investors and lenders / Jim Butler / September 2012

Finally, Some GOOD NEWS from Washington, DC / Jim Butler, Catherine Holmes and Victor T. Shum / September 2012

EB-5 Financing for Hotels is Now Mainstream Institutional / Jim Butler / September 2012

JMBM's Chinese Investment Group Happenings and Events / Jim Butler / August 2012

Dodd-Frank Act Presents Hotels with Decisions on Credit and Debit Card Charges / Jim Butler & Robert Braun / August 2012

Hotel Restructuring, Workouts, Receiverships and Bankruptcy. The Art of Heavy Lifting. / Jim Butler / August 2012

How to Buy a Hotel Handbook: Franchise issues in hotel purchase and sale transactions / Jim Butler / August 2012

Hotel Lawyer: Experts Share Top 5 Tips on Picking the Right Hotel Operator and Brand for Your Hotel / Jim Butler & Robert Braun / July 2012

Losing the Expectation of Privacy bit by bit, byte by byte / Jim Butler and Mark Adams / July 2012

How to Buy a Hotel Handbook: Labor and Employment Tips; Buying a hotel - the Hotel Purchase Agreement documentation and process / Jim Butler, Catherine DeBono Holmes and Marta M. Fernandez / July 2012

How to Terminate a Hotel Management Agreement: A Tale of Two Hotels - Marriott's Edition Waikiki and Fairmont's Turnberry Isle Resort; Two owners terminate long-term hotel management agreements, seize control of their hotels from branded operators, and then settle their litigation / July 2012

EB-5 Lawyer Alert #3: Update on California TEA designation procedure. What's the problem in California! / Jim Butler, Catherine DeBono Holmes and Victor T. Shum / June 2012

How to Finance Hotel Development in 2012....Alternate financing for new hotel construction in a brave new world / Jim Butler / June 2012

'Cyber Accessibility' is the New Frontier for ADA Lawsuits. Your Next DOJ Investigation or ADA Class Action Could be Just a Mouse Click Away! / Jim Butler / June 2012

ADA Compliance and Defense Lawyer: ADA Experts Discuss Hottest Issues Facing the Hotel Industry Today / Jim Butler / May 2012

HotelLawyer.com Launches; Portal to Knowledge for the Hospitality Industry; JMBM's Global Hospitality Group® of Hotel Lawyers Provide Comprehensive Hospitality Resource / May 2012

Update on California's EB-5 Policy Regarding Designation of Targeted Employment Areas or TEAs / Jim Butler / May 2012

Successful Joint Ventures for Hotel Development, Acquisition and Financing / Jim Butler / May 2012

Hotel Lawyer: Clarification on the DOJ's Amendment to the Pool Lift Extension / Jim Butler / May 2012

Hotel Lawyer from Meet the Money® - Lodging Industry Investment Council (LIIC) Announces its Top 10 Challenges for Hotel Industry in 2012 / Jim Butler / May 2012

Meet the Money® Conference Talks about Hotel Loans and Equity Investment, Creating Value with Hotel Value-add and Repositioning, Hotel Opportunistic Investment, Deal Making and Much More / Jim Butler / May 2012

ADA Compliance and Defense Lawyer Alert: Charles Schwab settles claim over website accessibility / Jim Butler / May 2012

EB-5 ALERT: California's New TEA Approach will Discourage EB-5 Investment in California / Jim Butler / May 2012

JMBM is One of 20 Hottest Law Firms in the U.S. Per the National Law Journal's Latest List / April 2012

Hotel Labor Lawyer: California Supreme Court Finally Gives Employers Some Good News in Brinker Restaurant Corporation v. Superior Court / Jim Butler & Travis Gemoets / April 2012

How to Negotiate a Hotel Management Agreement. 10 Tips for a Smoother Process / Jim Butler / March 2012

ADA Defense Lawyer: What does the ADA pool lift compliance extension mean to you? / Jim Butler / March 2012

DOJ Turnabout: Pool lift compliance deadline extended to May 15 / Jim Butler / March 2012

5 Things to Remember when Buying Hotel Notes / Jim Butler / March 2012

ADA Defense and Compliance Lawyer: More clarification or confusion on March 15 ADA standards? / Jim Butler / March 2012

ADA ALERT - A Call to Action Before the March 15, 2012 ADA Deadline / Jim Butler / February 2012

GlobeSt.com Interviews JMBM's ADA Defense and Compliance Lawyers: Hotels Handle Pool Lift Regulations / Jim Butler / February 2012

FBI Tips for Hotels; How to spot terrorists and what to do. / Jim Butler / February 2012

ADA Defense and Compliance Lawyer Advisory: DOJ Clarifies March 15, 2012 Mandatory Pool Lift Requirement! (Uh-oh!) / Jim Butler & Martin Orlick / February 2012

Quick! Can You Pass This 3-Question ADA Pop Quiz? / Jim Butler / January 2012

Hotel Lawyer in Los Angeles: ALIS - What's the commotion all about? Closing the conference hotel to outsiders. / Jim Butler / January 2012

Hotel Management Contract Disputes: Importance of 'Fiduciary' Duties in Owner-Operator Lawsuits / Jim Butler / January 2012

Litigation and Disputes Between Hotel Owners and Operators are on the Rise? Why? / Jim Butler / January 2012

ADA Defense Lawyer: New ADA Regulations Kick in Soon. Say goodbye to 'grandfathering' under the ADA / Jim Butler / November 2011

Hotel Lawyer in Washington D.C. - Why the Lodging Industry Will Continue to Do Well Despite Bumpy Markets and More / Jim Butler / November 2011

Chinese Investment in U.S. Hotels: What the Real Estate Professionals Want to Know / Jim Butler / October 2011

Hotel Lawyer in Dallas Listening to the Special Servicers / Jim Butler / October 2011

Hotel Lawyer with Optimism for the Hotel Industry from the Dallas Lenders Conference, Fishing for Solutions 2011 / Jim Butler / October 2011

Updating Service Animal Policies of Your Hotel or Other 'Place of Lodging' / Jim Butler, Martin Orlick and David Sudeck / October 2011

Hotel Industry Alert: Some things to feel (very) good about! / Jim Butler / September 2011

Hotel Lawyers in Phoenix: It's not just me. The market has changed in just the last 60 days! / Jim Butler / September 2011

Hotel Labor and Employment Lawyer Update: Controversial Union Rights Notice Subject to Legal Challenge - Employers Should Not Rush To Post It / Jim Butler & Scott Brink / September 2011

Hotel Franchise Lawyer: Hotel Franchise Agreements and the 5 Biggest Mistakes a Hotel Owner Can Make / Jim Butler & Robert Braun / September 2011

Hotel Labor and Employment Lawyer Alert: The NLRB is making it harder to stay union free / Jim Butler & Scott Brink / September 2011

Tips from Hotel Franchise and Management Lawyers: Beware the Trap of Changing Brand Standards / Jim Butler & Robert Braun / September 2011

Labor and Employment Alert: New Law Requires Employers to Post Employee Rights Notice by November 14, 2011; NLRB Publishes Final Rule for Notification of Employee Rights / Scott Brink , JMBM / September 2011

Hotel Lending Lawyer: What every hotel lender needs to know about hotel due diligence / Jim Butler & Guy Maisnik / September 2011

Hotel Lending Lawyer: What every hotel lender needs to know about Cash Controls / Jim Butler & Guy Maisnik / August 2011

Hotel Lawyers on Terminating Hotel Operators: M Edition Lawsuit Against Marriott Has a New Twist Marriott is Replaced Overnight / Jim Butler / August 2011

Hotel Lawyers on Terminating Hotel Operators: Turnberry Resort Drops Fairmont Flag / Jim Butler / August 2011

Hotel Lending Lawyer: What every hotel lender needs to know about SNDA's / Jim Butler & Guy Maisnik / August 2011

Hotel Lending Lawyer: What every hotel lender needs to know about HMAs and hotel franchise agreements / Jim Butler & Guy Maisnik / August 2011

Hotel Lawyer on the Importance of Brands - Intellectual Property Rights and What They Mean: Family Suites Resorts v. Viacom International d/b/a MTV Networks - a Suit Over Branding / Jim Butler / August 2011

Hotel Lawyer on the Fiduciary, Contractual and Agency Duties of Hotel Brokers - Host Hotels & Resorts LP v. Molinaro Koger Litigation / Jim Butler / August 2011

M Waikiki's Edition Lawsuit Against Marriott International and Ian Schrager - an Owner's HMA Dispute with Marriott and What it All Means / Jim Butler / August 2011

Hotel Investment: Why Asian investors are targeting U.S. hotels for purchase and investment, and what could it mean for you? / Jim Butler / August 2011

Hotel Developers: Why a "regional center" may be the key to financing your next hotel development or expansion. And what you need to know... / Jim Butler / July 2011

How to use the EB-5 Immigrant Investor Visa Program for financing / Jim Butler / July 2011

JMBM Announces Formation of the Chinese Investment Group™ - Hotels, Real Estate, EB-5 Immigrant Investor Visas / July 2011

Hotel Lawyer: How do you know when you should set up a captive insurance company for your hotel? Take our "litmus test". / Jim Butler & Gordon Schaller / July 2011

Hotel Lawyer: What you need to know about the "ancillary benefits" of setting up a captive insurance company / Jim Butler & Gordon Schaller / June 2011

Hotel Lawyer: Are you thinking about setting up a captive insurance company? Maybe you should be. . . / Jim Butler & Gordon Schaller / June 2011

Hotel Lawyer in New York with pre-NYU industry forecast: Sunny with occasional clouds and NO storms on the horizon / Jim Butler / June 2011

Hotel Lawyer with the Executive Roundtable Results; Debt is returning, equity is out looking, and we've passed the bottom of the trough. Why now is the time to purchase a hotel. / Jim Butler / June 2011

ADA Defense Lawyer: How to Quickly Lose Business. (No ADA-Compliant Reservation System) / Jim Butler & David Sudeck / May 2011

Hotel Lawyer with Fresh Perspectives on the Hotel Industry from Smith Travel / Jim Butler / May 2011

Hospitality Lawyers with PKF and Mark Woodworth's Lodging Overview / Jim Butler / May 2011

Hotel Lawyers' Updates on Capital and Debt Markets for Hotels, Transaction Sales Data and Financings / Jim Butler / May 2011

Hotel Lawyer with Updates on Hotel Cap Rates, Values and Transactions / Jim Butler / May 2011

Hotel Lawyer with nuggets from JMBM's Meet the Money® 2011 / Jim Butler / May 2011

Hotel Lawyer: The hotel transaction market is heating up! / Jim Butler / April 2011

Hotel Lawyer with good news! A new federal court decision upholds condo hotel structure. No "securities" involved as structured. Disgruntled condo hotel unit purchaser lawsuit dismissed. / Jim Butler / April 2011

Meet the Money®: Hotel Financing Renaissance is Underway! / Jim Butler / April 2011

JMBM’s Global Hospitality Group® announces publication of The HMA Handbook, a FREE practical guide for negotiating Hotel Management Agreements for Hotel Owners, Developers, Investors and Lenders / March 2011

Buying a Hotel? Don't Buy an ADA Lawsuit or DOJ Investigation / Jim Butler / March 2011

Hotel Lawyer on Hotel Management Agreements: Exculpation Clauses for Protecting the Owner's Assets / Jim Butler / February 2011

ADA Defense Lawyer: How to handle an ADA lawsuit....and How not to do it / Jim Butler / February 2011

Hotel Lawyer: 5 Key Elements for Good Hotel Management Agreement Budget Provisions / Jim Butler / February 2011

How improving fundamentals make 2011 the year of "Great Expectations" for the Hotel Industry / Jim Butler / February 2011

Ask the Hotel Lawyer: 2011 is starting as the year of "Great Expectations" for the hotel industry! / Jim Butler / January 2011

Hotel ADA Defense Lawyer: How a recent ADA case affects all hotels but particularly conference centers and meeting hotels / Jim Butler / January 2011

Hotel Lawyer: So, You Think You Want to Buy a Hotel? For savvy investors, the time could be right / Jim Butler / January 2011

Sheraton Universal Hotel Sale Facilitated by JMBM's Global Hospitality Group® / Jim Butler / January 2011

.


To search Hotel Online data base of News and Trends Go to Hotel.OnlineSearch

Home | Welcome | Hospitality News
| Industry Resources

Please contact Hotel.Online with your comments and suggestions.