News for the Hospitality Executive
Hotel Lending Lawyer:
By Jim Butler & Guy Maisnik of the Global Hospitality Group®,
Author of www.HotelLawBlog.com
August 19, 2011
Tips from the Hotel Lending Lawyer: Hotel loan problems and hotel loan document issues are best dealt with at the loan origination. Do you know these fundamentals about your hotel loan documents dealing with hotel management agreements (HMAs) and hotel franchise agreements?
There is a long list of things every hotel lender should take into account before making a loan so that it will be protected when a default occurs -- much less a foreclosure. But few considerations are as important as dealing with issues raised by HMAs and hotel franchises.
Over the years, we have counseled hotel developers, owners and lenders as they try to fix bad hotel deals and repair bad hotels loans. Often, their problems could have been avoided if experienced hotel advisors had reviewed the necessary documents with a practiced eye, connecting the dots and filling in the blanks before the loan was underwritten.
lending experience is the key
Because a hotel's operating business is inextricably intertwined with single-purpose real estate, the borrower's financial obligations are exceedingly complex. We have written other blogs about why hotel lending is different from other kinds of real estate lending, that you may want to read (see, Why hotel lending is different and 8 pitfalls of hotel lending and how to avoid them).
Guy has more than three decades experience in hotel and commercial real estate finance and has recently assisted 3 major lenders in revising and structuring their hotel lending programs and documentation, including their hotel construction lending. In this eye-opening series of articles, Guy discusses how hotel lenders often find unpleasant surprises with hotel loans when they don't get experienced hotel counsel to prepare their loan documents. And real estate lending experience is not hotel lending experience!
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 management agreements and hotel franchise agreements
Guy Maisnik |
Hotel Lending Lawyer, JMBM Global
Why hotel loans
are different than other
real estate loans -- A quick review
Further, because the hotel is an operating business, the hotel will succeed or fail by the actions and inactions of the hotel management team. Running a hotel is much more difficult than running a traditional real estate project. Because many lenders handle their hotel lending out of their real estate lending department, they often make the mistake of twisting their real estate secured loan documents to include hotel lending provisions. This is always a mistake. We have to remind these lenders that "You don't know what you don't know" when it comes to hotel lending. Hotel loans need to be in the hands of legal and business hotel specialists.
Because the operating business of the hotel represents at least half the value of the hotel, the hotel lender has to be tuned into issues that arise in the running of the hotel. Such issues include hotel projected revenues and expenses, marketing, trade credit, capital and operating costs, revenue enhancement and cost containment, employment and unions, ADA compliance, labor and employment, branding, back-end systems, and so forth.
Any good commercial real estate lender will plan for an exit strategy in the event the borrower should default. For the hotel lender, this means it must be prepared to own and run a hotel.
the impact on your loan of hotel management agreements and hotel
The hotel lender also needs to understand the other costs associated with the hotel management and franchise agreements, how these issues impact the value of its collateral, and how these agreements impact its rights and remedies as a hotel lender.
For example, such arrangements will have a significant cost structure, including a requirement that the hotel owner pay a variety of fees beyond the base fee, such as incentive fees, marketing fees, centralized system fees, consulting fees, and so forth. This fee structure can often be three or four times the base fee amount. This is why the hotel lender needs to take a systematic approach to reviewing the hotel and the hotel operating documents. The documents should answer the following critical questions:
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
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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