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.
Please see the links at the end of this article for other articles in the "What every hotel lender needs to know" series. Also, the hotel lender is exposed to the risk of a borrower default under the franchise agreement and its termination before the hotel lender is in a position to cure. But financing hotel purchases has some twists every borrower should understand.
Certainly other factors are also analyzed in underwriting hotels i. How frequently are reports provided? Has the hotel owner deferred payments to vendors? The analysis can also reveal serious discrepancies or festering problems that will cause a lender to reject the loan.
If lender budget approval is required, the capital reserve use may be limited to projects identified in the budget, or else, the capital reserve funds may be available for any projects necessary to keep the hotel in the condition required by the loan agreement, franchise agreement, and hotel management agreement.
Steiner Hotel Lawyer Hotels are operating businesses, but for lending purposes, hotels have traditionally been financed as real estate. In any case where lender approval is required, the borrower should negotiate for coordination of the lender approval process with the how to underwrite a motel loan schedule for budget delivery and approval in the hotel management agreement.
However, major brand hotel franchise agreements typically are not assignable to hotel lenders and are not assumable by a foreclosure purchaser. The lender has to dig and investigate issues.
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. 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 lender will count the income.
If so, are there considerations that affect the value of the hotel or the obligations of the lender? We expect to see this trend continue as hotel loans that were underwritten at the peak of the real estate market mature.
One thread is pulled to find it is securely knotted. 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. A successor hotel owner, including a lender acquiring by foreclosure, is not typically bound by the hotel management agreement and may terminate the existing hotel manager without liability to it.
That way the borrower can evaluate whether it has those rights under the hotel management agreement or if the manager will modify the borrower rights to terminate to conform to the loan documents.
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.
Is the hotel subject or vulnerable to an ADA investigation or lawsuit? The borrower should determine at the loan commitment stage what rights the lender will require to force the hotel manager termination. 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.
A good example of this is real estate tax, where lenders will underwrite to the greater of actual taxes or what taxes will be if the lender has to step into the property based on the loan amount for some lenders, or the actual appraisal value for others. 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.
Many think that this is the time to jump in, before it is too late. Of course, the first screening factor is your flag, location and franchise agreement. Also, if the annual operating budgets are being prepared by a major hotel management company, the hotel lender may be willing to eliminate budget approval as long as that management company operates the hotel.
Close Me United States: Operating expenses will be adjusted. The remainder of the variable expenses will be tied to comparable properties and industry metrics. Additional areas for review What major repairs or upgrades are needed, if any?
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. Many of these matter are appropriately addressed at the term sheet or commitment stage, rather than leaving them to be negotiated in the loan documents.
The hotel lender will typically also require the assignment of any hotel management agreement to it as additional loan security. 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.
Here we shed some light on the underwriting process, and what you can do to prepare for refinancing your hotel loan in the coming years.
Demonstrating historical trends is key. In both cases, it is time and money well spent.background / bio for each partner and for the ownership entity emphasizing hotel / hospitality industry / real estate experience.
backround / information on. 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.
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).
Today’s lenders are underwriting hotels to maximum LTV’s of 75% again with aggressive debt yields (varying by hotel type/market), but even still lenders are careful not to underwrite to the height but at a more reasonable, stabilized level. 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. Floor plans. 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.Download