HOTEL LENDING

The economic situation has brought some changes to the hotel industry and in particular to the hotel lending environment. Capital is scarce and deals are hard to close. Mortgage brokers are becoming very important in the hotel lending environment of today’s world. You need a mortgage and you don’t know how to proceed. Should you use a broker or go directly to a bank.

A bank is considered a direct lender. It is they who provide the money to the borrower at the closing table. In exchange, the hotel lender receives a note evidencing the borrower’s debt and the obligations to repay. The hotel lender also gets a lien on the property.

Mortgage brokers do not lend money. They are essentially a service provider who offers the loan products of several hotel lenders. A mortgage broker counsels you on the loans available from a wide variety of hotel lending sources. They will also counsel you during the qualification process if you have problems with such things as credit problems.

A few years ago, when hotel lending was very free and open, a broker was not as critical. Good real estate brokers who do hotels have relationships with hotel lenders. Now that financing is very difficult, they have these referrals to buyers to help them finance their assets. Well-connected brokers can contact various hotel lenders to find properties for buyers and make referrals.

A good broker will evaluate the deal and the buyer and sometimes make recommendations of hotel lenders. A savvy broker will make several recommendations and let the client make the contacts so that they can make up their own mind on selecting a hotel lender.

In today’s uncertain economic environment, certain transactions require lending from multiple sources. The minimum number for seeking multiple sources for hotel lending varies. There are some who feel that deals of more than $10 million dollars require more than one lender while others think that financing can be obtained from one hotel lender unless it is more than $20 million dollars. When you have to ask for deals over $20 million, you may have to deal with what is known as the “country club” effect. It may take two or three hotel lenders to handle the financing. This is a product of the recent economic fallout of the last 12 months.

A viable hotel lender has to pay attention to several other important details. Some of these areas demand the attention of hotel lawyers. Because hotels are going concerns that are situated on real estate, the hotel lender will obtain the security in the real and personal property as well as in all aspects of the operating business.

If there are other liens on the property, the hotel lender may need to get all other parties to subordinate their interest to that of the lender’s. If another lien holder were to remove beds, TVs, etc., it would have an adverse impact on the lender’s collateral and additional expenses to start up again could be prohibitive.

A hotel lender and their agents should review management agreements, franchise agreements, leases and other contracts such as liquor licenses and ownership structure of the hotel as it affects security in hotel revenues.

In evaluating the hotel as collateral, the operating business and the revenue stream it produces are critical aspects of collateral value. The physical plant, its geographic location and its position within the selected market segment, are factors to be considered.

These factors that are unique to hotels are fundamentals which should be examined by hotel consultants and appraisers. Hotel lenders are well advised to seek out these experts to help evaluate the property and the business. The cost of these services is usually paid by the borrower.