Why Hotel Loans are Different than other Real Estate Loans
a hotel loan is different than underwriting a real estate loan. Arkansas hotel
lending is far more involved. In addition to the due diligence a lender would
do for a real estate loan, an experienced hotel lender will want to ensure it
understands everything about the hotel, its operations, occupancy, rate
history, market penetration, finances, employment conditions, management,
compliance with applicable laws and brand requirements. The lender
has to dig and investigate issues.
- Are the reports provided comprehensive
- How frequently are reports provided?
(More than the typical real estate loan, updates should be provided
- Are the reports consistent with the
hotel operator's reporting requirements under its management agreement?
- Do the reports satisfy specific
accounting, record-keeping, and computerization requirements?
- In the case of a franchise, are copies
of the franchisor's own inspection reports available for review?
income and loss statements reflecting the real costs of running the hotel? Is
the hotel lender looking beyond the reports?
Here are some sample questions the
hotel lender ought to be asking:
- Has the hotel owner deferred payments
- Has the hotel sponsors received loans
from the hotel operator, vendors or third parties, or taken other actions,
to make hotel operating costs appear less than they actually are?
- Does the hotel owner own other hotels,
bars or restaurants? If so, are OS&E, food and beverage and other
purchases being purchased with this hotel's revenues or revenues from other
hotels or sources? Or, are OS&E, food and beverage and other purchases
for this hotel being made through its other hotels?
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
- Did the appraiser take into account
forecasts, market volatility, and occupancy demand for this hotel's market
- What is the competition in this market
is the likelihood of rate compression from higher-end hotels that could steal
this hotel's business or new hotels coming on line in the market area?
Market and Brand Compatibility
The hotel lender must be confident that the hotel owner is
selecting the right hotel brand and operator. Experienced
hotel lenders and advisers will have a good idea, after the analysis is
complete, if the operator, the market, the owner and the property are
compatible. The wrong
decision means the hotel may have to re-branded, which is exceptionally costly,
particularly if the hotel owner signs a long-term, no-cut contract which the
lender is required to honor through an SNDA.
Additional Areas for Review
- What major repairs or upgrades are
needed, if any? Will the lender have sufficient reserves as part of its
- Are the hotel's workers unionized? If
so, are there considerations that affect the value of the hotel or the
obligations of the lender?
- If the hotel workers are not
unionized, has the hotel implemented the right planning and training to
ensure that unionization does not become an unnecessary reality?
- Is the hotel ADA compliant? Is the
hotel subject or vulnerable to an ADA investigation or lawsuit?