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HOTEL LOANS

Hotels are not only acceptable collateral for loans, but also a desirable market in which lenders actively seek business. From being the collateral that no one wanted just a few years ago, hotels have become today the collateral that, it sometimes seems, every lender wants. 
Although the real estate is a crucial first element of any hotel loan, these loans are far more complex than traditional "pure" real estate loans.

That is because they are, in essence, loans to operating businesses of a particularly volatile nature. And the security for these loans consists not only of real property but also of a wide range of other assets that can be difficult to understand, preserve, and control.  Those who make hotel loans must understand all sorts of special issues that are not present in a typical real estate loan.

They must understand the elements that enable hotels to function, and obtain appropriate security interests and other controls to protect their position. They must also understand hotel finances. They must analyze the hotel's operations, and the loan documents must reflect reality while protecting the lenders' interests. Lenders may require financial covenants and procedures of a complexity uncommon in typical commercial mortgage loans. Should it become necessary to foreclose on a loan, a hotel lender must be able to take over the entire operation of the hotel and control all the cash flows. 

A lender that controls or obtains a lien on most of a hotel's assets, but somehow manages to miss a few of them, may find after foreclosure that it faces a situation that may range from awkward to disastrous. In the worst case, the lender may have to pay the foreclosed borrower to give up claims to property that was intended to be part of the collateral package but was overlooked. 

HOTEL APPRAISALS

The appraisal of a hotel can be even more sensitive and complex than an appraisal for a loan secured by more standard commercial real estate. The volatile nature of a hotel's income -- fluctuating sharply from week to week, month to month, and over the course of the business cycle -- gives an appraiser a canvas on which to paint almost any picture. And that picture may change substantially between the first discussion of the loan and its actual closing.

A hotel lender cannot accept appraisals blindly. More than for most forms of real estate, lenders must participate in, understand, and accept the assumptions, process and analysis that drive the appraisal.  The ultimate value estimate must be consistent with the lender's beliefs about income volatility, conservatism, and forecasts of demand for room-nights in the particular market niche where the hotel operates. Unprotected by long-term leases, the variables of demand -- crucial to determining income and hence value -- can change, quite literally, overnight. 

CONTROLLING THE LAND

Every mortgagee must control the land under and around the collateral real property. If a lender takes over a hotel after a borrower defaults, but does not control the land that the property requires to operate, the lender does not have a viable asset.

The lender's mortgage must cover not only the main hotel building, but also whatever other real estate the hotel needs to operate.  For example, if the hotel parking lot or valet parking service requires use of a neighbor's land, the borrower must mortgage whatever rights the neighbor has given the hotel operator regarding these arrangements. The same goes for an adjacent golf course, health club, or other amenity.

These issues arise most commonly at resort properties or in an integrated mixed-use development or commercial park.  In short, the lender must be certain that, in the event of foreclosure, it will control whatever real estate rights the hotel needs to continue to operate. If the borrower has not mortgaged those real estate rights, the lender cannot foreclose on them. If the borrower holds the pertinent real estate rights in a form that is anything less than full ownership, mortgaging them probably requires cooperation from third parties. Agreements to assure this cooperation must be in place at the loan closing to prevent surprises, problems, and expense later.