By: Heather S. Nason
The hotel industry appears to be on an uptick, which is good news for lenders. Hotel construction in May 2014 is up over 13% from the same time period in 2013 . Moreover, record high occupancy rates and low supply could continue to drive an influx of new rooms into 2015 and beyond . As more lenders are called upon to secure these projects, lenders should consider that hotel projects require a particular diligence not always found in other types of commercial projects. Below are a few of the more commonly overlooked issues.
The Elevated Role of UCC Financing . A significant percentage of the value of a hotel property is in furnishings, artwork, televisions, dining equipment, and other personal property. As such, lenders should obtain a separate security agreement that specifically identifies the personal property and prevents the borrower from disposing of the property except in the ordinary course of business. The lender should consider obtaining UCC insurance as well.
Management Agreements . Hotel properties are frequently managed by a third party under a management agreement between the manager and the borrower. The hotel manager controls the day-to-day operations of the hotel, hotel procedure, operating expenses, budgets and financial reports. The lender should review the management agreement to insure that it is adequately protected and has access to all financial and other reports of the hotel. The management agreement should be subordinate to the interests of the lender. Furthermore, a lender should carve-out an exception from any non-disturbance agreement between the lender and hotel manager, giving the lender the right to terminate the management agreement in the event of the borrower’s default or a distressed sale.