As published in Scotsman Guide's Commercial Edition, December 2012.
Funding is returning slowly for hotel properties, as many lenders have learned the hard way that hotels can be tricky collateral. Commercial mortgage brokers can expect these lenders to be more cautious when reviewing hotel properties as collateral for loans, and they should prepare clients for a close look at these assets before financing is secured.
To start, brokers should understand why lenders consider hotels different than other types of commercial real estate properties. Although hotels are operating businesses, they are highly prone to extreme fluctuations in revenue and operating expenses, unlike retail, office or multifamily properties.
Commercial mortgage brokers must keep this in mind when originating a loan involving a hotel property as collateral. They also must plan and prepare their clients to respond to lenders’ concerns regarding these types of business issues, and other pitfalls unique to this type of asset. The following five problem areas likely will be addressed by lenders at loan origination in an attempt to avoid problems and losses should the loan default or the borrower become uncooperative.
1. Personal property
Hotels contain significant personal property, like furniture, restaurant equipment, etc., that should not be overlooked in the loan-origination phase. It is important to confirm who owns the personal property. If the hotel has been master-leased to a third party, the master lessee rather than the borrower may be the owner of some or all of the personal property.
It may be required that loan documents include personal property as part of the lender’s collateral, and all parties must grant the lender a first-priority security interest in the personal property. Lenders typically try to confirm that there are no existing equipment or personal-property leases or other liens affecting the personal property that could have priority over the lender’s mortgage.
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