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Buying hotels usually means obtaining financing. Jeffrey Steiner, a hotel attorney, says there are ten things that a hotel buyer may not know about loans. At the top of his list is the role of franchise agreements.
Franchise Agreements. A hotel franchise may be important in the lender's underwriting of a hotel's economic performance. Many contracts valuable to the real property collateral for a hotel loan, such as leases and management agreements, can be collaterally assigned to the lender and preserved after a mortgage foreclosure. However, major brand hotel franchise agreements typically are not assignable to hotel lenders and are not assumable by a foreclosure purchaser. Also, the hotel lender is exposed to the risk of a borrower default under the franchise agreement and its termination before the hotel lender is in a position to cure. In the absence of a separate agreement between the hotel lender and franchisor, the hotel lender faces the risk of franchise loss following a foreclosure or imposition of new franchise fees, property improvement requirements (known as a property improvement plan or program (PIP)), or more stringent franchise terms as a condition of franchise continuation.
Comfort Letters. To improve the lender's position, typically it will require the franchisor to enter into a separate agreement addressing lender cure and franchisor termination rights upon a borrower franchise agreement default and lender rights to continue the franchise after a foreclosure. This agreement is known as a "comfort letter." [Hotel News Resource]
Read Part 1 of 10 Things Every Hotel Borrower Should Know