This is a very favorable time for hotel purchasing, but that doesn’t mean that everyone who invests in a hotel will automatically receive a great return. If you are thinking about becoming involved in the hotel purchasing business, here are some things you should know before you get started.
Institutions which provide funding for hotel purchasing can be at risk for losing their investment if the borrower defaults on payments. Therefore, they will often request of a borrower that a comfort letter is developed which constitutes an additional agreement between the two parties, which mitigates the level of exposure of the lender, thereby making a loan more feasible and more attractive.
Hotel Management Agreements
In many cases, the lender for a hotel purchasing transaction will require that a hotel management agreement be assigned to the lender as an additional form of security. In essence, this restricts the borrower from making any changes to the hotel management agreement, or from terminating it, without the consent of the lender.
A system of cash management will generally require that all revenues generated by the hotel be deposited directly into a specific account which is usually known as a clearing account or a lockbox. This clearing account cannot be accessed by the borrower to make any withdrawals. The borrower would also be obliged to contact all hotel revenue sources such as airlines, retail tenants, and travel agencies, so they can be directed to make their deposits into this special clearing account.
Annual Operating Budgets
Some hotel lenders require that a high level of control be exerted over the annual operating budget in a hotel purchasing arrangement. This means that the lender would be entitled to approve the annual operating budget before any funds were dispersed to suppliers or vendors providing goods and services to the hotel.
Thinking about an investment in hotel purchasing?
Purchasing a hotel is a major investment, and it’s one that can bring you a great return if you manage it well. At Prime Wealth Development, we may be able to help fund your hotel investment, so contact us and allow our financial experts to find out if there are ways we can assist you in your hotel investment project.