There is often confusion amongst lenders and borrowers between the nature of hotel financings and the general umbrella of real estate loans. This is because whilst it is possible to construct a financing against a hotel through a lease arrangement (typically an OpCo/PropCo), hotel financing is generally delivered as a corporate facility relying on corporate covenants (such as an EBITDA covenant based on the earnings of the hotel itself). The analysis, controls and the exit strategies are different. As distinct from general real estate loans, hotel facilities are almost a hybrid between a real estate facility and a corporate facility, as the underlying collateral (being the hotel) is ultimately a business, and the cashflow is dependent on the success of the operation of the hotel. It is a very specialised area of lending, with many specific covenants and tripartite agreements with third parties to ensure the lender’s rights are adequately protected. In this series, we discuss some of the characteristics specific to a hotel facility, and also some of the common issues/pitfalls to avoid in providing hotel financing.
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