Checking Into Your Hotel Loan

It is time to ring the bell at the front desk of the hotel you now hold as collateral.  As all seasoned commercial lenders know, the work on a loan never stops when the closing is over.  The loan must be properly monitored, analyzed and new risk grades applied.  With any loan this requires obtaining updated financials on the borrower and the guarantors.  New tax returns are obtained from all parties and reviewed. 

But what else is done regarding a hotel loan?  Is there anything different that needs to be done to reveal the condition of the company?

Truth be told, there are several additional steps that should be done with the annual review process than the steps taken for a typical commercial loan.  This blog will focus on what to look for with the physical inspection of the property. 

A visit should be made to the hotel and with the owner.  Careful review should be made to the condition of the property.  Are there any deferred maintenance items such as any worn carpet, fixtures or furniture?  The finishes and items in a hotel are not designed to last forever and will require constant repair and replacement. 

Pay special attention to the common areas of the hotel since these tend to get more wear and tear.  The entrance area is also a showcase and the first experience a traveler has when he enters the property.  It is important this area is clean and attractive.  A good measure would be to ask if the property would be a desirable place for you to stay with your family.  If not, then that may raise some red flags.

But there are other changes that may need to be made even if everything is in good order.  Franchises often may change their required finishes, signage, and furnishings.  The new changes, along with the deferred maintenance items may show up in a Property Improvement Plan (PIP) from the franchise.  Most of these will give a required list of items that need to be changed and time frames for when the changes should be made.  If they are not made in a timely manner, the franchise may elect to not renew the franchise agreement with the hotel, a move that is especially used when the franchise agreement is coming up for renewal.  This could result in a problem with the continuance of the income stream for the property, if the hotel were to lose its franchise.

A recent example is Choice Hotel's decision to require all Comfort Inns to be at least three stories high and also to have an interior elevator and room entrances.  Many hotels that operated as a Comfort Inn were forced to correct the situation or lose the Comfort Inn flag.  In either case, fixing the deficiency or reflagging the hotel, could cost substantial amounts of money, Properties with only two stories or exterior room entrances found that the cost to rehab the structure to bring it into compliance with the new rules was unbearable. This forced them to move to a different flag.  Changing flags also is costly with complying with the finishes and signage of that property.  There will also be an upfront fee paid to the new franchise.

Most franchises inspect their hotels at least annually and also provide reports quarterly to the hotel owner.  These may be from hotel inspectors, secret shoppers, or a compilation of guest comments.  The Quality Assurance Report (QAR) also may provide some insight into upcoming PIP items that will be required of the property.  QARs may also contain items on customer satisfaction. 

Understanding what items need to be repaired or improved on the hotel, when these items need to be done and how they will be paid for is essential.  You will also find out that the best hotel owners are those who proactively make improvements to their properties before the franchise requires or it is absolutely necessary to do so.  The best hotel owners realize they are not working just on making the current hotel stay nice for the guest; they need to “wow” the guest into coming back.--Phil Love