Why Lenders Require Comfort Letters for Branded Hotel Financing

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Investing in a franchise hotel can be a good way to diversify your portfolio and to achieve solid returns over an extended period of time. Finding the right hotel financing options can make this acquisition even more profitable. Comfort letters are designed to provide a legal framework for lenders and franchisors to handle situations in which the hotel purchaser defaults on the loan. Here are some facts ever investor should know about comfort letters.

What are Comfort Letters?

Comfort letters are documents that allow lenders to assume franchise rights if the original franchisee defaults on the loan. These letters include provisions that ensure that lenders can continue to operate the hotel in the event of default or foreclosure on franchise hotel loans.

Benefits of Comfort Letters

Comfort letters offer several benefits for all parties involved in the transaction, including the following:

  • Borrowers are more likely to find the most attractive hotel lending arrangements if the lenders have greater certainty that they will be able to recoup their investment even if the borrower defaults. This can improve the terms of these loans and can make it easier to obtain the financing needed to acquire franchise properties.
  • Lenders can more effectively collateralize their loans by ensuring the ability to maintain the profitability of the properties they finance.
  • Franchise companies can protect their brand name by continuing operations and maintain a presence even when franchisees fail to meet their financial obligations and go into default on their hotel loans.

Many lenders require comfort letters before they will finalize loans for franchise hotel properties.

Crafted by the Franchise Company

In most cases, the comfort letter is drawn up by the franchise company as part of the franchising process. These legal documents may follow a standardized template or may be customized to suit the needs of the borrower and the lender. The contents of the letter may include some or all of the following provisions:

  • A provision that ensures the ability of the lender to appoint a receiver to operate the hotel for a short period of time during foreclosure proceedings.
  • A clause that allows the lender to cure any default of the franchise agreement before it is terminated.
  • A provision that allows for the resale of the property and the transfer of the franchise agreement to a third party if the hotel goes into default.

These provisions are designed to protect the lender if the hotel financing loan goes into default.

About Peachtree Group

Peachtree Group is a direct lender with a specialty in hospitality lending. Our originators work with investors across the US to provide the most practical hotel financing arrangements for their specific needs. Contact us today to discuss your financial needs with one of our expert loan originators. We work with you to provide the best options for your hotel financing requirements.

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Safe Harbor in Choppy Waters: Hotels Resilient in Volatile Market

Peachtree Group's most recent webinar features Bryan Younge, EVP at Newmark, discussing the hotel industry in the post-COVID era. In his analysis he says the industry is marked by strong fundamentals, limited supply and increased capital inflows making it an attractive investment option.

The hotel industry has had a remarkable recovery in the post-COVID era, marked by strong fundamentals, limited supply and increased capital inflows, making it an attractive investment option.

Peachtree Group CEO Greg Friedman sat down with Bryan Younge, executive vice president at Newmark to discuss this remarkable recover and where the market is today. Bryan heads the hospitality practice group at Newmark and is a leading commercial real estate advisor. Below is a recap of his expert analysis and insights.

Listen to Peachtree's discussion with Bryan Younge, EVP Newmark here.

 

Hotel Industry Comeback

The industry witnessed an unprecedented come back after the pandemic. 

 

Limited New Hotel Supply: Limited new hotel supply coinciding with high travel demand creates a favorable scenario for the existing hotel inventory to capitalize on the surging interest.

 

Investment Attractiveness: The hotel sector's resilience has increased its appeal as an investment vehicle, offering substantial returns. This is reflected in the significant capital and dry powder ready for investment in this sector.

 

Macro Challenges: Despite its success, the industry faces challenges like staffing shortages, wage growth and inflation.

 

Hotel Performance – Segment: Closely examined the performance across various segments of the hotel industry, including commercial, group, leisure, and extended stay, as well as different distribution channels. These channels are crucial for predicting occupancy trends and Average Daily Rate (ADR), especially in the current volatile inflationary environment.

 

Key observations include:

  • The group segment, crucial for hotel revenue, experienced a significant decline during the pandemic but has recently fully recovered.
  • Other segments, like online travel agents (OTAs) and FIT (Foreign Independent Travel) and wholesale channel, outperformed group and global distribution     systems (GDS) in terms of recovery.
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Transaction Market: An equilibrium is emerging in the transaction market, with buyers and sellers reaching common ground and avoiding distressed pricing. This indicates a healthy market with growth potential and abundant opportunities. 

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Why Lenders Require Comfort Letters for Branded Hotel Financing

Investing in a franchise hotel can be a good way to diversify your portfolio and to achieve solid returns over an extended period of time. Comfort letters are designed to provide a legal framework for lenders and franchisors to handle situations in which the hotel purchaser defaults on the loan. Here are some facts ever investor should know about comfort letters.

Investing in a franchise hotel can be a good way to diversify your portfolio and to achieve solid returns over an extended period of time. Finding the right hotel financing options can make this acquisition even more profitable. Comfort letters are designed to provide a legal framework for lenders and franchisors to handle situations in which the hotel purchaser defaults on the loan. Here are some facts ever investor should know about comfort letters.

What are Comfort Letters?

Comfort letters are documents that allow lenders to assume franchise rights if the original franchisee defaults on the loan. These letters include provisions that ensure that lenders can continue to operate the hotel in the event of default or foreclosure on franchise hotel loans.

Benefits of Comfort Letters

Comfort letters offer several benefits for all parties involved in the transaction, including the following:

  • Borrowers are more likely to find the most attractive hotel lending arrangements if the lenders have greater certainty that they will be able to recoup their investment even if the borrower defaults. This can improve the terms of these loans and can make it easier to obtain the financing needed to acquire franchise properties.
  • Lenders can more effectively collateralize their loans by ensuring the ability to maintain the profitability of the properties they finance.
  • Franchise companies can protect their brand name by continuing operations and maintain a presence even when franchisees fail to meet their financial obligations and go into default on their hotel loans.

Many lenders require comfort letters before they will finalize loans for franchise hotel properties.

Crafted by the Franchise Company

In most cases, the comfort letter is drawn up by the franchise company as part of the franchising process. These legal documents may follow a standardized template or may be customized to suit the needs of the borrower and the lender. The contents of the letter may include some or all of the following provisions:

  • A provision that ensures the ability of the lender to appoint a receiver to operate the hotel for a short period of time during foreclosure proceedings.
  • A clause that allows the lender to cure any default of the franchise agreement before it is terminated.
  • A provision that allows for the resale of the property and the transfer of the franchise agreement to a third party if the hotel goes into default.

These provisions are designed to protect the lender if the hotel financing loan goes into default.

About Peachtree Group

Peachtree Group is a direct lender with a specialty in hospitality lending. Our originators work with investors across the US to provide the most practical hotel financing arrangements for their specific needs. Contact us today to discuss your financial needs with one of our expert loan originators. We work with you to provide the best options for your hotel financing requirements.

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5 Proven Tips for Securing Funding in a Turbulent Market

It's a tough market. But we've been here before. Peachtree President and Principal CRE Daniel Siegel shares insights garnered by our team after completing hundreds of transactions worth north of $15 billion. Need capital, but not sure how to do it - read on for Daniel's time-tested tips.

Statista estimates the value of the commercial real estate market will reach $24.67 trillion in 2023. According to the Deloitte Center for Financial Services 2024 industry outlook, half the industry expects the cost of capital and capital availability to worsen through next year. Couple that with the $1.5 trillion wall of debt maturing before the end of 2025 and it’s easy to understand the trepidation in the market today.

But we’ve been here before.

The credit team at Peachtree Group has completed hundreds of transactions worth north of $15 billion. In our collective careers, we have seen borrowers navigate unstable markets, such as what we are experiencing today, in a variety of different ways.

Here are five tips for borrowers trying to navigate today’s difficult market, and secure funding for their project.

Acknowledging your Situation

It has been a borrower’s market for several years now, and this is not one of them. Do not forsake the term sheet in your hand – the Fed has raised interest rates 11 times since March of 2022. Spending too much time on turns of a term sheet might leave you losing any spread concessions to increases in the benchmark or, even worse – lenders deciding to pull terms altogether. If you have an offer from someone you trust, you might want to take it.

Grass Isn't Always Greener

On existing projects, your current lender is most likely your best friend. A lender willing to give you an extension is gold in this market. Getting additional terms out of your current lender is likely the least costly option, even if it comes with fees and a rate increase – it likely is still significantly less costly than what the current market will give you. However, I hope that you have been a good borrower – up to date on deliverables, communicative about the status of your project, etc. – make no mistake, the bank is doing you a favor, don't give credit committee a reason to say no.

Have you Considered CPACE

Being one of the largest CPACE originators in the country, Peachtree has seen a significant increase in pipeline looking to apply proceeds retroactively.  Properties are eligible for CPACE up to 3 years after certificate of occupancy in approved municipalities and proceeds can generally be up to 35% of stabilized value.  It’s a source of capital that has become more interesting to first mortgage lenders as the proceeds could be used to paydown your first mortgage and size a new interest reserve.

Try to Pay for your Overages and Carry Upfront

We pride ourselves on being lenders who want to be part of the solution when a deal has a budget bust or stabilization is taking longer than anticipated. However, I always encourage borrowers to size up their budget contingencies (i.e., 7% vs. 5%) or structure additional interest reserves. Yes, it will increase your initial capitalization, but your lender will pick up 60-70% of that cost in the loan funding. It may mean more work on the initial capital raise, but it's usually less costly than going back to your lender and/or equity mid-project to get additional capital.

Communication, Honesty and Transparency are Key

Lenders have access to data and information. They ultimately will discover the truth; it might as well come from you. This includes prior credit aberrations or issues and accurate property performance information. We have capital specifically for lending on special situations – there are a lot of deal-level risks that can be mitigated, but lack of trust with sponsorship is not one of them.

In uncertain times, hope for the best but prepare for the worst. Peachtree is an experienced capital partner who understands commercial real estate's nuances. With funding options limited from traditional lenders, our team has the lending solutions, financial capacity, and expertise to close complex transactions in today's challenging capital market environment.

We are available to discuss your lending options that meet your business objectives. Visit us at www.peachtreegroup.com.

Daniel Siegel is president and principal of Peachtree's commercial real estate lending group.

Before joining Peachtree, he was with Ardent Companies as managing director and the head of high-yield investments leading the company’s debt investments. Prior to that, Daniel was vice president of acquisitions at Rialto Capital, overseeing the distressed loan acquisitions platform. During his tenure at Rialto, Daniel directly oversaw the acquisition of commercial real estate loans on domestic and international opportunities. Additionally, he developed the firm’s small balance loan acquisition platform and led the company’s first European acquisition.

Daniel has a bachelor’s degree in finance from Tulane University. Contact him at dsiegel@peachtreegroup.com.