We recently were delayed in closing a number of hotel loans due to a recurring issue. Often hoteliers, primarily those involved in the construction of smaller (less than $10 million) limited-service hotels, obtain their franchise agreement well in advance of property construction. This secures a protected area for the owner while a site is located. Many times the franchise agreement is executed in the individual name of the owner because an entity that might hold the future land and hotel property has not been formed as there may not be any land or building to put in the entity at that point.
Then the owner finds a site, obtains the funds to build the property, creates an entity to hold the land and hotel, and begins operation once construction is complete. Often new hotels perform quite well, and with lending markets cooperating, the owner seeks a long-term, fixed-rate CMBS conduit loan with cash-out to extract equity for the next project. During loan processing, we routinely obtain a comfort letter from the franchise that provides for certain notice and agreements between the borrower, lender and franchise. This is where the problem begins.
CMBS conduit lenders require that the franchise agreement be in the name of the borrower (logical, if you need to enforce the terms in the comfort letter and you have to have the correct legal parties executing agreements). But recall our borrower executed the franchise originally in his own name, and he never thought to update it when the hotel entity was formed.
The process to redo the franchise agreement in the name of the borrowing entity is known as “re-alignment,” as you are realigning the franchise agreement to match the borrowing entity. It’s not a big deal because the franchise usually has no issue doing it, but it can take two to three weeks. The moral of the story is the day the sponsor executes his CMBS conduit loan term sheet, check the signature block of the franchise agreement to be sure it’s in the name of the borrower, and if not, start the re-alignment process right away.