11.20.17: Hotel Franchise Termination Windows Are Tricky in CMBS

Some franchisors, including Choice Hotels International and LaQuinta Franchising, allow for mutual termination of franchise agreements during the franchise term. This provision is known as “termination windows.” Franchisees pushed for this provision as a way to get out of franchise relationships that were not working out, particularly if the franchisor was not delivering reservations from the central reservation system or if the brand perception among guests was declining. The way the provision works in general is either the franchisee (hotel owner) or the franchisor (hotel brand) could mutually terminate the franchise agreement on the 5th or 10th anniversary of a typical 15-year franchise agreement without any financial payments to either party (sometimes referred to as liquidated damages). The termination windows were also advocated by the Asian-American Hotel Owners Association (AAHOA) in its set of standards called the Points of Fair Franchising.

The concern with termination windows in CMBS conduit lending is that the CMBS lender recognizes that a significant portion of the value of the hotel lies in the franchise brand. Typically, the hotel revenue and cash flow are directly correlated to the franchise brand: The better the brand perception, the better the property performance. The CMBS lender is making the loan under the assumption that the franchise brand in place at closing will remain for the loan term. The termination window puts this premise in jeopardy as the franchisor can terminate the franchisee during the loan term. As a result, the termination windows that fall within the loan term need to be removed from the franchise agreement prior to closing. ValueXpress has successfully negotiated the removal of franchise terminations from agreements for its CMBS clients. ValueXpress uses its long-standing relationships with franchisors to get this done for its clients.


This entry was posted in CMBS, CMBS Conduit Loans, Commercial Lending, Commercial Real Estate Loans, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , , . Bookmark the permalink.

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