What is a Hotel Comfort Letter?
A hotel comfort letter is a document issued by a hotel franchisor to a lender when a hotel owner (the borrower) seeks financing. It provides the lender with assurances about the relationship between the franchisor, borrower, and lender.
What is the Purpose of a Hotel Comfort Letter?
There are 3 main purposes of a comfort letter: (1) to alert the franchisor that a lender will have a financial stake in the hotel; (2) to allow lender the ability to address any problems or concerns caused by the owner/operator which could result in a termination of the franchise agreement by franchisor and (3) to list conditions under which the lender can transfer ownership without losing the franchise.
What Points Are Typically Negotiated?
1. Franchisor’s Termination Rights / Lender’s Cure Rights. The parties often negotiate whether or not lender will get notice of a borrower default under the franchise agreement and if so, the amount of time the lender will have to cure any such default (e.g., unpaid franchise fees, brand standard violations, physical improvements and upgrades). Lenders prefer the flexibility of a long cure period while hotel franchisors want the default cured ASAP.
2. Continuity of the Franchise Agreement. Upon a default by Borrower under the franchise agreement, Lenders prefer that the existing franchise agreement remain in place to maximize the value of the property and to expedite the sale of the property after foreclosure. Hotel franchisors prefer the flexibility to require the lender or new owner to enter into a new form of franchise agreement and/or meet certain brand standards.
3. Fees and Costs. Hotel franchisors may require a lender or successor owner pay a transfer fee upon the transfer or assignment of the franchise agreement.
Why Does it Matter?
Besides being a closing requirement for many lenders financing hotels. A well-negotiated comfort letter protects the lender’s collateral (by keeping the franchise brand intact), while also giving hotel owners and operators flexibility and a path to follow in the event of financial difficulties.
Learn more about the recent Hotel Deal Alert here.