Hotels Neglect Critical Franchise Payments

October 12, 2010 – In The News
National Real Estate Investor

According to Real Capital Analytics, $38 billion in U.S. hotel properties have fallen into distress since the beginning of the financial crisis. “With a lot of these properties, the occupancy simply isn’t there to meet the expenses,” said Michael Kornacki. “And this is happening from the lowest-end hotels to the luxury hotels.” When hotel owners run out of money, they begin to make partial payments on taxes, franchise fees, mortgage, etc., but what owners may not realize is that a default on the hotel’s license with a national brand could denote a default on the mortgage as well.

“Maybe if you’ve got limited dollars to go around, you’re better off keeping the franchise current and not paying off the loan,” said Kornacki. Most hotel mortgage agreements require the hotel to maintain its relationship with a national brand. Kornacki noted that defaulting on a hotel franchise agreement affects liability even for the loan’s guarantor. However, a number of hotels still put their franchise licenses on the line in order to cut expenses.

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