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 every 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 maintaining 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.
Stonehill Strategic Capital is a direct lender serving the hospitality industry. We work with investors across the U.S. to provide the most practical hotel financing arrangements for their specific set of needs. Call us today at 713-666-2544 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.