Hotel Financing Series, Part 2: Covenants

• Published date: 01 September 2020
• Subject Matter: Finance and Banking, Media, Telecoms, IT, Entertainment, Real Estate and Construction, Financial Services, Real Estate, Hotels & Hospitality
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Mr Duncan Hubbard and Livia Li

In Part 2 of our series on hotel financing in the wake of COVID-19, we take a look at some of the most common covenants in a typical hotel financing transaction, with the understanding that each set of agreed covenants is tailored and specific for each transaction.

Financial covenants

As with all real estate financing, loan-to-value ratio (a measurement of the total loan outstanding against the value of the property) is an essential financial covenant in hotel financing. In addition, the other key financial covenant is the interest cover. Unlike traditional real estate financing, where the historical rent and/or projected rent is used, in hotel financing, the interest cover (or, if applicable, debt service cover) is worked out using the cashflow of the hotel, which is usually a formulation of EBITDA as agreed between the lender and the borrower, against the interest for the same period. In addition, there can be other restrictions, such as an annual limit on capex (unless topped up by the sponsor), or in some instances, where the bank has placed some emphasis on the sponsor's financial backing, a net worth covenant on the sponsor.

General covenants

In addition to the general property covenants, hotel financing usually include a few additional specific covenants, such as:

• maintenance of property to also extend to adhering to brand standards;
• capital expenditure is monitored closely, as hotels often require frequent upgrades and refurbishments. There should be pre-agreed budget and capex...