When a hotel loan goes sideways, the question is rarely only what the owner owes: It is who controls the cash.
A hotel is not just a building: It’s an operating business, a brand platform and a layered partnership among ownership, management, franchisors and capital providers. That complexity does not disappear when an owner evaluates financing. In many ways, that is where complexity begins. When owners shop for financing, the conversation tends to focus on proceeds, pricing and timing. Those terms matter, but they are not the whole story. For hotel owners, the more consequential questions are structural.
Hotels occupy an unusual position in the lending world. Most real estate assets are underwritten primarily against the property value, with the mortgage as the lender’s core security. At the same time, most operating businesses are underwritten against cash flows, contracts and enterprise value. The thing is: hotels are both. A lender financing a hotel may hold a recorded first-lien mortgage on the physical asset, but may also seek rights to revenue generated by daily operations. Understanding which of those two levers your lender can pull, and when, is the most important thing a hotel owner can know before signing a loan.
The mechanism that determines cash-flow control is the cash-management agreement. These agreements give the lender a security interest in the dollars the hotel produces, in addition to the real estate itself. In a hard, cash-management structure, revenues are swept into a lender-controlled account from day one. In a springing structure, the owner retains control until a trigger occurs, such as an event of default or failure to meet a debt-service-coverage threshold. The difference between those two structures is not legal fine print: It is the difference between an owner who controls the operating checkbook and one who does not.
Ask Yourself
The core questions every owner should have answered before closing are: Who has first claim to cash flow? What happens if performance softens? Which expenses are paid before debt service reaches the lender? When can the lender redirect funds, and how quickly?
Brand-managed hotels add another layer. Major brands typically require management fees, incentive fees and operating expenses to be paid before funds are diverted to the lender, even in a default scenario. That can create direct tension between what the lender’s documents require and what the management agreement demands. If those two waterfalls are not reconciled at closing, they will be reconciled under pressure, which is a worse time to have the conversation.
Reserves for replacement deserve attention, too. Lenders frequently require cash to be set aside for capital expenditures, maintenance and furniture, fixtures and equipment replacement. Owners should compare those requirements against obligations under any brand or franchise agreement. When both the lender and the brand require reserves for overlapping purposes, the combined drag on distributable cash flow can be material.
Hotel owners should also underwrite their lender the same way their lender underwrites them. If the business plan hits turbulence, who will you be talking to? Will it be the same team that originated the loan, knows the market and understood your strategy at closing? Or, will the file be transferred to a third-party servicer with no relationship to the asset and a different set of incentives? What is the lender’s track record on loan modifications, extensions and workouts? Is the lender predisposed to working through a challenged business plan with the borrower in the owner’s seat, or does it move quickly toward enforcement and asset takeover?
Prepare for the Unexpected
Hotel business plans change. Renovations run long. Restaurant concepts get reworked. Brand conversions become necessary. Stabilization takes longer than the model projected. And the lender’s willingness and ability to move with those realities is not a soft consideration: It is part of the loan’s actual cost.
That brings in the final variable: the relationship between pricing and flexibility. Traditional bank financing may offer a lower cost of capital, but that rate is often accompanied by tighter covenants and less room to maneuver if the asset underperforms or the business plan needs to shift. Private lenders and debt funds tend to be more expensive, but they are often better positioned to accommodate management changes, lease modifications, brand conversions or timeline adjustments without triggering an adversarial process.
Neither structure is categorically better. A lower rate may be the right call for a stabilized asset with predictable cash flows and limited execution risk. A more flexible lender may be the better fit for a transitional hotel, a repositioning play or an asset with meaningful operational complexity.
The point is not to choose one type of lender reflexively over another. It is to understand what you are actually selecting when you choose a lender, and to make that choice with the downside scenario in mind, not just the upside. In hotel financing, the capital partner whose structure aligns with a particular asset and operating strategy and fits an owner’s tolerance for execution risk is worth more than the one with the lowest spread.
Know who controls the cash. Know when that control can shift. And know how your lender behaves when a plan requires adjustment—before you need to find out.
This Perspective piece was authored by Brian Horner, VP of originations and underwriting at BridgeInvest, a vertically integrated investment manager focused on structuring and investing in diversified portfolios.