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Buying a Hotel? 3 Management Issues to Discuss with Your Lender

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Many buyers of hotels often use borrowed money to pay for the purchase. Those loans usually come with conditions regarding several aspects of how the hotel can or will be managed. Some of those conditions may hinder the decision-making process if ample time was not devoted to negotiating the management terms with the lender. This article discusses some important clauses that hotel buyers should negotiate with their lenders before buying a hotel:

Management Fee Issues

Many lenders usually insist that loan repayment will take precedence over the payment of the fees of the management firm running the hotel. Some lenders also insist that no changes should take place in the management's fees without the lender's approval. Such conditions can make it hard for a hotel owner or buyer to adjust the management fees in a timely manner since the owner may not dictate the timeframe within which the lender will respond to the request made.

It is therefore important for you to negotiate favourable terms regarding this clause before you take on a given lender for a hotel purchase. For instance, you can stipulate that you can notify the lender after lowering the management fee. Such flexibility can give you the leeway that you need to act quickly.

Management Contract Termination Issues

Many lenders require stable management as a condition for providing funding to facilitate a hotel acquisition. It may, therefore, become hard for a borrower to terminate the contract of the manager or the management company since the lenders may feel jittery about the security of their funds. The negotiations that you have should give you some liberty to fire hotel managers in a way that won't compromise the interests of the lender. For instance, you can agree on timelines within which you and the lender should reach an agreement regarding the specific conditions under which you can terminate the current managers.

Hiring New Managers

Disagreements can also arise between the lender and the borrower regarding the borrower's choice of new hotel managers if this aspect of management wasn't agreed upon during loan negotiations. You can avoid such disagreements by agreeing on how new managers will be recruited. For instance, your contract with the lender should list several hotel management entities from which you can select new managers without waiting for approval from the lender. Such foresight will reduce the time that is taken by the recruitment process.

Work closely with experienced hotel brokers when you are buying a hotel. Those professionals will guide you on how to negotiate with lenders so that you don't find it hard to make management decisions once you have acquired the hotel.