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ARTICLE · 01 SEPTEMBER 2020

Hotel Financing Series, Part 2: Covenants

Hogan Lovells Cadwalader
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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...

United KingdomFinance and Banking
Duncan Hubbard
Duncan Hubbard
Livia Li
Livia Li
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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

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