MEMORANDUM
To: Neal Aronson
From: Dan Abrams
Date: May 14, 1996
Subject: U.S. Franchise Systems ("USFS") -- Franchise Loan Program -- Revised
The following are the general terms upon which Nomura Asset Capital
Corporation ("NACC") would provide a comprehensive construction and permanent
loan program for eligible USFS franchisees, including both the Microtel and
Hawthorne Suites brands. Additional brand financing will be considered by NACC
as and when acquired by USFS.
GENERAL
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Commitment Term: 2 years
Facility Size: $200 million -- consideration will be given to expanding
facility based on experience and attainment of benchmarks to
be discussed
Lender: NACC -- all loans would be made directly by NACC to the
Borrowers; USFS would conduct Construction
Loan/Permanent Loan commitment due diligence and
underwriting based upon NACC standards: upon USFS's
delivery to NACC of complete underwriting package, NACC
will have 5 business days to approve/disapprove Borrower for
Construction Loan/Permanent Loan commitment; NACC will
be responsible for closing the transaction; closings will
generally occur within 30 days of NACC's approval of
Borrower
Closings: Provided that there are no regulatory or other legal
impediments, loans will be closed in Atlanta, GA, and will be
originated through an entity bearing a "USFS" designation
CONSTRUCTION LOAN PARAMETERS
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Borrower: Special purpose entity
Loan to Cost: 70%
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Equity: 30% of Cost -- Borrower must demonstrate availability of
equity moneys, which may require posting of full amount in
cash, letter of credit or other adequate security, in NACC's
discretion: equity moneys must be expended prior to initial
draw on Construction Loan
Draws: Monthly, upon presentation of evidence of work completed in
accordance with approved plans and specifications, and
architect's certificate as to work completed and of adequate
funds to complete construction
Collateral: First mortgage lien on the land and improvements as built;
completion bond; Construction Loan will be recourse to the
principal economic entity or persons behind the SPE Borrower
until certificate of occupancy
Term: Construction draws must be completed within 9 months of first
draw. Entire Construction Loan term will not exceed 27
months for Microtels and 30 months for Hawthorne Suites
(inclusive of draw period)
Interest Rate: Floating at Prime plus 1.0% per annum; any additional spread
obtained by USFS will be shared 50/50 between NACC and
USFS; if NACC syndicates the entire Construction Loan, and
such syndication is at an effective yield of less than Prime plus
1.0%, NACC and USFS will share 50/50 in the differential in
interest between the syndication rate and Prime plus 1.0%
Amortization: None
Construction Loan
Commitment Fee: 0.50% of committed Construction Loan amount
Condition to Construction
Loan Commitment: Execution by Borrower and NACC of Permanent Loan
commitment letter and payment by Borrower of minimum
permanent loan commitment fee of 0.50%
Repayment: Construction Loan will automatically convert to Permanent
Loan at maturity (or earlier at Borrower's option once there
are 12 full months of operation)
PERMANENT LOAN PARAMETERS
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Borrower: Special purpose entity
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Amount: Maximum amount based on DSCR of 1.4:1 using NACC
underwritten NOI and debt service constant equal to the
greater of the actual constant and 10.48%; provided, that the
maximum amount will in no event exceed 90% of the cost to
build. For this purpose, "cost" may include all third-party hard
and soft costs, including financing fees, paid by the Borrower
relating to construction of the property. In addition, where
NACC has advanced the Construction Loan, NACC will
commit to fund proceeds at least sufficient to satisfy the entire
Construction Loan, such proceeds to take the form of the
Permanent Loan plus. If the proceeds of such loan are
insufficient, Mezzanine Financing, as described below
Mezzanine Financing: Mezzanine Financing will take the form of a preferred equity
interest in the Borrower entity; the term of the Mezzanine
Financing will be between 3-5 years; interest will accrue and
be payable at LIBOR plus (i) 450 bps for three-year term, (ii)
550 bps for four-year term or (iii) 650 bps for five-year term;
fully amortizing on a straight-line basis over term; Borrower
will be required to apply between 50% and 75% (as
determined by NACC in its discretion) of excess cash flow to
amortization
Funding: Borrower can request funding of the Permanent Loan at any
time following 12 full months of operation and no later than 27
or 30 months, as the case may be, following issuance of the
Permanent Loan commitment
Collateral: First mortgage lien on property: Borrower with more than one
funded property will be required to either (i) cross-default and
cross-collateralize all such properties (see below for reduction
in interest rates resulting from certain crossed situations) or if
loans to one borrower aggregate to greater than $15 million,
(ii) hold each property in a separate bankruptcy remote entity
and provide acceptable opinions of counsel relating to
substantive non-consolidation; Permanent Loan will be non-
recourse
Term/Amortization: 10-year term/20-year fully amortizing schedule or 11-year
term/22-year fully amortizing schedule
Interest Rate: 10-year US Treasury rate or 11-year interpolated US Treasury
rate (depending on selected term) plus indicated spread
DSCR Spread Crossed Spread
1.4:1 370 bps 355 bps
1.6:1 325 bps 310 bps
1.8:1 280 bps 270 bps
2.0:1 235 bps 225 bps
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Crossed spreads available for any pool of 4 or more
geographically diversified crossed properties
Underwritten NOI: Trailing 12-month actual cash flow adjusted, if necessary, to
reflect FF&E expenditures of 5% of gross revenues and 4%
management fee, NACC reserves the right to set forth other
pro forma adjustments to cash flow as it deems reasonably
necessary, such as to reflect the impact of future competitive
properties, and consistent with its hotel underwriting
procedures and practices at the time of the execution of the
Permanent Loan commitment
FF&E Reserves: The Borrower will be required to fund reserves on a monthly
basis equal to 2.5% in Year 1, 3.25% in Year 2 and 4.0% in
Year 3 and thereafter. Properties that are not new (Hawthorne
conversions) will require reserves of 4% of gross revenues
Debt Service Reserve/
Lockbox: 2 months debt service reserve will be required in lieu of a
lockbox for initial 9 or 10 years (depending on term selected);
lockbox will be instituted commencing in year 10 or 11
(depending on term selected); NACC will have the option to
initiate a lockbox in the event of a default under the loan;
Lockbox will be required if NACC funds Mezzanine
Financing (and until Mezzanine Financing is paid off)
Prepayment: Locked out for 2 years following securitization by NACC;
thereafter Treasury equivalent yield maintenance -- specific
procedure for prepayment to be discussed
Sale of Property: Loan may be assumed by qualified purchaser
Permanent Loan
Commitment Fee: If NACC is construction lender -- 0.5%
If NACC is not construction lender -- 1.0%
In each case payable to NACC at time of commitment, based
on amount of Construction Loan
Permanent Loan
Funding Fee: If NACC is construction lender -- 1.0%
If NACC is not construction lender -- 0.5%
In each case payable to NACC at time of funding, based on
amount of Permanent Loan actually funded (including make-
up if prior Permanent Loan commitment fee is based on a
lower projected amount for the Permanent Loan than actually
funded)
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Fee Arrangement: NACC and USFS will share on a 50/50 basis in the aggregate
Construction Loan/Permanent Loan commitment funding fees in
excess of either 1.25% or 1.00% (depending on whether the
NACC construction loan is issued), on a per Borrower basis, at
the time that the Borrower pays such fees -- with the initial 1.25%
or 1.00%, as the case may be, being retained by NACC and any
excess over such amounts being shared as on when paid by the
Borrower. Following is a summary of the loan fee structure and
sharing arrangements:
NACC No NACC
Const. Loan Const. Loan
Const. Loan Com. Fee 0.50% 0.00%
Perm. Loan Com. Fee 0.50% 1.0%
Perm. Loan Fund Fee 1.00% 0.50%
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2.00% 1.50%
Fees shared over 1.25% 1.00%
Firm Commitment: The Permanent Loan commitment would be binding on NACC
and the Borrower, including the principal economic entity or
persons behind the SPE
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