Hotel properties located in cold climates or resort areas can have revenue that is seasonal. Most of the revenue is generated in three seasons of the year and little or no revenue is generated in the fourth season. But the mortgage payment is due every month. How does an owner prepare for mortgage payments in the off season? Typically, an owner sets aside extra cash in the strong months to be used to pay the mortgage in the off season.
To help borrowers manage mortgage payments for seasonal properties, the CMBS market developed the seasonality reserve escrow account. It works like this: In the strong months, the borrower makes its regular mortgage payment (principal, interest, 1/12 of taxes, 1/12 of insurance and monthly replacement reserve) plus an additional amount for a few months such that by the end of the strong season, the seasonality reserve has sufficient funds to make the mortgage payments for the off season from the reserve and the borrower does not make any payments themselves. At the end of the slow season, the reserve is typically zero and the cycle starts over again.
We recently had a hotel transaction located at a summer vacation spot on Lake Michigan. The hotel is closed from January through March (three months), but is nearly 100% occupied from May until October (six months). A seasonality reserve was structured to collect double payments from May through October 2019, with the extra payments placed into the seasonality reserve escrow account. During November 2019 through April 2020, the mortgage payment is made from the seasonality reserve escrow, and the borrower makes no payments directly. In May 2020, the cycle will start again.