Last week's headlines about converting the Fifth Third Center, one of downtown Nashville's largest office towers, into a hotel signal more than a one-off real estate story.
Across the city, from The Gulch to Peabody Street, Nashville developers are looking at underused office buildings and imagining a second life for them as hotels.
For lenders, these projects can present real opportunity. They can also bring a very different set of risks than a typical office loan.
Why Banks Should Care
An office-to-hotel conversion is not just another construction loan.
The revenue model changes. Daily rates and occupancy replace fixed leases, which means cash flow can swing more from month to month.
The collateral changes. It is not only the building that matters now, but also the brand rights, furniture, fixtures and equipment, licenses, and permits that make the hotel run.
The execution risk changes as well. Projects can stall if zoning is not secured, if brand approval takes longer than expected, or if construction milestones slip.
Considering these factors before the commitment letter is signed can make the difference between a smooth deal and a distressed asset.
Drafting Key Legal Protections in Office-to-Hotel Conversions
1. Clearing the Path Before Commitment.
Lenders should confirm that hotel use is permitted and identify all approvals needed to bring the project to completion, including zoning changes, building permits, and brand approval. Any reciprocal easement agreements or restrictive covenants that limit hotel operations, such as valet service, rooftop amenities, or liquor sales, should be amended or consented to before closing. All office tenants and vendors should have executed termination agreements, lien releases, and funded buyouts in place before construction draws begin.
2. Embedding Protections in the Loan Documents.
Loan advances should be conditioned on clear, verifiable milestones, such as receipt of brand approval letters, completion of property improvement plan requirements, or issuance of a certificate of occupancy. Security interests should cover hospitality-specific assets, including furniture, fixtures and equipment, room revenues, operating accounts, and rights under franchise and management agreements. Subordination, non-disturbance, and comfort letters, along with consent rights, should be obtained to prevent unapproved changes in brand or management that could reduce asset value.
3. Controlling Risk After Closing.
Protective covenants can require excess cash to be directed to debt service or reserves if performance falls below agreed debt service coverage or revenue thresholds. Loan agreements should preserve the right to replace the general contractor during construction to avoid costly delays. Insurance requirements should include builder's risk with delay-in-startup coverage, business interruption protection during ramp-up, and liquor liability for food and beverage operations. Long-term operations and maintenance plans for environmental conditions such as asbestos or lead paint should be implemented and supported by enforceable compliance covenants.
The Bottom Line
The Fifth Third Center proposal is the latest sign that Nashville's office market is shifting quickly. For lenders, the upside in these conversions is real, but so are the risks. Integrating adaptive reuse considerations into underwriting and documentation from the outset can help banks capture opportunity while safeguarding their investment.
Early legal involvement can mean fewer surprises, stronger collateral, and a smoother path from concept to grand opening.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
