Attorney Mike Kornacki has seen it happen all too often. A hotel owner runs out of capital and begins making partial payments on its taxes, franchise fees, mortgage and other bills in an effort to keep all its creditors happy.

What many owners fail to realize is that a default on the hotel’s license with a national brand may constitute a default on the mortgage as well, according to Kornacki, who is a partner at Philadelphia-based law firm Fox Rothschild. “Maybe if you’ve got limited dollars to go around, you’re better off keeping the franchise current and not paying off the loan,” he says.

It’s unclear how many hotel owners are in arrears on franchise payments, but the problem is undoubtedly widespread, according to Morris Lasky, CEO of Lodging Unlimited, a Chicago-based hotel management and consulting firm. “If everybody that wasn’t paying had their franchise pulled right now, there wouldn’t be any franchise companies,” he says.

Hotel occupancy in the U.S. simply isn’t high enough to provide the revenue many hotels require in order to remain profitable. A hotel needs to rent 65% to 70% of its rooms every night in order to break even, and the occupancy rate nationally has been well below that level for nearly two years now, says Lasky, who is often called in to rescue struggling hotels.

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