How is the principal amount of the Embassy Suites Development Incentive Note forgiven each year?
Embassy_Suites Franchise · 2025 FDDAnswer from 2025 FDD Document
The principal amount of this Note will be disbursed by Holder to Maker, and Maker will become subject to the obligation to repay or discharge this Note, when and if (a): Maker opens the Hotel with our consent; (b) there have been no material adverse changes in the business, legal, litigation, bankruptcy status or finances of the Maker, any guarantors, or the project since approval; (c) Maker has completed any PIP; and (d) Maker has paid the Franchise Application Fee. If the Franchise Agreement terminates before the Hotel opens and Holder has not disbursed the principal amount of this Note to Maker, then this Note will be deemed discharged and neither party will have any further obligation to the other under this Note. On each anniversary of the Hotel's Opening Date, one-twentieth (1/20th) [UPDATE IF FA TERM IS NOT 20 YEARS] of the original principal amount will be forgiven without payment. Maker's obligation to repay the principal of this Note will cease and this Note will automatically be canceled and discharged when and if the principal is completely forgiven or repaid in accordance with these terms. For the purposes of calculating the portion of the principal amount of this Note that is forgiven each year, Holder will be deemed to have disbursed the full principal amount regardless of whether or not Holder has set off any amounts from such principal amount pursuant to the Franchise Agreement prior to disbursement to Maker.
Source: Item 22 — CONTRACTS (FDD page 97)
What This Means (2025 FDD)
According to the 2025 Embassy Suites Franchise Disclosure Document, the principal amount of the Development Incentive Note is forgiven incrementally over time. Specifically, on each anniversary of the hotel's opening date, one-twentieth (1/20th) of the original principal amount will be forgiven without requiring any payment from the franchisee. This implies that the standard term for forgiving the note is 20 years, although the FDD indicates this may be updated if the franchise agreement term is not 20 years.
Embassy Suites treats the full principal amount as disbursed for forgiveness calculation purposes, regardless of whether any offsets were applied before the actual disbursement to the franchisee. This is beneficial for the franchisee, as the forgiveness is based on the initial principal amount, not any reduced amount they may have received after offsets.
The franchisee's obligation to repay the principal ceases entirely once the principal is either fully forgiven through these annual installments or fully repaid according to the terms of the note. This provides a clear end point to the financial obligation, assuming the franchisee meets all the conditions for continued forgiveness. Prospective franchisees should confirm the exact term and principal amount in their specific Development Incentive Note, as these details are subject to the specifics of their agreement with Embassy Suites.
It's important to note that this forgiveness is contingent on the franchisee maintaining the franchise agreement and adhering to its terms. If the agreement is terminated for any reason, the remaining unamortized principal balance becomes immediately due and payable. This acceleration clause underscores the importance of compliance with the franchise agreement to realize the full benefit of the development incentive.