To help lenders avoid unnecessary pitfalls, we asked Guy Maisnik, one of the senior member of our real estate department and Global Hospitality Group® to help us review the essential principles that every lender should know. Guy is one of members of our deep bench who has been through every real estate downturn since the 1980s, and is used to helping lenders and investors maximize the value on billion dollar portfolios or one-off assets.

In Guy's career, he has worked with lenders to advise on the restructuring and exercising of remedies. These clients include numerous banks, special services, opportunity funds and pension funds on the structuring and/or exercise of their remedies, such as GE Capital, Midland Loan Services, Helios AMC, HSH Nordbank, AG, HSBC, Wells Fargo Bank, BankAmerica, Morgan Stanley, Sumitomo Mitsui Bank, Colony Advisors, Loan Star, Archon Capital, CalPERS and Washington PERS. Such work involved analyzing and assisting in the successful bidding and purchase of loan/asset portfolios, from small portfolios to those exceeding a billion dollars, exercising remedies on the acquired loans, addressing complex workout and guaranties realization issues, addressing tranche disputes, restructuring capital requirements, structuring sales of the acquired loans/assets and addressing tax consequences of note holders to facilitate workout and disposition strategies.

Here is what he has to say. You may also find the rich library of materials on www.HotelLawBlog.com a valuable source of information on this and related subjects. At the top of the blog, check out the tab that says "Hotel Law Topic" and click on the one called "Workouts, Bankruptcies and Receiverships."

As hotels loan defaults soar, and California claims more than its share of troubled assets, it is a good time for a quick refresher on some of California's unique rules that sometimes frustrate foreclosing lenders' ability to accomplish their objectives.

So here is a quick review of California's one action and anti-deficiency rules. California's consumer-oriented laws and a pro-active judiciary often combine to produce some surprising results for real property secured transactions.

Even those of us who practice regularly in this area find that the principles of California commercial finance law can be contradictory, inconsistent and less predictable that we would like. It requires that lenders and their counsel be ever-vigilant for the trouble issues that might jeopardize recovery.

Remember, this is the state where a judge released a guarantor from its debt obligations because the judge did not like a perfectly well-drafted guaranty waiver (so now we have a new form of waiver . . .). This is also the state where a court found a bank's violation of California's one action released the security interest in the real property, and also made the debt uncollectible (and a later case sustained the first part of this decision releasing the real property security, and reversed the second part, holding the debt was not uncollectable). Welcome to the sunshine state!

Unless you are a lawyer and regularly work with California law on troubled assets, you will want to understand some essential rules to avoid falling into some dangerous -- and unnecessary -- traps.

California's laws: In case you are an avid reader, who likes the details, California's one action and anti-deficiency rules we discuss below are set forth in California Code of Civil Procedure ("CCP") section 726, Civil Code ("CC") sections 580a, 580b, 580d and California Commercial Code ("CCC") section 9-604.

One action rule

Foreclosures in California are subject to special statutory and judicially created rules. Lenders are well-advised to develop their strategies with these rules and pitfalls in mind. The learning curve is simply too steep and too expensive.

What is an "action"?

CCP § 22 defines "action" as "an ordinary proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement or protection of a right..." This seems to be a simple enough definition. However, California courts have redefined "action" in an expansive and inconsistent manner. For example, The court in Bank of America v. Daily, 152 Cal. App. 3d 767 (1984), ruled that a bank's setoff of the debtor's deposits constituted an "action." Yet, in Wozab, the California Supreme Court ruled that such a setoff was not an "action."

Other judicial decisions continue to construe "action" so as to require the exhaustion of all real property security before seeking action directly against the debtor.

Fortunately, there are some limits to the bounds of judicial activism. For example, in Hatch v. Security-First Nat'l Bank, 19 Cal. 2d 254, 258 (1942), the court ruled that a trustee's sale under a mortgage or deed of trust is not an "action" for purposes of the One Action Rule. And how about seeking appointment of a receiver? Is that an "action"? CCP §564(d) states that an action by a secured lender to appoint a receiver is not an "action" under § 726. Further, § 564(b)(11) states that the appointment of a receiver may be continued even after entry of a judgment for specific performance in that action, if appropriate to protect, operate, or maintain real property encumbered by the deed of trust or mortgage or to collect the rents therefrom while a pending non-judicial foreclosure under power of sale in the deed of trust or mortgage, is being completed.

As anyone knows who is familiar with Rule #1 of Hotels, hotels are more than just real estate. In fact, in any full service hotel, the operating business easily comprises more than half the value of the property. So the question is: does § 564(d)(11) apply to the collection of operating revenues from a hotel if appropriate to "protect, operate or maintain" the hotel pending non-judicial foreclosure? Arguably, revenues from hotel rooms can be construed as "rents." But what about food service, gift shop proceeds, green fees and proceeds from other amenities? Again, while unclear, the application of § 564(d) to hotels ought to fall within § 564(d)(12), which includes any case "brought by an assignee under an assignment of leases, rents, issues, or profits pursuant to subdivision (g) of Section 2938 of the Civil Code." More about this in the next article on this subject.

Can a creditor apply collected rents and revenue to the debt without violating § 726?

"No judgment shall be rendered for any deficiency upon a note secured by a deed of trust...in which the real property...has been sold by the...trustee under power of sale contained in the...deed of trust."

What happens if the creditor violates the One Action Rule?

Earlier case law (Bank of America v. Daily) held that the creditor's violation applied to extinguish both the real property collateral and the debtor's obligation. This was an extraordinarily punitive result, particularly since the main purpose behind the One Action Rule was primarily procedural, to prevent multiple actions, and compel exhaustion of all security before a deficiency judgment is entered and ensure that debtors are credited with the fair market value of the secured property before they are subjected to personal liability. However, the Supreme Court in Wozab, modified the earlier decision, holding that the violation of the One Action Rule did not extinguish underlying debt but did terminate the real property collateral interest.

How does California law address mixed collateral?

A hotel creditor typically has multiple forms of collateral such as real property, fixtures, furnishings and equipment and cash collateral? How does the One Action Rule work under these circumstances? Is the creditor required to foreclose on the real property first, even before taking cash collateral or other personal property?

California Commercial Code § 9604(a)(2)(A) provides a broad exception to the One Action Rule for personal property and fixtures included in a "unified sale" conducted under real property rules. Otherwise, the drafters of California's "mixed collateral" statute clearly intended to insulate personal property collateral from compliance with real property provisions. There is no security-first requirement under California law with respect to personal property collateral. Further, CCP § 730.5 expressly states that except as otherwise provided by CCC § 9604, the anti-deficiency rules do not apply to any security interest in personal property or fixtures governed by the Commercial Code.

What if the creditor applies cash collateral to the debt?

Do payments from a collateralized cash account to a lender (either directly or from a receiver) who holds real property collateral violate the One Action Rule? In re Sunnymead,178 B.R. 809 (9th Cir. BAP 1995), the court found that the creditor's acceptance of payments from the debtor did not constitute an "action" the "security-first rule." The court BAP stated that the payments were "cash collateral" and that the lender had not sought "to collect against noncollateral general assets."

Judicial v. non-judicial foreclosure

The redemption period makes judicial foreclosure a clumsy remedy for lenders since the lender does not have right to possess the collateral after the judicial foreclosure until the redemption period has expired.

Judicial foreclosure is the process by which a creditor sues the debtor in court for foreclosure, and obtains a judgment for foreclosure against real property collateral and, presumably, obtains a personal judgment against the debtor for any deficiency amount. This process is usually time-consuming and expensive. Moreover, even after the judicial foreclosure sale, the debtor will retain a right to redeem the real property for a period of one year, frustrating any commercially reasonable sale for that period of redemption. CCP § 729.010.

The redemption period makes judicial foreclosure a clumsy remedy for lenders since the lender does not have right to possess the collateral after the judicial foreclosure until the redemption period has expired. In fact, in such cases the lender is forced to seek a receiver post-foreclosure under CC§ 564(b)(4) to possess the property and collect revenues during such period.

As a result, the preferred remedy for most lenders is typically non-judicial foreclosure. Non-judicial foreclosure is relatively fast and inexpensive, if uncontested. A non-judicial foreclosure is a public sale by the trustee identified in the deed of trust under the private power of sale clause contained in that deed of trust. The process is strictly governed by statute, taking approximately 120 days, unless delayed if the borrower contests the action in court, seeks delays and adjournments of sales

Typically, the lender will acquire the property at the trustee's sale by credit bidding all or some portion of its secured debt. (There is an art to the credit bid, with potentially serious legal and business implications to the amount of the bid, but that is for another article on another day). The lender's title is evidenced by a trustee's deed upon sale.

This sale is final and results in the lender becoming the owner of the property free and clear of all junior liens. The counterbalancing consequences to a lender of a non-judicial sale is foregoing the right to seek a deficiency if proceeds from the trustee's sale fails to cover the outstanding debt, as discussed below.

Regardless of proceeding with a judicial or non-judicial foreclosure, hotel lenders are cautioned to pay careful attention to whether a non-disturbance is in place with the hotel operator, requiring the lender to honor a hotel management agreement upon the lender's taking of title. Depending upon the impact of that hotel management agreement to the value (positive or negative) of the hotel, lenders are well-advised to seek legal counsel to address issues concerning that hotel management agreement well before commencing and completing a foreclosure sale on the hotel.

Anti-deficiency rules

The One Action Rule and the anti-deficiency protections are supported by strong public policy, and, as a result, cannot be waived in advance by a borrower.

CCP §580d -- No deficiency after a non-judicial sale

"No judgment shall be rendered for any deficiency upon a note secured by a deed of trust...in which the real property...has been sold by the...trustee under power of sale contained in the...deed of trust."

The law is designed to prevent a creditor from underbidding at a non-judicial foreclosure sale, thereby maximizing a deficiency to be recovered in later action. § 580d only refers to a "note" secured by mortgage or deed of trust. Thus, arguably, a deficiency judgment may be obtained after a non-judicial foreclosure sale where the obligation is evidenced by other than a note. However, California courts have applied § 580d even when a note was not involved (Willys of Marin v. Pierce, 140 Cal. App. 2d 826 (1956)).

Thus, the trade off for a lender who chooses to foreclose non-judicially on the property is surrendering any right to recover any deficiency from the debtor after a non-judicial foreclosure sale.

Unlike a judicial foreclosure which allows a lender to pursue a deficiency judgment against the debtor, a non-judicial foreclosure limits the lender's recovery against the debtor to the value of the property.

A non-judicial sale does not, however, preclude the lender from foreclosing on other collateral, whether real or personal property, provided the lender has not credit bid (or received in the case of a third party purchase) the full amount of the debt at the foreclosure sale.

CCP § 580b: deficiency protection for purchase-money borrowers

CCP § 580b states: "No deficiency judgment shall lie...after a sale of real property...under a deed of trust...given to the vendor to secure payment of the balance of the purchase price of that real property...." Thus, CCP § 580b precludes a deficiency judgment after judicial or non-judicial foreclosure of a "purchase-money" deed of trust.

A few exceptions to § 580b

A foreclosed out junior purchase-money lienholder who subordinated it's lien to a construction loan may be an exception to § 580b. Bad-faith wastes committed by a debtor may also be an exception. Cornelison v. Kornbluth, 15 Cal. 3d 590 (1975). The 9th Circuit found that wastes committed from a debtor's economic hardship were not committed in bad faith, even though the debtor diverted the hotel funds to other uses. However, in another case where a debtor diverted funds instead of paying property taxes was found liable for bad faith wastes, and the court assessed compensatory and punitive damages against the debtor. Nippon Credit Bank Ltd., Los Angeles Agency v. 1333 North California Boulevard, 86 Cal. App. 4th 486 (2001).

Can borrowers validly waive the One Action Rule and Anti-deficiency rule protections?

The One Action Rule and the anti-deficiency protections are supported by strong public policy, and, as a result, cannot be waived in advance by a borrower. CC § 2953. Thus, contemporaneous waivers (contemporaneous with making the loan) of the California anti-deficiency statutes (CCP §§ 726, and CC 580a, 580b, and 580d) are generally prohibited both by statute on and public policy grounds. Some cases have discussed subsequent waivers of certain anti-deficiency statutes. Although it may be possible for these protections to be waived subsequent to the initial loan - typically in connection with a workout after an event of default, or in connection with a loan modification. The validity of such waivers have not been fully explored by the California courts. Many issues remain unanswered. Note, waivers of the protections of CC § 580b have so far not been permitted.

Can guarantors validly waive One Action Rule and Anti-deficiency rule protections?

These same public policy protections that benefit borrowers do not extend to guarantors. CC § 2856. Earlier case law has not been consistent as to what would constitute an effective guarantor waiver. Some courts allowed general guarantor waivers; others required very specific waivers. The California legislature clarified matters after the judicial decision in Cathay Bank v. Lee, 14 Cal. App. 4th 1533 (1993) by enacting (in 1994 and 1996) a specific statute which sets forth what would qualify as an effective waiver. See CC § 2856(c) and (d). Most guaranties quote this statute verbatim in the waiver sections of the guaranty.

Still, lenders should be remain cautious as California courts can and do find ways to protect guarantors. Bank of Southern California v Dombrow (ordered not published March 14, 1996; former opinion at 39 Cal. App. 4 th 1457 (1995) (court avoided awarding a deficiency judgment after the lender foreclosed on the real property security, stating the guarantor was entitled to a judicial hearing to determine the fair market value of the property as of the date of foreclosure, regardless of the amount bid at the foreclosure sale, and any judgment against the guarantor could not exceed the difference between the total amount of the debt and the greater of the foreclosure sale price or the fair market value of the property determined by the court).

Errant judicial decisions notwithstanding, and with few exceptions, a lender should be able to proceed against the guarantor independent of any action against the borrower, and the guarantor should not be able to hide behind the collateral and require a lender to pursue the collateral first. Still, with the complexities and unique structures presented in modern day real estate secured transactions (e.g., structured finance, CMBS market), there is little doubt the opportunity will continue to exist in California for further judicial interpretation and legislative refinement of California's famous and complex real property secured transaction laws.

California foreclosures can be tricky for lenders, particularly for hotels and mixed collateral.

Foreclosures in California are subject to special statutory and judicially created rules. Lenders are well-advised to develop their strategies with these rules and pitfalls in mind. The learning curve is simply too steep and too expensive.

Guy Maisnik is a partner in JMBM's Real Estate Department and a senior member of JMBM's Global Hospitality Group®-a team of 50 seasoned professionals with more than $60 billion of hotel transactional experience, involving more than 1,000 properties located around the globe. Guy's deep and broad transactional practice includes complex real estate finance and venture capital transactions, including project finance, commercial finance, leveraged leasing and real estate acquisitions. He assists clients with development, leasing and disposition, loan portfolio acquisitions, loan and debt restructure, workouts and real estate exchanges. For more information, please contact Guy Maisnik at 310.201.3588 or mgm@jmbm.com.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $50 billion of hotel transactions and more than 100 hotel mixed-used deals in the last 5 years alone. Who's your hotel lawyer?

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Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $50 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" or "hotel mixed-use" or "condo hotel lawyer" and you will see why.

Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $50 billion of hotel transactional experience, involving more than 1,000 properties located around the globe. In the last 5 years alone, Jim and his team have assisted clients with more than 100 hotel mixed-use projects -- frequently integrated with energizing lifestyle elements.

Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

Contact him at jbutler@jmbm.com or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.

In early November, we warned the readers of the Hotel Law Blog that the multi-year fight over "lost" transient occupancy taxes (TOT) that has been raging between local governmental entities (state, city, and county) and the various online travel companies (OTCs), such as Travelocity, Orbitz, Hotels.com, Priceline.com, and Expedia, was reaching the point where it was going to start impacting hotels financially. Unfortunately, we are there NOW, and things don't look good for the lodging industry!

Two important developments have just occurred recently, which hotel owners and operators need to watch carefully because they will be spreading rapidly.

First, at least one city has amended its TOT ordinance to expressly make hotels liable for the collection and payment of the TOT on the entire amount that a guest ultimately pays an OTC for the use of a guest room.

Second, some cities are amending their TOT ordinances so that it will make it more difficult and expensive for hotels to challenge TOT assessments.

As we explained in the blog post Occupancy tax update on internet hotel booking: More lawsuits against Expedia and online travel companies (OTCs) over "lost" bed taxes -- Why hotels should care about the transient occupancy tax (TOT) battle, billions of dollars of hotel rooms have been sold through the OTCs, and no TOT has been paid on the marked up portion of the room rates which the OTCs keep when they resell the rooms to hotel guests. More than 200 local governments have brought lawsuits against OTCs in an effort to recover this "lost" TOT. Some cities have announced that if they don't win against the OTCs, they will take aggressive action to collect these lost bed taxes from the hotels themselves. On their part, the OTCs have said that if they lose the fight, they may come back against the hotels.

Here's what has taken place since we ran that story on November 1, 2009:

First Bad News: In the City of South San Francisco, hotels will bear the burden of the TOT wars

On November 3, 2009, voters in the City of South San Francisco approved a measure that expressly makes hotels responsible for the collection and payment of the TOT applicable to the entire amount that a guest ultimately pays for the use of a guest room. (The ballot measure also increased the city's TOT rate to 10% and made the TOT applicable to parking charged to guests by hotels.)

How will this impact hotels? Here's an example: Assume that a hotel sells room nights to Expedia (or any other OTC) for $50 per night. Expedia pays the hotel $50 for the room night, plus the applicable 10% TOT of $5, for a total of $55. Assume further that the OTC then sells the room to the guest for $80. Until the City of South San Francisco amended its ordinance, it would have had to try to collect the extra $3 in TOT from Expedia. (As readers of the Hotel Law Blog know, cities all over the country have been trying for years to get that extra TOT from the OTCs.) But because the City of South San Francisco has amended its ordinance, it can now make the hotel pay the entire $8 TOT, which includes the $5 it received from Expedia plus the extra $3 out of its own pocket--unless, of course, the hotel can get Expedia to reimburse the $3 to it. Good luck!!!

On December 4, 2009, the City of South San Francisco sent a letter to all of its hotels explaining how this new TOT wrinkle will work:

"As clarified by the voters, the TOT ordinance requires hotel and motel operators to collect the full TOT rate on the final price paid for a room by or on behalf of the occupant, even when the reservation is made or the room paid for using a third-party internet sales operation (such as Expedia, Hotwire, or Hotels.com). That means that the hotel or motel operator is ultimately responsible to make sure that the third party collects the TOT on the final amount paid by a customer to occupy the room; the [hotel] operator must also obtain the TOT collected by the third party [OTC] and remit it to the City. The hotel operator is liable "for any amount that he or she fails to collect or remit; and must remit to the City the entire amount of tax due." In the event that there is a difference between hat the third party pays the hotel or motel operator to be able to book a room, and what that third party ends up charging the customer, that difference is subject to tax." (Emphasis added.)

By taking this step, the City of South San Francisco doesn't have to engage in a lengthy and complex fight with the OTCs; it simply assesses the hotels for the entire TOT, and leaves it up to the hotels to decide whether to pay it out of their own pockets or seek reimbursement from the OTC.

There is little doubt that governmental entities all over--in California and elsewhere--are going to be attempting similar legislative actions to make hotels responsible for collecting TOT even though the hotels have no idea how much the OTCs ultimately charge for a given room and don't have any ready means to collect it from the guest.

It is interesting to note that once the hotels in South San Francisco received notice of this change, there has been enough of an uproar that the city is now trying to ameliorate the impact of its amended ordinance. On December 8, the city sent a new letter to its hotels, explaining that it "encourages hotel operators to review their contracts and operating agreements with third party internet sites, and make sure those internet sites are collecting and remitting the full 10% TOT on the final price for each room paid by internet customers. The City does not intend to alter its current audit or enforcement, but it does expect full compliance with the clarified terms of the TOT." (Emphasis added.) It appears that this is a sop to the lodging industry and an effort to buy time to sort out the details of how to make sure that the city gets the additional TOT revenue.

Second Bad News: "Pay first" ordinances will make it harder for hotels to fight back

A number of cities in California have levied TOT assessments against the OTCs amounting to tens of millions of dollars. The prevailing assumption until recently was that the OTCs had to pay the amount assessed as a condition to challenging it administratively or in court.

But on November 24, 2009 the California court of Appeal ruled in City of Anaheim v. Superior Court (Priceline.com, Inc.), that Anaheim couldn't require the OTCs to "pay first" in order to challenge the assessment it had levied. The court pointed out, however, that Anaheim could impose a pay first requirement merely by inserting such a provision in its TOT ordinance.

Some cities have already amended their TOT ordinances to insert a pay first obligation (e.g., West Hollywood), and it is expected that other California cities will do the same shortly. It is likely that similar efforts will be made in other jurisdictions throughout the country, depending on applicable state and local tax law considerations.

It is important to note in this regard that imposing a "pay first" obligation in a TOT ordinance will apply to any hotel that challenges a TOT assessment--whether related to an OTC transaction or otherwise--forever in the future. This will make it more difficult and expensive for hotels to challenge TOT assessments.

What's ahead for hotels?

We feel certain that cities everywhere, not just in California, will be taking similar steps to enable them to collect OTC-related TOT in faster and easier ways by inserting hotels into the process. This means that OTCs are almost certainly going to get heavily involved in state and local politics in order to cut their losses and either avoid this extra TOT burden altogether or shift as much of it as possible onto the lodging industry. As we continue to preach, it is imperative that lodging operators establish mechanisms to monitor state and local legislative activities to catch developments of this kind before they become finalized.

Orbitz has sponsored a bill, Senate Bill 2 in California's Sixth Extraordinary Session, to allow OTCs to challenge TOT assessments without having first to pay the amount arguably owing. It is quite possible that similar bills will be introduced in Sacramento, as well as in other states.

All of this makes it very clear that lodging operators are now in the bulls eye of this fight and need to take proactive steps to avoid what could be extraordinary financial liability. For our suggestions what hoteliers can do, go to: Hotel Occupancy Tax Alert: online travel company suits over transient occupancy taxes raise - 5 things every hotel owner and operator needs to know.

Hotel owners and operators need to consult their hotel lawyers, analyze their exposure and get prepared to fight one of the biggest tax threats to face the hotel industry in a long time.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?
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Jim Abrams is a senior member of the JMBM Global Hospitality Group® and the former President and CEO of the California Hotel & Lodging Association. Jim has served the hospitality industry for 40 years and specializes in lodging and hospitality law and in representing and advising trade associations and other non-profit entities. Jim has significant experience in government affairs at the national level, the state level - including the California Legislature and scores of state agencies - and with local governments and agencies. He has authored successful ballot measures and scores of bills for his clients. For more information, contact Jim at jabrams@jmbm.com or 415.398.8080.

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Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

Even if you don't have a hotel in Manhattan, you will want to know about the "Manhattan Hotels ADA Compliance Review Survey" conducted by the U.S. Department of Justice (DOJ). The DOJ's reach is nationwide and other cities are targeted for the same kind of survey and enforcement.

In an interview on the Hotel Law Blog earlier this year, Coming to a Theater District Near You: The DOJ's ADA "Survey," my partner, Marty Orlick, described the sweeping scope of the DOJ's ADA Compliance Review Survey of Manhattan hotels. In that interview, Marty emphasized that hoteliers who receive the questionnaire should be aware that DOJ investigators may have already been to their hotel -- in fact, the DOJ's sub rosa investigation may be why the hotel received the survey in the first place.

In today's interview on the same topic, Marty explains what hotel owners and managers should do when they receive the DOJ's ADA Compliance Review questionnaire in the mail. (First: take it very, very seriously.)

What to do when you receive an ADA Compliance Questionnaire from the U.S. Department of Justice

Jim: So, I am a hotel owner or manager and I get an envelope from the DOJ with the ADA Compliance Review questionnaire inside. What do I do?

Marty: First, take it very seriously. Make sure the questionnaire gets to the right person as quickly as possible. That person should call an experienced ADA lawyer to walk them through this potential minefield of questions. The DOJ is surveying both hotel owners and managers, and the last thing you want is for this document to be sitting in someone's inbox while the person tries to figure out what it means and who should be dealing with it. Every question on the form has been carefully crafted to elicit important information about ADA compliance. The survey is specifically focused on identifying architectural access barriers and, equally important, your hotel's ADA policies and procedures. It is very detailed. Completing the questionnaire will take time and careful thought.

Don't complete it yourself. Have a lawyer review it and advise you, first.

Jim: Why can't a knowledgeable hotel professional answer the questionnaire? Why should an lawyer get involved?

Marty: Each question is designed to obtain precise information about complex, technical compliance with the ADA guidelines. Each answer may create liability. Your answers can also help you to avoid exposure. The questions must be thoroughly understood from a "Standard of Compliance" as defined by law. The right answer to a misunderstood question can cause serious problems that could cost you dearly. For example, the age of the property and the year that construction or "alterations" were performed can significantly impact the answers to questions.

Many hoteliers have spent time and money making their properties accessible to the disabled, and they may believe genuinely -- but erroneously -- that their properties are in compliance with the ADA, when in fact they still have barriers as defined under Title III of the ADA

Jim: Give us an example of a question that could cause a hotelier problems.

Marty: Questions about guest rooms have to be answered with great care. The questionnaire will likely ask for a description of all room categories in the hotel, and the number of accessible rooms in each distinct room class, as hotels are generally required to provide accessible rooms in each class. The thing you have to ask is: "What is a category or room class"? If this part of the questionnaire is completed by listing each marketing or price-point category, as opposed to actual different room types, you are going to have a problem. You should consider identifying guest rooms according to functional categories based on the types of amenities they offer. Your hotel may have many marketing-driven categories for rooms, but in actuality your rooms may simply be singles, doubles, queens, kings and suites.

In other words, if your "suite", for marketing purposes, is a room that has an extra lamp, you may describe it separately for marketing purposes but you may not want to list it in a separate category on the questionnaire. If rooms cost an additional five dollars per floor, but there is no difference between the rooms on the 17th and 18th floors, they should not be listed in separate categories.

Jim: That could be tricky. Is there a little leeway in answering this questionnaire?

Marty: No, not much. You must be absolutely truthful! Remember, the questionnaire is submitted under penalty of perjury. Besides, it is likely that a DOJ investigator has already been to your hotel and knows the types of rooms you have.

Jim: What else should the owner or manager do, after he or she gives you a call?

Marty: The ADA Compliance Review specifically focuses on the hotel's written accessibility policies and procedures. So, the ADA lawyer should ask you to start pulling together documentation. We need to review the written ADA policies and procedures that are provided to staff to see what they look like. Policies and procedure manuals should detail all the devices installed and all the processes the hotel has established for serving disabled guests.

Jim: Give us some examples of what those documents would include.

Marty: Your written policies and procedures manuals should include how to easily identify which ADA compliant rooms are available when customers call for reservations. It should include procedures for hooking up telephone "TDD" devices or smoke alarms for the hearing or seeing impaired, or any other specialized equipment needed for specific disabilities including repositioning furniture and guest amenities.

It should also include procedures for the evacuation of disabled guests in event of emergency, and how to deal properly with disabled guests who have service animals.

Jim: That's a long list -- is that it?

Marty: No, not by a long shot. Plus, you need to show how your reservations, sales and operating staff are trained in all these procedures.

Jim: So the first thing a hotel owner or manager does is call you and send you the questionnaire. Then you direct them to collect this documentation. Now what happens?

Marty: Next, we will set up a time for a professional independent access consultant to review your property for access barriers and we will respond to that part of the questionnaire. As I mentioned in the last interview, the DOJ has probably already been through your property, so you want to respond to this part very carefully. After you turn in the survey, the DOJ will come in with their team and perform a more formal site inspection.

Jim: So, what happens after the DOJ performs their inspection?

Marty: The DOJ's people will determine what action needs to be taken. At that point, my job as your ADA lawyer is to advise you as to what is required by law and what is not, and to negotiate a reasonable resolution, taking into account the DOJ's concerns and the resources you have available. We will most likely come up with a voluntary compliance agreement that everyone can live with. The goal here is to bring your hotel into compliance and provide accessibility to your disabled guests in a way that works for everyone.

Jim: With your experience in defending more than 300 ADA cases, how would you say that these ADA sweeps by the DOJ differ from the other ADA lawsuits you defend?

Marty: The issues are not much different. However, the DOJ is more serious about meaningful change than some ADA plaintiffs I have dealt with in the past. The DOJ is typically more concerned about compliance.

Jim: Thanks, Marty.

Other articles on ADA

If you found this article of interest, you may want to check out some of the other articles on this topic on www.HotelLawBlog.com which can all be found under the "HOTEL LAW TOPIC" of "ADA" at the top of the home page (or by clicking here). The following are titles and links to some of those articles:

• Hospitality Lawyers: ADA Sweeps by U.S. Department of Justice -- Coming to a theater district or Hotel near you soon? How to get ready before it's too late.

• Hotel & Timeshare Lawyer: Does the timeshare exit strategy or repositioning your property create ADA problems?
• Hotel Lawyers: Americans with Disabilities Act -- How recent ADA developments can affect your hotel. Are you ready for a class action ADA lawsuit because of your hotel website?

• Hospitality Lawyer with urgent ADA warning: You won't believe what they want to do with ADA now
• Hospitality Lawyers: Defending ADA lawsuits. How your hotel website can make you a target for ADA lawsuits
• Hotel Lawyer: How hotel swimming pools may spawn ADA lawsuits and what to do about it.
• Hospitality Lawyer -- Who's crying "Woof"? What you must know about the ADA requirements for disabled guests and their service animals
• Hospitality Lawyer: ADA Update -- Federal Courts Denying Plaintiffs' Attorneys' Fees

________________________

Martin H. Orlick is a senior member of the law firm's Global Hospitality Group® and a partner in the Firm's Real Estate Department. He has helped clients with more than 300 ADA cases for hotels and other businesses. He is also a member of the American College of Real Estate Lawyers (ACREL). For more information about ADA compliance and defense, contact Marty at 415.984.9667 or morlick@jmbm.com.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]> tag:hotellaw.jmbm.com,2009://1.545 2009-11-04T05:04:00Z 2009-11-10T02:59:34Z

Hotel Lawyer: The transient occupancy tax litigation by cities and local governments continues to mushroom. On November 3, Florida became the first State to file suit against Expedia, Orbitz and other online travel companies (OTCs) for lost bed taxes. Although October was a big month in the OTC battles, November may be even bigger. Today, we are going to look at the latest litigation filings and what they mean.

Jim Butler http://www.jmbm.com By Jim Butler and Jim Abrams | JMBM's Global Hospitality Group®
Hotel Lawyers | Authors of www.HotelLawBlog.com
3 November 2009

Hotel Lawyer: The transient occupancy tax litigation by cities and local governments continues to mushroom.

On November 3, Florida filed one of the first lawsuits against Expedia and Orbitz for lost bed taxes, but using the Florida Deceptive and Unfair Trade Practices Act.

Although October was a big month in the OTC battles, November may be even bigger. Today, we are going to look at the latest litigation filings and what they mean.

]]> Florida tax officials have estimated the underpaid bed taxes in Florida at $146 million since 2000.

Latest development in the local government litigation against the OTCs

On October 31, 2009, San Antonio won a $20 million verdict against major travel companies. Earlier in the month, the Georgia Supreme Court upheld a lower court decision against the OTCs for the City of Columbus. And just last week, 5 Florida counties announced they would sue Expedia, Orbitz, Priceline and Travelocity over shortchanged bed taxes. (if you missed this, see " Hotel Occupancy Tax Alert: online travel company suits over transient occupancy taxes raise - 5 things every hotel owner and operator needs to know " at www.HotelLawBlog.com or click the link at the end of this article.)

But November promises to be another important month. On November 3, 2009, Florida Attorney General Bill McCollum announced what is believed to be the first such TOT lawsuit filed by a state against the online travel companies. Some Florida tax officials have estimated the underpaid bed taxes in Florida at $146 million since 2000.

As the State of Florida now joins more than 200 municipalities and other governments suing Expedia and the other online travel companies, the high stakes got even higher. What does this all mean for hotel owners and operators?

. . .either way, hotels are likely to be targeted for unpaid bed taxes, by either frustrated local governments who were unsuccessful against TOTs, or by the TOTs who lost to local governments.

How many hundreds of millions of taxes are at issue?

No one knows how much lost tax revenue is at issue. But just a few days ago, looking at present awards and assessments already made, we saw more than $300 million at stake.

If the recent filings by the State of Florida and 5 more counties in Florida indicate a continuing trend, this number can soar even higher.

Why is the current occupancy tax litigation so important for hotel owners and operators?

The current occupancy tax battles are generally between Expedia and the other online travel companies pitched against various state, county and local governments. If matters went no further, this litigation might be a matter of idle curiosity for hotel owners and operators. But it does not look like it will stop there.

James O. Abrams is a senior member of the JMBM Global Hospitality Group® and the former President and CEO of the California Hotel & Lodging Association. He has been watching the TOT problem develop over the past few years, starting with the lawsuit which Los Angeles filed in 2004 against all of the OTCs.

As the State of Florida now joins more than 200 municipalities and other governments suing Expedia and the other online travel companies, the high stakes got even higher.

According to Abrams, before the City of Los Angeles filed suit, it amended its TOT ordinance to allow it to collect TOT from the OTCs. Later in 2004, the city sent all of the hotels a letter which said, in so many words, that if the city cannot collect the additional TOT from the online travel companies, it was going to collect it from the hotels.

Recently, the cities of Anaheim and San Francisco have taken the same position and told local lodging operators informally that they intend to come after the hotels for the additional TOT if they ultimately lose to the online travel companies in court. This seems to be part of a national trend.

On the flip side, Abrams says, "I am convinced that if the local governmental entities ultimately win, the online travel companies will do whatever they can to recoup the extra TOT from the hotels."

So either way, hotels are likely to be targeted for unpaid bed taxes, by either frustrated local governments who were unsuccessful against TOTs, or by the TOTs who lost to local governments.

Detailed background and 5 things every hotel owner and operator needs to know

We will keep you posted on new developments we see. If you learn of anything new, please let us know and we will share material information with our readers.

If you would like more detail on this issue, please click "Hotel Occupancy Tax Alert: online travel company suits over transient occupancy taxes raise - 5 things every hotel owner and operator needs to know."

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?
_____________

Jim Abrams is a senior member of the JMBM Global Hospitality Group® and the former President and CEO of the California Hotel & Lodging Association. Jim has served the hospitality industry for 40 years and specializes in lodging and hospitality law and in representing and advising trade associations and other non-profit entities. Jim has significant experience in government affairs at the national level, the state level - including the California Legislature and scores of state agencies - and with local governments and agencies. He has authored successful ballot measures and scores of bills for his clients. For more information, contact Jim at jabrams@jmbm.com or 415.398.8080.

_____________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]> tag:hotellaw.jmbm.com,2009://1.543 2009-11-02T01:00:00Z 2009-11-02T22:42:47Z

How Expedia, Orbitz, Travelocity and other online travel companies (OTCs) create huge headaches for owners and operators on their suits over hotel occupancy taxes. Billions of dollars of hotel rooms have been sold through the online travel companies or OTCs. Generally speaking, no transient occupancy taxes (TOT) or bed taxes, have been paid on the portion of these sales kept by the OTCs when they resell the rooms to hotel guests. The exposure on these unpaid hotel bed taxes easily exceeds $100 million -- before interest and penalties. Until now, most of the press has focused on the lawsuits brought by more than 200 local governments against Expedia, Orbitz, Travelocity and the other third party internet hotel booking companies. As many of these lawsuits now reach final resolution, some cities have announced that if they don't win against the OTCs, they will take aggressive action to collect these lost bed taxes from the hotels themselves. And OTCs have said that if they lose, they may come back against the hotels. Who will be the biggest loser in this high-stakes poker game, and how did we get here? If you think you already know that, then skip to end of this article to see if you also have a firm grip on the "5 things every hotel owner and operator needs to know."

Jim Butler http://www.jmbm.com By Jim Butler and Jim Abrams | JMBM's Global Hospitality Group®
Hotel Lawyers | Authors of www.HotelLawBlog.com
1 November 2009

How Expedia, Orbitz, Travelocity and other online travel companies (OTCs) create huge headaches for owners and operators on their suits over hotel occupancy taxes.

Billions of dollars of hotel rooms have been sold through the online travel companies or OTCs. Generally speaking, no transient occupancy taxes (TOT) or bed taxes, have been paid on the portion of these sales kept by the OTCs when they resell the rooms to hotel guests. The exposure on these unpaid hotel bed taxes easily exceeds $100 million -- before interest and penalties.

Until now, most of the press has focused on the lawsuits brought by more than 200 local governments against Expedia, Orbitz, Travelocity and the other third party internet hotel booking companies. As many of these lawsuits now reach final resolution, some cities have announced that if they don't win against the OTCs, they will take aggressive action to collect these lost bed taxes from the hotels themselves. And OTCs have said that if they lose, they may come back against the hotels.

Who will be the biggest loser in this high-stakes poker game, and how did we get here? If you think you already know that, then skip to end of this article to see if you also have a firm grip on the "5 things every hotel owner and operator needs to know."

]]> What is the TOT problem all about?

On October 31, 2009, the City of San Antonio won a $20.6 million verdict against 11 online travel companies

Problem starts with the merchant model

For the past decade, hotels have used a "merchant-model" to sell unused room inventory at discounted rates to online travel companies which, in turn, mark up the cost of the rooms and resell them to individual consumers. The mark-up typically consists of items characterized by the OTC as "service fees," "taxes," and/or "tax recovery charges."

It is important to understand that the online travel company, not the hotel, enters into a contractual relationship with each paying consumer.

The issue that local governments have with the OTC scenario, is that the OTC pays bed taxes on the discounted rate purchased from hotels -- not on the rate the OTC ultimately charges the consumer for the room. Assuming a 10% TOT, a guest that pays $100 to the hotel directly, would contribute a $10 bed tax to the local government's coffers. But if the OTC buys the room at discount from the hotel for $70, then sells it to the guest for $100, the local government gets only $7.00, and the $3.00 difference is "lost". Multiply this "lost" TOT by thousands of rooms over thousands of stays -- that is what local governments are seeking to recover from the OTCS, (and some are asking for punitive damages, as well.)

Impact on local governments is big

By our rough calculations, local governments have arguably "lost" more than $100 million in transient occupancy taxes on these internet channel sales -- perhaps several hundred million.

The hotel tax problem first emerges with OTCs

As early as 2000, SEC filings by OTCs began to acknowledge the discrepancy that soon led to the issue now at hand (and explained below). Hotels began flocking to OTCs when people stopped traveling after 9/11. Online booking of hotel rooms soared and by 2002 many cities and local governments began to focus on the problem.

The City of Los Angeles was one of the first to file suit against the OTCs in late 2004, and was soon joined by San Diego, San Francisco and Anaheim. But this is not just a California problem. It is national.

One source recently estimated that more than 200 local governments have filed suits or levied assessments. They range from Chicago, Atlanta, Orlando and Louisville to tourist destinations like Branson, Missouri and Charleston, South Carolina. San Antonio filed suit and was joined by 176 cities. But a lot of counties have also joined the action, including Nassau County in New York; Broward, Miami-Dade and Orange Counties in Florida and Pitt County in North Carolina.

And more local governments get on the band wagon every day. On October 25, 2009, The Bradenton Herald announced that 5 more Florida counties were expected to file lawsuits against the OTCs within a week, seeking to recoup back bed taxes.

Mixed results on cases so far -- but the stakes are already huge

To date, the record has been mixed. The online travel companies won a few early victories such as dismissal of suits filed by Louisville and Lexington, Kentucky. They also won a favorable decision in the fourth circuit dismissing a class action by Pitt County, North Carolina against OTCs.

But the online travel companies have also lost some big cases, either in court litigation or in tax administrative proceedings. For example, earlier this year, the City of Anaheim assessed more than $21 million against eleven online travel companies, including Expedia, Hotel.com, Hotwire, Travelocity, Orbitz, and Priceline, among others. San Francisco assessed more than $30 million against various online travel companies.

On October 31, 2009, the City of San Antonio won a $20.6 million verdict against 11 online travel companies. In this case, the OTCs escaped being hit with an additional $40 million in punitive damages.

Also in October 2009, the Georgia Supreme Court ruled 6-1 for the City of Columbus that OTCs must pay TOT on the rate paid by the retail customer, not the amount paid to the hotel by the OTCs.

And earlier this year in June, a Washington State Court awarded $184 million against Expedia -- the largest consumer class action judgment in the State's history. This was actually a different kind of case finding that the way Expedia described its charges was a fraudulent scheme that deceived consumers and made Expedia liable for everything over the amount paid by Expedia to the hotels.

Unless reversed, the present awards and assessments in just a few cases look to exceed $300 million. If one looks at all of the hotel rooms sold through the OTCs, it is obvious that there is a tremendous amount of money at stake.

Why hotels should be concerned

Some OTCs are presently refusing to accept responsibility for the bed taxes on a prospective basis. For now, the OTCs are saying "take-it-or-leave-it."

Someone will go after the hotels.

Why should hotels be concerned about the outcome of the dispute between cities and OTCs? There are hundreds of millions of dollars at stake. Whether local governments prevail or the OTCs prevail, we can be pretty sure whichever is the loser will go after hotels.

If courts determine that the cities cannot collect the lost TOT revenue from the OTCs, there is little doubt that the cities will come after the hotels for this money. For example, the City of Los Angeles amended its TOT ordinance in 2004 to allow it to collect this lost revenue from its hotels if it cannot collect it from the OTCs. Similarly, Anaheim has said that it will ultimately seek to hold its hotels liable if the OTCs win, and San Francisco has made similar indications.

If, on the other hand, the OTCs are ultimately held liable to the cities and counties for the TOT revenue that is in dispute, it is anticipated that the OTCs will do everything they can to seek indemnification or reimbursement from the hotels.

Simply put: When this kind of money is at stake, no one is going to give up easily.

Are the hotels really exposed to liability?

Whether a particular hotel has exposure will depend, of course, on who is making the claim and the specific circumstances involved.

If the cities lose against the relevant OTCs and then pursue claims against the hotel, the hotel's liability will hinge on the specific wording of the applicable tax law, entitlements and contracts as well as the legal theories asserted by the local governments. But the hotels would have a number of due process and other legal defenses that will have great merit in many situations.

Among other things, and while this involves uncharted legal waters, hotels should certainly argue that by changing its TOT mechanism -- either by formally amending its ordinance as Los Angeles did or by simply by administrative fiat -- to hold hotels liable for the TOT on the marked-up prices charged to guests by the OTCs, a local governmental entity has either created a new tax or increased an existing tax, thereby requiring voter approval. To our knowledge, no local government in California has obtained this voter approval.

On the other hand, where the OTCs lose to the local governments and the OTCs seek reimbursement from the hotels, a hotel's exposure to the OTCs will depend, in large part, on the terms of the transient occupancy tax provision and the specific language contained in the agreement between each hotel and each online travel company.

And that is also why it is so important now that lodging operators focus on this issue as they negotiate their new contracts with the OTCs -- something that is underway right now. Liability and indemnification for the exposure discussed in this article should be covered in these agreements. But beware. Some OTCs are presently refusing to accept responsibility for the bed taxes on a prospective basis. For now, the OTCs are saying "take-it-or-leave-it."

5 things every hotel owner and operator needs to know

Why should hotels be concerned about the outcome of a dispute between cities and OTCs? There are hundreds of millions of dollars at stake. Whether local governments prevail or the OTCs prevail, we can be pretty shure whichever is the loser will go after hotels

Given the enormous potential liability hotels are facing in this dispute, Jim Abrams and the hotel lawyers of JMBM's Global Hospitality Group® formed a task force working on these issues. We are working with hotels to formulate specific approaches and responses.

5 things every hotel owner and operator needs to know

1. Review and analyze your applicable TOT law
2. Oppose any effort by the local government to amend the TOT law to make you and your hotel liable for the TOT on the gross amount charged by the OTC to your hotel guest (i.e. the retail rate)
3. Watch all communications from local tax authorities to avoid inadvertent agreement or acknowledgement that you are liable for TOT on the incremental amounts received only the OTCs.
4. Review agreements with each OTC to sort out potential liability for any TOT (or related obligation) due to incremental amounts above the wholesale rate your hotel actually receives from the OTC
5. Don't make any new agreement with an OTC before you understand all the ramifications of new provisions

In other words, each hotel needs to quickly analyze its specific situation and exposure to relevant taxing authorities and OTCs. Prudent hotel owners and operators will consult counsel now and be prepared. This one of the biggest tax threats to face the hotel industry in a long time. A lot is at stake here.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?
_____________

Jim Abrams is a senior member of the JMBM Global Hospitality Group® and the former President and CEO of the California Hotel & Lodging Association. Jim has served the hospitality industry for 40 years and specializes in lodging and hospitality law and in representing and advising trade associations and other non-profit entities. Jim has significant experience in government affairs at the national level, the state level - including the California Legislature and scores of state agencies - and with local governments and agencies. He has authored successful ballot measures and scores of bills for his clients. For more information, contact Jim at jabrams@jmbm.com or 415.398.8080.

_____________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]> tag:hotellaw.jmbm.com,2009://1.515 2009-10-02T01:01:21Z 2009-10-02T21:54:01Z

Our national hotel practice focuses on being the legal and business advisors for lenders, borrowers and investors. With the hotel industry suffering a record-breaking collapse of revenues and no immediate relief in sight, everyone is starting to examine available options. Recently, Chris Crowell of Hotel and Motel Management researched and published a helpful article on maximizing the value of a distressed hotel (http://www.hotelworldnetwork.com/trends/how-maximize-value-your-distressed-property). If you missed it, you should take a look. Crowell writes: "It's far from an ideal situation, but it's a reality of the industry today--many hotel owners will deal with a distressed property. After accepting this reality, borrowers must form a specific plan to maximize property value, minimize personal financial loss and move on. Depending on the particular loan situation, there are a variety of options borrowers need to consider." The article describes three of the options that are available to owners: workouts, defaults and bankruptcy.

Jim Butler http://www.jmbm.com By Jim Butler and the Global Hospitality Group®
Hotel Lawyers | Authors of www.HotelLawBlog.com
01 October 2009

This is one of many articles on the subject of "troubled hotel loans - workouts, bankruptcies & receiverships" in the rich library at www.HotelLawBlog.com.

Our national hotel practice focuses on being the legal and business advisors for lenders, borrowers and investors. With the hotel industry suffering a record-breaking collapse of revenues and no immediate relief in sight, everyone is starting to examine available options.

]]> How to maximize value of your distressed hotel

Recently, Chris Crowell of Hotel and Motel Management researched and published a helpful article on maximizing the value of a distressed hotel. If you missed it, you should take a look.

Crowell writes: "It's far from an ideal situation, but it's a reality of the industry today--many hotel owners will deal with a distressed property. After accepting this reality, borrowers must form a specific plan to maximize property value, minimize personal financial loss and move on.

Depending on the particular loan situation, there are a variety of options borrowers need to consider." The article describes three of the options that are available to owners: workouts, defaults and bankruptcy.

Troubled hotel investment tools and resources

Our team has been through all the major down cycles since the 1980s. We have represented clients in more than 1,000 workouts, receiverships and bankruptcies.

We have developed win-win solutions for lenders and borrowers that come from our deep understanding of what lenders and borrowers really want. Some of these solutions creative approaches such as
JMBM's SAVE™ program and our Enhanced Note Sale™.

Hotel lenders, borrowers and investors tell us that their eyes are opened to new possibilities by our hotel workout tools such as Butler's Matrix and our Key to Hotel Mortgage Loan Defaults.

They also appreciate our pragmatic guidance on issues such as

• The Hotel Owner's and Hotel Lender's Dilemma: Sell now or sell later?
• Why closing or mothballing a hotel can be a very bad idea
• Some practical alternatives to hotel closings - turning around operating results.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships, bankruptcies and workouts, including many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM's SAVE™ program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]> tag:hotellaw.jmbm.com,2009://1.477 2009-10-01T01:00:30Z 2009-10-01T22:48:43Z

Worried about ADA claims? If not, you should be! There is a flood of private claims driven by evangelistic "true believers" and blackmail artists. The real tsunami is still coming. The government itself is initiating nationwide enforcement "sweeps" against hotels, and the California Supreme Court is making it more profitable and easier than ever to file ADA claims. What can YOU do? Finally, there is something you can do to shield yourself against this ADA litigation threat in California. The CASp program is cost-effective and invaluable protection. Don't wait until it is too late!

Jim Butler http://www.jmbm.com By Jim Butler and the Global Hospitality Group®
Hotel Lawyers | Authors of www.HotelLawBlog.com
30 September 2009

Americans with Disabilities (ADA) update. Why you need to take advantage of the "Certified Access Specialists program" (CASp)! Much needed new protection for property owners against ADA litigation even as California Supreme Court decision opens door to more ADA claims

ADA Lawyer update. Worried about ADA claims? If not, you should be! There is a flood of private claims driven by evangelistic "true believers" and blackmail artists. The real tsunami is still coming. The government itself is initiating nationwide enforcement "sweeps" against hotels, and the California Supreme Court is making it more profitable and easier than ever to file ADA claims.

What can YOU do? Finally, there is something you can do to shield yourself against this ADA litigation threat in California. The CASp program is cost-effective and invaluable protection. Don't wait until it is too late!

]]> But how do I deal with ADA issues in times of financial distress like these?

You simply can't afford not to do it! Even in these days of desperate expense slashing, owners and lenders cannot afford to overlook critical ADA compliance for hotels, restaurants, and other public places. ADA violations make bad headlines and are far costlier to defend or "fix" than to prevent. (See our rich library of ADA articles at http://hotellaw.jmbm.com/ada/).

The government focus on enforcing the ADA standards is symbolized by the recent, high-profile U.S. Department of Justice's ADA "sweeps" of many Manhattan hotels. More sweeps are expected nationwide in the coming months. ADA Sweeps by U.S. Department of Justice . . . How to get ready before it's too late.

More importantly, the cost of preventing a potential disaster is so small, the process is so easy, the exposure so great, and the benefits so significant, that you simply cannot afford to overlook it. It should command one of the highest budget priorities on your list.

WARNING TO OPERATORS: It may be gross negligence to miss this protection.

ADA Lawyer Update: California Supreme Court decision likely to fuel increased ADA litigation, but the Certified Access Specialists program (CASp) offers some protection

A step backward

In a decision that is likely to lead to more lawsuits filed under the Americans with Disabilities Act (ADA) and California's disabled access laws, the California Supreme Court unanimously ruled on June 12, 2009 that plaintiffs do not have to prove "intentional discrimination" to recover the $4,000 minimum statutory damages provided, per occurrence, under California's Unruh Civil Rights Act.

Background

The case, Munson v. Del Taco, Inc., stemmed from two seemingly inconsistent rulings in California on whether an ADA plaintiff must plead and prove "intentional discrimination" to recover the $4,000 minimum statutory damages under the Unruh Act, or -- without such pleading and proof -- they could recover only $1,000, under California's Disabled Person Act (DPA). While these figures don't sound too alarming, remember that many plaintiffs allege numerous occurrences of discrimination at one property, and claim damages for each occurrence.

The federal ADA prohibits businesses from denying disabled individuals equal access to any public facilities. Similarly, California's Unruh Act and DPA bar public businesses from discrimination based on disability, (among other classifications). Here's the difference: while the Unruh Act allows plaintiffs to collect actual damages (a minimum of $4,000 in statutory damages without sustaining any physical injury), the DPA allows only $1,000 minimum statutory damages per occurrence, and the ADA does not afford any monetary amount to private plaintiffs.

In 2004, The Ninth Circuit Court of Appeals in Lentini v California Center for the Arts ruled that ADA violations, whether or not they involved intentional discrimination, would qualify for damages under the Unruh Act. However, the 2006 California state appellate decision, Gunther v. Lin, asserted that the Lentini decision was incorrectly decided and that ADA plaintiffs must plead and prove intentional discrimination in order to recover the $4,000 minimum statutory damages for each and every offense under the Unruh Act. In light of the conflict between the state and federal courts, the Ninth Circuit Court of Appeals petitioned the California Supreme Court to interpret the standard for imposing Unruh Act minimum statutory damages. Munson v. Del Taco, Inc. resolves the inconsistent rulings of Lentini and Gunther by concluding that Lentini's interpretation was right--that a plaintiff "need not prove intentional discrimination in order to obtain damages." While the decision provides clarity, it could be troublesome for some California businesses, including hotel owners and operators.

Now, the good news

If there is a silver lining in the California Supreme Court's decision, it is that recent legislative changes under California SB1608, now part of California's Civil Code, were designed to curb abusive ADA litigation. Under SB1608, pure "testers" cannot recover damages simply because they identified technical access barriers that had no genuine impact on their full enjoyment of a business, (such as a hotel). The new law also creates a procedure for business owners to "certify" that their facilities meet state and federal accessibility standards.

The Certified Access Specialists program (CASp) certifies State of California experts in the field of ADA compliance and can offer certain litigation safeguards. Business owners that have initiated CASp certification have the option to stay or stop all ADA litigation and proceed to mediation. The primary benefit of staying litigation is to avoid expensive discovery and other proceedings which drive up legal fees. (This process generally has been in effect for ADA cases in the Northern and Southern District federal courts for years, and it is now available in other state and federal California courts.) To avail oneself of this stay, a hotel owner must file a motion to stay within 30 days of being served with the summons and complaint. An Early Evaluation Conference is to be set within 50 days from filing the request.

Under the Civil Code, a plaintiff can only recover damages against a CASp-certified property for violations actually encountered or violations which deterred the plaintiff from visiting the business on a particular occasion. Reasonable settlement offers by business owners, if rejected, are to be considered in determining any attorneys fees to be awarded the plaintiff.

Participating in the CASp program does not solve all problems with abusive ADA litigation but it is an important new step in that direction. As a practical matter, it is unlikely that plaintiffs or their attorneys will commence ADA litigation against a business knowing it is certified by the State of California as being compliant.

What to do now

Our ADA attorneys have been actively involved in developing the CASp program. As part of our commitment to helping our hospitality clients avoid the pitfalls of ADA litigation, we can advise you as to how your California properties can benefit from CASp and help guide you through the CASp certification process.

Hotel lawyers with JMBM's Global Hospitality Group®, including Marty Orlick and Jim Abrams, have significant experience in setting up ADA compliance programs designed to minimize potential problems on new construction, rehab, and in the repositioning and sale of properties. Our team has also defended more than 300 hundred ADA lawsuits, many of them involving hotels, restaurants and other hospitality facilities. For any legal issue concerning your hospitality business, you can call on me and I will put you in touch with the right expert on our team.

Other articles on ADA

If you found this article of interest, you may want to check out some of the other articles on this topic on www.HotelLawBlog.com which can all be found under the "HOTEL LAW TOPIC" of "ADA" at the top of the home page (or by clicking here). The following are titles and links to some of those articles:

• Hospitality Lawyers: ADA Sweeps by U.S. Department of Justice -- Coming to a theater district or Hotel near you soon? How to get ready before it's too late.

• Hotel Lawyers: Americans with Disabilities Act -- How recent ADA developments can affect your hotel. Are you ready for a class action ADA lawsuit because of your hotel website?

• Hospitality Lawyer with urgent ADA warning: You won't believe what they want to do with ADA now
• Hospitality Lawyers: Defending ADA lawsuits. How your hotel website can make you a target for ADA lawsuits
• Hotel Lawyer: How hotel swimming pools may spawn ADA lawsuits and what to do about it.
• Hospitality Lawyer -- Who's crying "Woof"? What you must know about the ADA requirements for disabled guests and their service animals
• Hospitality Lawyer -- Landmark ADA case could provide relief for California hotels.
• Hospitality Lawyer: ADA Update -- Federal Courts Denying Plaintiffs' Attorneys' Fees
• Hospitality Lawyer: Big ADA Changes Coming to Hotels
• Hotel & Timeshare Lawyer: Does the timeshare exit strategy or repositioning your property create ADA problems?

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]> tag:hotellaw.jmbm.com,2009://1.512 2009-09-29T06:08:54Z 2009-10-01T02:23:17Z

Hotel Lawyers' insights from The Lodging Conference at the Arizona Biltmore. As our Global Hospitality Group® members compared notes from last week's Phoenix Lodging Conference, we had some observations we wanted to share. Congratulations to Morris Lasky and Harvey Javer for another great event. Here is our take on what happened in Phoenix . . .

Jim Butler http://www.jmbm.com By Jim Butler and the Global Hospitality Group®
Hospitality Lawyers | Authors of www.HotelLawBlog.com
28 September 2009

Hotel Lawyers' insights from The Lodging Conference at the Arizona Biltmore. As our Global Hospitality Group® members compared notes from last week's Phoenix Lodging Conference, we had some observations we wanted to share. Congratulations to Morris Lasky and Harry Javer for another great event.

Here is our take on what happened in Phoenix . . .

]]> The Lodging Conference 2009, Phoenix, Arizona

This conference has been one of my favorites for many years. The Arizona Biltmore is a beautiful facility. The weather is usually fantastic, and the informal atmosphere promotes a relaxed environment for doing business.

The program did not disappoint in any of these areas in 2009. There were about 1,000 participants in attendance -- a few less than last year and perhaps fewer lenders. But the major players were there and it was easier to talk with people with a slightly smaller crowd.

The hotel industry mood

At one level, the mood of the conference was more optimistic than one might anticipate from the current state of the industry and its prospects. There were reports of transactions for smaller hotel properties and notes -- particularly at the $10 million-and-under level.

While hotel brokers say that transaction volume is down a stunning 97% from last year, in just the last 30 days, many lenders have issued a flood of requests for Broker Opinions of Value or BOVs. The brokers are hoping that lenders' rush to understand collateral value means that lenders are preparing to take action, whether that is selling notes or REO.

Liquidity

Liquidity is still a dominant problem. But it seems that the public stock markets may be opening for IPOs, like Hyatt's, and David Loeb or RW Baird thinks that by this time next year there may be 3 or 4 lodging IPOs providing fresh equity capital to the industry. Some even claim to see trickles of new debt, but any debt available is underwritten on "reset values" based on current NOI and cap rates, with 50-60% loan to value and roughly 1.5 times debt service coverage from available cash (generally discounted to reflect further market adjustments).

In other words, this debt (where you can find it) won't help anyone invested at 2005-2007 prices.

The elephant in the living room is still there

The real problem that the optimists want to ignore (like the big white elephant sitting in the living room) is that hotel industry NOI continues to fall. Falling NOI will not recover for a while, and when it does, it will take considerable time to get back to former levels. In the meantime, more and more hotels are unable to meet debt service, and many increasingly cannot pay operating expenses like payroll and utilities.

So what?

While we are waiting for things to get better, somebody is going to have to do something. Who is going to meet the shortfall in payroll and utility bills? And while the brands have eased their strict enforcement of brand standards for many situations this past year, this cannot continue indefinitely. Sooner or later, additional investment will have to be made in the properties to maintain their competitive position with other properties being bought at deep discounts and upgraded to take advantage of the situation.

When does hotel industry NOI recover?

I thought one of the most thought-provoking (and disturbing) slides I saw at the conference came from Mark Woodworth, President of PKF Hospitality Research. Here is the slide and why it looks so important to me.

Note that NOI is projected to have dropped about 4% for 2008, 39.1% for 2009 and 10% for 2010, before it hopefully starts growing at about 14-15% in 2011, 2012 and 2013. (By the way, the data Mark used is only one of the likely scenarios predicted by Moody's with something like a 53% likelihood, and all of the other scenarios are more negative. )

This decreasing NOI is needed to pay debt service and bills. It is the same income that most investors are going to scrutinize and apply a cap rate to -- a cap rate that is at least 200 basis points higher than it would have been in 2007, and maybe more. So income and values will continue their downward path for 2009 and into 2010.

The problem of percentage improvements from a new reset base level

Do the math:

Although 2008 was not a great year for the hospitality industry (after the Lehman bankruptcy), let's use 2008 NOI as the starting point.

Then, apply the PKF projections for NOI to decrease in 2009 by 39.1% and then by 10% in 2010.

It takes 4 years of these compounding NOI increases -- until 2015 -- before you get back to the 2008 starting point. This is using the NOI increases projected by Mark Woodworth of 14% in 2011, and 15% in each year thereafter.

Some people think that we are likely to have another recession by 2013 or 2014, before we get to the recovery point. And remember, there is almost a 50% chance that the economic assumptions underlying the projections will turn out to be worse than those used for the calculations.

What does this mean for the hotel industry?

Unfortunately, the data keeps confirming continued declines in hotel income and values for a long time, with a very slow recovery. See the detailed discussion at The Hotel Owner's and Hotel Lender's Dilemma: Sell now or sell later? . If you aren't prepared for this scenario, then get out now before it gets worse.

If you haven't yet read "The Black Swan," by Nassim Nicholas Taleb, I would highly commend it to you. This New York Times bestseller lays out a now-popular theory about high-impact, highly improbable events that have an extraordinary affect on the world. These events can be either negative like World War I or the September 11, 2001 attacks, or positive like development of the personal computer and the Internet.

We find ourselves in the current financial crisis because of something that might be called a negative Black Swan event. But, while the hotel industry grapples with how to service debt and pay bills with deteriorating fundamentals for another year to 18 months, a "good" Black Swan event could come along and help us jump out of this mess a lot faster than it looks like we otherwise will.

The idea of Taleb's book is not to predict Black Swans, because they are so rare and improbable that they cannot be predicted. But being able to identify and exploit the positive Black Swan events is as critical as surviving the negative ones.

Keep looking for the Black Swan!

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]> tag:hotellaw.jmbm.com,2009://1.478 2009-09-17T07:10:16Z 2009-09-29T20:23:41Z

Hotel Lawyer insights on the new CMBS rules -- implications for troubled loans today. On September 15, 2009, the United States Treasury changed the REMIC rules applicable to CMBS to give servicers greater flexibility to modify troubled commercial real estate loans. The changes are effective immediately and are implemented in final regulations under the tax code and a revenue procedure that is designed to provide guidance. In fact, the revenue procedure applies to loans modified after January 1, 2008. What does all this gobbledygook really mean? Here's our take.

Jim Butler http://www.jmbm.com By Jim Butler, Jeff Steiner and the Global Hospitality Group®
Hospitality Lawyers | Authors of www.HotelLawBlog.com
14 September 2009

Hotel Lawyer insights on the new CMBS rules -- implications for troubled loans today.

On September 15, 2009, the United States Treasury changed the REMIC rules applicable to CMBS to give servicers greater flexibility to modify troubled commercial real estate loans. The changes are effective immediately and are implemented in final regulations under the tax code and a revenue procedure that is designed to provide guidance. In fact, the revenue procedure applies to loans modified after January 1, 2008. What does all this gobbledygook really mean?

Here's our take.

]]>

Insights on the new CMBS rules:
Dawning of a new era, or error of a new dawning?

by Jeff Steiner and Jim Butler
Hotel Lawyers, JMBM's Global Hospitality Group®

CMBS defaults: A current issue with huge significance to all commercial real estate and real estate finance

More than $615 billion of commercial real estate loans is in the CMBS structure, and defaults are projected to reach more than 5% by the end of the year. Some analysts (such as Morgan Stanley's group) project that hotel loan default rate in CMBS will exceed 10%. In addition to ballooning monetary payment defaults caused by insufficient revenues to pay regular principal and interest payments to meet current debt service, more than $60 billion of maturities is coming due next year, and another $60 billion following that.

The lawyers at JMBM have been very involved in CMBS debt issues for a long time. We still receive many appreciative comments on the REMIC article that we published in 2001 and has borne the test of time in predicting the difficulties in modifying loans held in REMICs.

Now, we would like to give you our insights on the issues we see with the latest changes to the REMIC rules, applicable to all CMBS loans -- whether hotel loans, retail, office, or other commercial real estate. These rule changes at least go in the right direction in terms of addressing some of those difficulties. But do they go far enough or can they even scratch the surface of the pending commercial real estate bust?

New REMIC rules' target: ability to modify loans without "blowing up" the tax status of the REMIC trust.

Many borrowers have encountered the dilemma that meaningful modifications of a REMIC loan could not be made by the servicers until a material loan payment default had occurred or was imminent. In what may turn out to be the most significant of the rule changes made, the IRS has stated in the revenue procedure that it will not penalize REMICs for making loan modifications when the servicers reasonably foresee a significant risk of default in the future. The other rule changes allow modifications and substitutions of collateral, modifications and additions of guarantees and revisions of recourse status of the loan to be made before a loan default has occurred.

Will these changes in the REMIC rules prevent a massive collapse of commercial real estate, or are there other factors that render the changes almost meaningless? Here is our initial take.

What is different? Liberalizing rules on loan modifications.

Q. Why do REMIC rules affect CMBS?

A. Every CMBS pool is formed with a promise to bond purchasers that the income from the trust holding the bonds will be distributed without a corporate tax at the CMBS pool level. To qualify for this privilege, the CMBS trust must satisfy the strict terms laid down by Congress for so-called real estate mortgage investment conduits or REMICs. Because the tax status drives this entire structure, these rules are set forth in the Internal Revenue Code, as amplified by regulations that the IRS promulgates to interpret the tax code.

Q. What do the new CMBS rules actually say?

A. The text of the new rules are widely available. You can download a pdf of the New CMBS Rules here.

Q. What are the major changes?

A. Industry leaders were concerned about collapsing commercial real estate values and massive loan defaults fueling the economic crisis. Many felt that a few things needed to be "fixed" with the tax rules governing CMBS pools, or loan defaults and fire-sale liquidations would further weaken the economy.

The changed CMBS rules and revenue procedure focus on what loan modifications can be made by CMBS servicers without endangering the critical tax pass through status of a REMIC and when the loan modification can be done. Here is the situation:

• The REMIC rules prohibit a CMBS trust from issuing or acquiring any new loans after the REMIC is originally formed (its startup day). Penalties include a 100% tax on the prohibited loan's income, and loss of REMIC tax status.
• The old REMIC rules, and interpretations, said that certain changes in the terms of an existing loan -- one held from startup day -- would be deemed to be a "new loan" (and a prohibited loan) in certain circumstances.
• The old rules had many gray areas as to what change was big enough to trigger the disastrous tax consequences.
• The old rules permitted more extensive modifications only after the loan was in default or a default was reasonably foreseeable, a requirement that servicers have interpreted to mean that the default had to be imminent.
• The new rules have both relaxed some of the strict prohibitions, and created greater clarity on certain permitted loan modifications -- changes that will be OK.
• The new rules allow the servicers the flexibility to make the more extensive types of modifications when the servicers reasonably believe that a significant risk of default either at maturity or before exists.

Q. What is your take on the impact of the new REMIC rules, then?

A. At JMBM, we think the new rules provide some welcome clarity and flexibility. But these changes are not a panacea for the commercial real estate crisis. The effect of these CMBS rule changes will be severely limited by other factors:

• The latest CMBS rule changes by the IRS do not override the "Pooling and Servicing Agreements" or PSAs that govern every CMBS pool and which establish binding contractual duties and limitations on what loan modifications can be made by the servicers.
• A CMBS pool still cannot create a new "loan to facilitate" a sale.
• Cash flow mortgages, joint ventures and other types of contingent or participating returns are difficult, if not impossible, to structure.
• The new rules do not affect the often-conflicting interests of different tranches of bond holders and the practical impossibility of amending the PSA or getting agreement on such conflicting issues.
• In the widely anticipated "tranche warfare" amongst classes of certificate holders seeking to recover loan losses from servicers or other certificate holders, deferred sales will likely be viewed as favoring junior note holders over senior note holders. This is particularly true when the servicer making this decision also holds the controlling "B-piece."
• Greater clarity from the new rules on the ability of servicers to extend loan maturities based upon the significant risk test may be helpful, but the crisis of declining income from commercial properties will limit defaulting borrowers' ability to service debt, and will raise serious questions about the prudence of deferring asset sales where asset values are likely to continue to erode for a long time. [see The Hotel Owner's and Hotel Lender's Dilemma: Sell now or sell later?]

Q. OK, so the CMBS rule changes are helpful. Anything else?

A. Correct. The CMBS rule changes are helpful as far as they go, but external factors prevent these changes from being a Panacea.

Some also see a possible bad impact from the rules. For example, David Loeb of Robert W. Baird & Co., asks in a September 16, 2009 Research Report, if these rules might not backfire by encouraging the "pretend and extend" phenomenon, and thereby actually delaying a recovery in the financial and real estate markets.

We are very interested in your perspectives on the new CMBS rules and issues you encounter as a lender, servicer or borrower. Please contact Jim Butler or Jeff Steiner to explore this further.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Jeff Steiner is is a partner in JMBM's Corporate Department and a senior member of JMBM's Global Hospitality Group®. Jeff Steiner's practice, spanning more than 30 years, emphasizes real estate, including: representation of both institutional lenders and borrowers in connection with construction and permanent lending, loan work outs and restructurings, real estate development, design and construction contracts, real estate acquisitions and sales, preparation and negotiation of commercial leases on behalf of landlords and tenants, joint venture transactions and hotel management agreements, purchases and sales and financings. For more information, please contact Jeff Steiner at 310.201.3514 or jsteiner@jmbm.com

________________________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]> tag:hotellaw.jmbm.com,2009://1.465 2009-09-14T04:46:11Z 2009-09-29T20:23:41Z

Florida Supreme Court invalidates parental release. Hotel Lawyers suggest fast action. A recent opinion out of Florida involving a fatal ATV accident to a 14 year old at an ATV track could have a major impact on the validity of parental release forms. In the case of Kirton v. Fields, the Florida Supreme Court ruled that a pre-injury release signed by a parent is not valid against a minor who is injured while participating in a "commercial activity." While other courts have reached similar results, the Kirton case has attracted nationwide attention and may lead those other states that currently uphold parental release forms to change their law to follow Florida's lead.

Jim Butler http://www.jmbm.com By Jim Butler and the Global Hospitality Group®
Hotel Lawyers | Authors of www.HotelLawBlog.com
13 September 2009

Florida Supreme Court invalidates parental release. Hotel Lawyers suggest fast action.

A recent opinion out of Florida involving a fatal ATV accident to a 14 year old at an ATV track could have a major impact on the validity of parental release forms. In the case of Kirton v. Fields, the Florida Supreme Court ruled that a pre-injury release signed by a parent is not valid against a minor who is injured while participating in a "commercial activity." While other courts have reached similar results, the Kirton case has attracted nationwide attention and may lead those other states that currently uphold parental release forms to change their law to follow Florida's lead.

]]> Hotel lawyer update on parental releases by Mark M. Rosenthal & Brian M. Yates

In Kirton, the Florida Supreme Court found that a pre-injury release executed by the parent of a 14 year-old boy who died in an ATV accident could not be used to protect the operator of a motor sports park from liability in a wrongful death suit filed by the boy's mother. The court reached this conclusion even though the boy's father stated that he fully understood the risks involved with the activity and knew what he was signing. In fact, the young rider himself had previously been involved in a serious accident at the same facility riding the same type of ATV. In spite of those factors, the court held that public policy considerations prohibited a parent from binding a minor child to a release of liability for negligence.

Only Applies to Commercial Activities

The Court took pains to stress that it was only "commercial activities" that could not validly use parental release forms; release forms signed in connection with school and other non-profit groups will still be considered valid. The rationale behind this distinction is that profit businesses can better afford the cost of insurance than nonprofits. There may be many instances, however, in which the line between a "commercial enterprise" and a non-profit may not be so easy to draw.

While there are a number of states such as California which appear to still recognize the validity of parental release forms, the Florida decision is not only the majority opinion, but also the clear trend of the recent cases. Thus, companies in every state would be well-advised to assume that any release they ask a minor's parent to sign could later be found unenforceable.

There is no perfect solution to the liability issue created by cases like Kirton, but with some planning a company can at least minimize its potential exposure. First, it is still a good idea to have parents sign release forms. While such forms may be unenforceable against the minor, they may at least prevent the child's parents from filing their own lawsuit.

Assumption of Risk Forms

Even more importantly, a teenager participating in a potentially hazardous recreational activity should sign a carefully tailored separate form; one that has a portion highlighted in bold entitled "Assumption of Risk." This provision should state that the potential activity is hazardous (and spell out the hazards), that the participant has experience performing this activity and nonetheless assumes the risk of injury. A number of cases have held that a knowledgeable teenager may be held to have "assumed the risk" of injury when he or she signed a form acknowledging the risk.

Finally, owners of potentially hazardous recreational facilities used by minors should recognize the risk of an unavoidable lawsuit and plan for it. In addition to taking safety precautions to protect participants and eliminate any potential claims of negligence on its part, if a business allows minors to participate, it should make sure that it carries enough liability insurance to protect the business in the event of an accident in which a lawsuit results and a parental release is found to be invalid. Accidents and injuries are an unfortunate part of the sports and recreation business, regardless of whether minors are involved. Being aware of the current state of the law and making sure that your release forms are properly worded can help minimize the risk when such accidents happen.

Mark M. Rosenthal and Brian M. Yates are members of the Global Hospitality Group® and also the National Sports Law Group at Jeffer Mangels Butler & Marmaro LLP. They regularly help professional sports teams in player negotiations, stadium construction, team purchase and sales, and other transactional and litigation matters. Recently, they have been helping many property owners update their parental release forms in response to the liabilities presented by the Kirton case and its ilk.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]> tag:hotellaw.jmbm.com,2009://1.453 2009-09-02T05:15:00Z 2009-10-02T21:55:29Z

As a hotel owner or lender with a distressed property in the worst business environment for more than 70 years, you have a decision to make. Do you sell the hotel now at a deep discount, or do you hold on for things to get better? How long does it take to market a property in this environment? Owners and lenders of thousands of hotels in the United States and abroad are confronted with this decision. Here are a few thoughts from the pros.

Jim Butler http://www.jmbm.com By Jim Butler and the Global Hospitality Group®
Hospitality Lawyers | Authors of www.HotelLawBlog.com
1 September 2009

This is one of many articles on the subject of "troubled hotel loans - workouts, bankruptcies & receiverships" in the rich library at www.HotelLawBlog.com.

Do the math yourself! Run a present value analysis of likely cash flows on 3 alternate scenarios. Decide whether you have the stamina and capital for a long haul if you intend to hold.

Hotel Lawyer. As a hotel owner or lender with a distressed property in the worst business environment for more than 70 years, you have a decision to make. Do you sell the hotel now at a deep discount, or do you hold on for things to get better? How long does it take to market a property in this environment?

Owners and lenders of thousands of hotels in the United States and abroad are confronted with this decision. Here are a few thoughts from the pros.

]]> What price can you get if you sell now? Market value or liquidation value?

When making the "sell now or sell later" decision, many hotel owners are concerned about the value they will realize on sale, and how long it will take to realize a "market value."

Last week, Steve Rushmore, founder and CEO of HVS, presented a webinar on distressed properties. He said that there are at least two big differences between a seller realizing "market value" on a hotel property instead of "liquidation value." According to Rushmore, today

"Anyone who talks about a 1 to 2 year marketing period is out of his mind. If you have not sold within 90 days of putting your hotel on the market, you're toast!" ~ Alan X. Reay, Atlas Hospitality

1. It takes 1 to 2 years to provide adequate marketing time to realize a market value price in today's market.
2. Liquidation value will be 20-50% below market value.

Mark Elliott of Hodges Ward Elliott, one of the premier hotel brokers in the country, agrees with Steve Rushmore that there is at least a 20% additional discount from 2007 values for "forced sale" transactions.

Sell now and avoid the traffic jam!

Mark Elliott also thinks that there will be a rush of sales over the next few quarters as more desperate owners and lenders come to the realization that values are not going to improve for a long time, and decide that they would rather cash out now at any cost. He believes lots of desperate sellers will likely start dumping properties and keep values low for a long time. His advice" Sell now and avoid the traffic jam!

How long to market in order to accomplish market value?

At an intellectual level, I understand what Steve Rushmore is saying. He believes it is going to take a long time before someone can realize a higher price than they can today -- maybe up to 2 years . . . or even longer.

But as a practical matter, the concept of a 1 or 2 year marketing period is absurd. This is not a period for marketing. It is a refusal to deal with the abysmal economy that is our reality today. A 1 or 2 year marketing period is just a stall -- waiting for the world to change. Can you actually imagine giving a broker a 2-year listing agreement on your property?

It takes 1 to 2 years to provide adequate marketing time to realize a market value price in today's market. ~ Steve Rushmore, HVS

I decided I would test my reaction out on Alan Reay, the founder and CEO of Atlas Hospitality -- the leading hotel broker in California. Alan's Atlas Hospitality Group has sold more hotels in California than any other brokerage firm.

Alan takes a more pragmatic approach to the marketing period.

Alan Reay says lenders are asking him for the price they can realize on a property sale within 60 to 90 days. Alan believes that this the only feasible approach today. At least in the real world, Alan says "The price we give lenders today is based on 60 to 90 days closing, otherwise, they need to lower the price 10 to 15% at least."

According to Reay, "The days of 6 to 12 month marketing timeframe (what you see in all appraisals) are long gone. Anyone who talks about a 1 to 2 year marketing period is out of his mind. If you have not sold within 90 days of putting your hotel on the market, you're toast!"

"a hard present value analysis is likely to show that you are better off selling today at a realistic market price." The alternative may be feeding a negative cash flow beast and waiting for a long time for value recovery."

Why is delay a problem?

When I asked Alan Reay what this means, he had two specific considerations:

We have a 10 year supply of hotels on the market at the present absorption rate -- and that assumes no other hotels are put on the market. It is "highly unlikely" that more hotels will not be put on the market.

Unless you are prepared for a fairly long term hold -- say 3 to 5 years -- "a hard present value analysis is likely to show that you are better off selling today at a realistic market price." The alternative may be feeding a negative cash flow beast and waiting for a long time for value recovery."

Reay says, "If you don't like the market price today, you are really not going to like it 12 to 18 months from now." Basically, Alan sees that sellers have been looking for "yesterday's prices" and by the time they reconcile themselves to the price they were offered 6 months ago, that is no longer achievable.

If you would like to speak directly with Alan Reay, he can be reached at (949) 622-3409, alan@atlashospitality.com or www.atlashospitality.com.

What do the hotel lawyers at JMBM's Global Hospitality Group® advise?

Do the math yourself! Run a present value analysis of likely cash flows on 3 alternate scenarios. Decide whether you have the stamina and capital for a long haul if you intend to hold. Or decide that you are a gambler.

Be realistic. And if you are going to be a seller, then sell quickly. Many experts see values continuing to decline until at least 2011 or, more likely 2012. Some think values recover peak levels by 2014 and others think recovery to 2007 levels is TWO real estate cycles from now (given that a typical hotel cycle lasts 7 to 8 years, this could possibly be 10 to 16 years, i.e. 2019 to 2025).

We would be happy to help you evaluate your options and develop the best plan from here.

Other articles on the Troubled State of the Hotel Industry

Other recent articles that relate to the state of the industry paint a pretty consistent picture of data and trends. Here are a few links to articles for your convenience:

• Closing that hotel may be the worst money-saving idea you ever had! Lenders, here's why mothballing a hotel can be a very bad idea.

• Hotel Lawyer: Some practical alternatives to hotel closings - turning around operating results.
• Hotel receiverships, bankruptcies, restructurings, workouts, turnarounds and opportunistic investment
• Hotel Lawyer Marta Fernandez: The Labor Pains of Hotel Closings Optimal Strategies for Full or Partial Hotel Closings
• National implications from the latest hotel industry Survey
• Conditions for hotel industry "RESET" may be coming into alignment
• Hotel foreclosures on track to set new records in California and elsewhere.
• Special servicers: Busy now? Realpoint says work will double by year end! Implications for all CRE loans.
• Hotel delinquencies predicted to exceed 8% by year end. Red Roof defaults on $361 million in loans. Are there lessons for hotel lenders and investors in the latest California market report?
• PKF says 2009 worst year in lodging history. Robust recovery likely but years away
• What lies ahead for the hotel industry? When do values bottom? When do they recover?
• Hospitality Lawyer at the 2009 NYU hotel conference
• Hospitality Lawyers present JEWELS from Meet the Money® 2009
• Hospitality Lawyer Insights
• Hospitality Lawyer: The "amazing relationship" between GDP and hotel room demand. When the recovery comes, what will it look like for the hotel industry?

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]> tag:hotellaw.jmbm.com,2009://1.452 2009-08-30T23:22:23Z 2009-10-02T22:02:28Z

Hotel Lawyer with some bad news for the luxury hotel segment. From some reactions, you might think that the likely "End Of The Recession" by the end of 2009 means that the "Recovery" is close behind. Unfortunately, what follows next will not feel much better for many for a very long time. Nowhere is that more true than in the luxury hotel segment, where Smith Travel Research foresees a 27% drop in RevPAR for 2009 followed by another 9% in 2010! Here are a few of the most important slides from Smith Travel Research presented on August 20, 2009, focusing on the luxury hotel segment. How bad are things? How bad are they likely to get from here? Fasten your seat belt!

Jim Butler http://www.jmbm.com By Jim Butler and the Global Hospitality Group®
Hospitality Lawyers | Authors of www.HotelLawBlog.com
30 August 2009

This is one of many articles on the subject of "troubled hotel loans - workouts, bankruptcies & receiverships" in the rich library at www.HotelLawBlog.com.

Hotel Lawyer with some bad news for the luxury hotel segment.

From some reactions, you might think that the likely "End Of The Recession" by the end of 2009 means that the "Recovery" is close behind.

Unfortunately, what follows next will not feel much better for many for a very long time. Nowhere is that more true than in the luxury hotel segment, where Smith Travel Research foresees a 27% drop in RevPAR for 2009 followed by another 9% in 2010!

Here are a few of the most interesting slides from Smith Travel Research and other industry sources since August 20, 2009, focusing on the luxury hotel segment. How bad are things? How bad are they likely to get from here? Fasten your seat belt!

]]> NOI for all hotels is projected to hit all-time low with almost a 40% decline

For the last 70 years, at least since such records have been kept, the NOI of the hotel industry has never taken such a plunge. According to PKF, 2009 NOI for the entire hotel industry (all segments, all geographic regions) will fall nearly 40%, and it won't start to improve until 2011 at the earliest.

Most experts believe that average daily rate (ADR) cannot turn around until demand has recovered for a little bit. Moody's doesn't see a significant improvement in occupancy over the next 4 years. As of August 26, 2009, Moody's senior analyst did not see occupancy recovering even to 2009 levels through that period.

This is a very negative outlook for any hotel lender or owner. But the outlook is even worse for the luxury and full service segments of the hotel industry.

Luxury hotels are being hit harder

Given the horrific 40% NOI declines suffered by the entire industry, it is painful to think that one segment might do even worse, but that is the prospect for the luxury segment from both Smith Travel Research and PKF.

Smith Travel is projecting a -27% decline in RevPAR for 2009, followed by an additional -9% RevPAR decline in 2010. PKF is projecting only slightly more favorable numbers -- a -26% decline in 2009 and a -0.4% decline in 2010 (based upon a 7% more optimistic view of occupancy in 2010).

These views are summarized in the slide below.

Smith Travel notes that in addition to the 10% supply increase in the number of luxury hotel rooms, there is another 5% supply increase under construction and a further 5% in the pipeline. That will mean more supply to absorb in the future when demand comes back.

What does this all mean? What do you do as an owner or lender?

Hotel values will come back. The only question is how long it takes, and the data is suggesting at least a minimum 3 to 4 year hold to get back to 2008-2009 levels. Who knows when we get back to peak values again.

Before you go for the mothballs for that hotel, remember the analysis recommended in our recent article: "Closing that hotel may be the worst money-saving idea you ever had!".

We would be happy to help you evaluate your options and develop the best plan from here.

Other articles on the Troubled State of the Hotel Industry

Other recent articles that relate to the state of the industry paint a pretty consistent picture of data and trends. Here are a few links to articles for your convenience:

• Closing that hotel may be the worst money-saving idea you ever had! Lenders, here's why mothballing a hotel can be a very bad idea.

• Hotel Lawyer: Some practical alternatives to hotel closings - turning around operating results.
• Hotel receiverships, bankruptcies, restructurings, workouts, turnarounds and opportunistic investment
• Hotel Lawyer Marta Fernandez: The Labor Pains of Hotel Closings Optimal Strategies for Full or Partial Hotel Closings
• National implications from the latest hotel industry Survey
• Conditions for hotel industry "RESET" may be coming into alignment
• Hotel foreclosures on track to set new records in California and elsewhere.
• Special servicers: Busy now? Realpoint says work will double by year end! Implications for all CRE loans.
• Hotel delinquencies predicted to exceed 8% by year end. Red Roof defaults on $361 million in loans. Are there lessons for hotel lenders and investors in the latest California market report?
• PKF says 2009 worst year in lodging history. Robust recovery likely but years away
• What lies ahead for the hotel industry? When do values bottom? When do they recover?
• Hospitality Lawyer at the 2009 NYU hotel conference
• Hospitality Lawyers present JEWELS from Meet the Money® 2009
• Hospitality Lawyer Insights
• Hospitality Lawyer: The "amazing relationship" between GDP and hotel room demand. When the recovery comes, what will it look like for the hotel industry?

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]> tag:hotellaw.jmbm.com,2009://1.436 2009-08-10T03:10:48Z 2009-10-02T21:57:54Z

Hotel closings: Hotel Lawyer with another look at alternatives to closing that hotel. We have gotten a lot of feedback on our recent article about the precipitous drop in value that accompanies a hotel closing, or as some say, when the hotel is "put in mothballs" or "goes dark". See "Closing that hotel may be the worst money-saving idea you ever had! Lenders, here's why mothballing a hotel can be a very bad idea" (http://hotellaw.jmbm.com/2009/08/closing_that_hotel_01.html). In that recent article, we talked about 8 bad things that happen when you close a hotel, and suggested that a hotel should never be closed without first running a careful analysis of cash flows and holding costs. That is not to say, a hotel should never be closed, but a hotel closing deserves close scrutiny, and full exploration of the alternatives. Today, we will focus on one of those.

Jim Butler http://www.jmbm.com By Jim Butler and the Global Hospitality Group®
Hotel Lawyers | Authors of www.HotelLawBlog.com
9 August 2009

This is one of many articles on the subject of "troubled hotel loans - workouts, bankruptcies & receiverships" in the rich library at www.HotelLawBlog.com.

Hotel closings: Hotel Lawyer with another look at alternatives to closing that hotel.

We have gotten a lot of feedback on our recent article about the precipitous drop in value that accompanies a hotel closing, or as some say, when the hotel is "put in mothballs" or "goes dark". See Closing that hotel may be the worst money-saving idea you ever had! Lenders, here's why mothballing a hotel can be a very bad idea.

In that recent article, we talked about 8 bad things that happen when you close a hotel, and suggested that a hotel should never be closed without first running a careful analysis of cash flows and holding costs. That is not to say, a hotel should never be closed, but a hotel closing deserves close scrutiny, and full exploration of the alternatives.

Today, we will focus on one of those.

]]> Intense, pro-active asset management

Jack Westergom, one of our long-time industry friends responded to the blog with some thoughtful insights, or "real-time thoughts from the field." Jack Westergom is Chairman and Managing Director of Manhattan Hospitality Advisors. We have worked with him for many years and have seen clients get some great results by tapping into his 30 years' of hotel experience, so we thought we would share his comments with our readers. Jack can be reached at (310) 798-8863 or jwestergom@manhattanhospitalityadvisors.com.

Jack Westergom's report from the battlefield really expounds on another alternative to closing hotels or liquidating them in distressed sales. He tells us that his team improves the operating results and makes it feasible to hold the assets longer. He says, he has set up budgets with owners and lenders for an agreed-upon minimum amount of working capital to fund shortfalls while making an all-out focused effort to make hotels self-sustaining where others continue to falter.

The one concept that many operators have failed to deal with effectively is the need for increased revenue generation.

Here is his message from the field with 12 observations for us:

Dear Jim,

Loved your blog on hotel closings and figured I would forward some real-time thoughts from the hospitality battlefield on what is truly happening in the marketplace. Hotels and resorts in every market and at every price point are fighting for survival as declining demand, over-supply and the current financial crisis has impaired many hotels' ability to fund their operating costs and meet debt service coverage.

The business plans and strategies that supported record financial results in 2007 don't work any more. As asset managers, we are responsible for "managing the hotel management company." It is quite apparent to us that only new and bold actions will enable hotels and resorts to survive in these perilous financial times. While many operators have already taken some steps to minimize the gap between operating expenses and revenues, much more needs to be done. The primary focus has been on cost containment and very little attention has been given on altering strategies to drive revenue. Here is a recap on what is happening:

1. Communication between owners, asset managers and operators must be improved in order to facilitate the relationship between the two. Today, all but the worst of operators generate cash-flow forecasts as a regular operating exercise for owners and lenders. Some run them monthly, which might have been adequate in years past, but is highly inadequate with today's declining revenue stream. We have asked operators to focus on cash-flow on a weekly basis, in order to compensate for the difficulties in forecasting in today's environment.
2. The best operators already reduced expenses last fall and many have reduced them again in the first quarter of this year. Now, expense reduction today is no longer the issue. Today, revenue enhancement is the main issue facing hotels.

There is a misconception amongst many lenders today who believe that additional expense reduction is the only appropriate strategy to create income.

3. Most operators have failed to understand that the "doing business as usual" business plan no longer works and alternative strategies and creative game plans are necessary. The one concept that many operators have failed to deal with effectively is the need for increased revenue generation. This is an area where we, as asset managers, collaboratively guide the operator to get creative and change their way of thinking.
4. The past six great years of good times in the hospitality business has bred a new generation of marketing people who focus on "order taking," as opposed to "order making."
5. Operators have become too reliant on generic brand marketing to fill their hotels -- a strategy that may be adequate in the best of times, but is grossly inadequate in the worst of times. In recent years, strong brands could generate the majority of a property's business, generating up to 75-80% of their business. Today, a brand might be capable of generating 35-40% of a hotel's business as corporate and group travel has declined markedly. With the brands delivering less than 40% of a hotel's business, both the operators and their marketing personnel do not know how to make up the difference.
6. They have long forgotten and abandoned the "backyard strategies" required to drive "local marketing initiatives" that fill hotel rooms in good times and in bad. These property specific strategies include marketing partner alliances, local website strategies, neighborhood marketing strategies for food and beverage and competitive hotel intelligence.

Operators have become too reliant on generic brand marketing to fill their hotels

7. There is a misconception amongst many lenders today who believe that additional expense reduction is the only appropriate strategy to create income. We strongly disagree as we have reviewed many distressed properties this year that have cut expenses so deeply that service is below minimum brand and consumer standards. In many instances the asset and its ability to generate revenue, and asset value have suffered.
8. It appears that most lenders basic strategy with today's distressed assets is to immediately put a receiver in place to hold the asset. We believe that this may not necessarily be the most prudent action in order to maintain and increase asset value.
9. Most operators' sole goal is to meet brand standards, not to protect and preserve asset value, and, therefore, they do not have their interests aligned with the owners.
10. Most operators do not understand that CMBS loans differ from traditional loans and require capital expenditure approval by lenders.
11. Most operators do not know that the ground rules for operating hotels change when a receiver is put in place or a hotel is foreclosed upon.
12. In this financial downturn, most brands have done little to create programs (as they did last downturn) that attempt to focus on the owner and the owner's ability to satisfy debt service requirements.

Very truly yours,

Jack Westergom
Chairman & Managing Director
Manhattan Hospitality Advisors, Inc.
2615 Pacific Coast Highway
Suite 218
Hermosa Beach CA 90254

(310) 798-8863
jwestergom@manhattanhospitalityadvisors.com

What's it all mean?

In order to make intelligent decisions, you should know all your options and understand their consequences. Closing a hotel is generally one of the least attractive options, compared with a fast sale or better asset management. Sometimes, keeping a hotel open takes cooperation and contributions from different stakeholders -- perhaps unions, municipalities, operators, lenders, owners and others.

Other articles on State of the Hotel Industry

Other recent articles that relate to the state of the industry paint a pretty consistent picture of data and trends. Here are a few links to articles for your convenience:

• Hotel Lawyer: Some practical alternatives to hotel closings - turning around operating results.
• Hotel receiverships, bankruptcies, restructurings, workouts, turnarounds and opportunistic investment
• Hotel Lawyer Marta Fernandez: The Labor Pains of Hotel Closings Optimal Strategies for Full or Partial Hotel Closings
• National implications from the latest hotel industry Survey
• Conditions for hotel industry "RESET" may be coming into alignment
• Hotel foreclosures on track to set new records in California and elsewhere.
• Special servicers: Busy now? Realpoint says work will double by year end! Implications for all CRE loans.
• Hotel delinquencies predicted to exceed 8% by year end. Red Roof defaults on $361 million in loans. Are there lessons for hotel lenders and investors in the latest California market report?
• PKF says 2009 worst year in lodging history. Robust recovery likely but years away
• What lies ahead for the hotel industry? When do values bottom? When do they recover?
• Hospitality Lawyer at the 2009 NYU hotel conference
• Hospitality Lawyers present JEWELS from Meet the Money® 2009
• Hospitality Lawyer Insights
• Hospitality Lawyer: The "amazing relationship" between GDP and hotel room demand. When the recovery comes, what will it look like for the hotel industry?
• Closing that hotel may be the worst money-saving idea you ever had! Lenders, here's why mothballing a hotel can be a very bad idea.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from troubled hotel transactions. Who's your hotel lawyer?

________________________

Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.

JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE program".)

Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

]]>