On June 26, 2009, Atlas Hospitality released the results of its study on foreclosures in California We think these results have much broader implications for the hotel industry on a national basis. Here is the latest.

Atlas Hospitality Group specializes in the sale of California hotels. It was founded by Alan X. Reay in 1997. Since its inception, Atlas has sold more hotels in the state than any other brokerage firm. Alan Reay can be reached at (949) 622-3409, alan@atlashospitality.com or www.atlashospitality.com.

Here are some highlights from the Atlas report (download the full text below):

• The number of hotel defaults or foreclosures in California has jumped 125% in the last 60 days. California now has 31 hotels foreclosed on and 175 hotels in default.
• Approximately 2,500 California hotels were either financed or refinanced between 2005 and 2007.
• California hotel values today are estimated to be 50-80% lower than at market peak in 2006-2007 because of the 2009 year-to-date date drop in room revenues of more than 21.5%, combined with the jump in cap rates.
• Alan Reay says that this means that there is no equity left in virtually any of the 2,500 hotels financed in 2005-2007. Increasingly, these hotel properties are challenged to generate revenues sufficient cash to meet operating expenses like payroll and utilities, much less providing enough money to pay the mortgage.
• The wave of distress in California hotels started with smaller, non-flagged hotels in secondary and tertiary markets, but now it affects all property types from economy to luxury. Look at economy chains like Extended Stay and Red Roof Inn, and then look at the St. Regis Monarch Beach and W San Diego.

These numbers are stunning. Recall that in the last great downturn of the early 1990s there were a record-setting 2,000 hotel foreclosures and bankruptcies. Now the Atlas report suggests that there could be more than that number in California alone.

Are California hotel foreclosure risks representative of other U.S. markets? (Probably)

Consider some of the facts recently presented here on the www.HotelLawBlog.com:

Some of the best data is available for CMBS loans which represent about one third of the total debt on all commercial real estate. Another third is debt owed to banks, and the rest is debt to all other lenders.

The loans in CMBS pools are probably reasonably representative of all the debt. Therefore, the performance or defaults of real estate loans will likely be similar for all such debt.

Realpoint reports that loan delinquencies through May 2009 were up 5 times from one year ago to approximately 2.28%, and they predict, based on stress analysis, that the default rate by the end of the year will at least double to 4.4% and could reach 5.7%.

Bloomberg reports that Morgan Stanley analysts say hotel delinquencies (as opposed to all commercial real estate) are already at 4.7% and will likely reach 8.2% by December 2009.

California, Texas, and Florida have 30% of the loan delinquencies today, and the top 10 states have 60% of the loan delinquencies.

If 75% of all hotels in California (and the rest of the U.S.) were financed or refinanced in the 2005-2007 period, they have no equity left, may not be covering operating costs and likely will not recover their peak values until 2014 under the Steve Rushmore prediction, or later according to more pessimistic views.

PKF projects that the "typical U.S. hotel" will suffer almost a 47% decline in NOI through 2010 (37.8% in 2009 and an additional 9.2% in 2010). This is the first time in 72 years that PKF has recorded unit-level profit declines in excess of 20%, and the prediction is for double that threshold.

If Atlas is right that 2,500 California hotels -- from economy to luxury -- are under water, there must be double or triple that number in the United States, maybe approaching 10,000 hotels which have no equity and may soon fail to cover operating costs.

3 big questions are:

1. How long will owners continue to fund debt service that is not covered by the property?
2. How long will owners fund payroll, utilities and other operating costs that cannot be paid from cash flow?
3. What incentive do owners have to fund shortfalls if they don't recover any equity for several (many?) years?

What does this all mean?

There is a lot more pain ahead for all commercial real estate, and particularly for hotels. It is not going to get better quickly. There needs to be a complete RESET in the industry -- a reset of values, leverage and expectations. That has not really happened yet, but there is about to be a terrible wrenching that will force it to happen.

In practical terms:

• If you are a lender, watch your assets carefully. You may have rolled a maturity, but any hotel financed between 2005 through 2007 is likely going to have seriously deteriorating cash flows that have eliminated all equity, and threaten to impair ability to pay operating expenses. Don't be caught by surprise when a borrower gives back the keys and tells you payroll is due Friday (and there is no money in the operating account to pay it).

• If you are a borrower, what are your options? Do you have the capital to withstand the big RESET that is going to come, or can you get it? Is there another plan that makes sense for you? How do you handle a continuing downturn in the hospitality industry fundamentals and a long, slow recovery?
• As a lender or investor, what is your investment horizon or time schedule? If it is very short, sell or foreclose (and sell) now -- before further price deteriorations. If it is longer, and you have the capital and stamina, why not get the 30% IRR investors are looking for today on your own assets? Get some good advisors to help you plot the strategy to survive and thrive.

Other articles on this topic

Click here to download the Atlas report referred to in this article.

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:

• 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?
• Special servicers: Busy now? Realpoint says work will double by year end! Implications for all CRE loans.
• Hospitality Lawyers present JEWELS from Meet the Money® 2009
• Hospitality Lawyer Insights.

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'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.

On June 24, 2009 the Federal Reserve left interest rates and its policies unchanged. Government forecasters predicted that unemployment will continue to rise from its already high level of 9.4% and will not begin a reverse trend until "some time next year." And today in CNBC and Bloomberg interviews, Warren Buffett said he sees unemployment continuing to rise. He does not seem to see "green shoots" of economic recovery in the United States.

Unfortunately this is all consistent with a much delayed recovery for the hotel industry, likely in 2011 or beyond. In today's Bloomberg article, Morgan Stanley analysts are quoted as saying "The hotel loan delinquency rate is currently 4.7 percent and is likely to reach 8.2 percent -- the peak rate in the 2001 economic downturn -- by the end of the year."

Here is some more information on the continuing crisis in the hospitality industry.

We are not pessimists. But as long as we see continued bad news for the hospitality industry, it does not seem responsible to us to predict unrealistically cheery prospects. We think that owners and lenders need the best information that they can gather to assess investment situations and timelines. How else do you chart viable strategies and approaches. Hospitality Lawyer: Lender and borrower alternatives for troubled hotel mortgage loans.

If hotel values are likely to continue to decline at least through 2011 or 2012, isn't it prudent for a lender or owner to know that in deciding whether to continue to try to hold on or to increase the bet? See Mark Woodworth's 'Night has fallen. Waiting for sunrise'. and Steve Rushmore's What lies ahead for the hotel industry? When do values bottom? When do they recover?.

In this spirit of optimizing information, we will continue our observations on important economic and industry developments. We don't see a recovery until many months AFTER the economy bottoms and begins a substantial and sustained upward trend. See PKF says 2009 worst year in lodging history. Robust recovery likely but years away.

Unfortunately, the predictions for that upward inflection (as opposed to just the bottoming) are not in place yet. Meaningful economic recovery for our country and the hospitality industry will require that financial institutions be healthy again, consumer debt be restored to more normal levels, the housing bust gets cleared up, dealing with the overhanging credit card and commercial real estate problems, and creating employment to replace the 7 million jobs lost since December 2007. THEN maybe we can get credit flowing again and eventually get leisure and business travel growing to fill empty hotel rooms.

Lessons for lenders and sellers to be learned from a deeper look at the California hotel markets?

California is not the worst market in the United States. It is only a little worse than the national average right now. And remember that PKF is predicting that "the typical U.S. hotel will suffer a 37.8% decline in NOI in 2009 and an additional 9.2% in 2010." But take a look at Atlas Hospitality's July 2009 Lender News. (See download link below.)

The following chart from the Atlas Hospitality Lender newsletter shows that 24 out of the 27 California markets have double-digit RevPAR declines on a 2009 year-to-date basis. Led by the San Jose/Campbell area (-36.5% RevPAR decline in May 2009), there are 19 major metropolitan areas in California with more than a 20% RevPAR decline in May 2009!

The 2-page newsletter can be downloaded by clicking here: Atlas Lender News.

By the way, Atlas Hospitality Group specializes in the sale of California hotels. It was founded by Alan X. Reay in 1997. Since its inception, Atlas has sold more hotels in the state than any other brokerage firm.

Regarded as "the expert" in the California hotel market, Alan Reay has been quoted in numerous major publications including the Wall Street Journal, Los Angeles Times, and many other financial and hotel industry publications.

Alan Reay can be reached at (949) 622-3409, alan@atlashospitality.com or www.atlashospitality.com.

So what should a lender or borrower do with this information?

Alan's pragmatic advice to lenders and sellers may be applicable to most hotel markets in the United States, depending on the investment time frame. Alan is advising people:

• Have realistic price expectations and move quickly.
• The market will continue to deteriorate for some time.
• You may not like the price for a hotel today, but you will like it less in 6-12 months.

There will certainly be some interesting challenges and opportunities ahead of us in the hospitality industry everywhere. Maybe there are some lessons here for all of us.

________________________

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.

Mark Woodworth and his colleagues at PKF Hospitality Research have released PKF's latest report on the U.S. lodging industry, it's turning points and prospects. I thought you might find it useful as you consider options for dealing with troubled hotel assets, and hope you will keep us in mind as you face coming challenges.

The PKF report is a little startling. I found the following points noteworthy:

• With Moody's increasingly pessimistic projections of unemployment, PKF has revised its RevPAR forecast accordingly. They now expect a 17.5% RevPAR decline in 2009 and a further 3.5% RevPAR decline in 2010.
• 2009 will be the weakest year on record in the U.S. lodging industry, and 2010 will not be much better.
• Hotel industry pricing power has collapsed. There will be nine consecutive quarters of the year-over-year reductions and ADR continuing through the fourth quarter of 2010. RevPAR growth will not begin until 2011.
• PKF projects that "the typical U.S. hotel will suffer a 37.8% decline in NOI in 2009 and an additional 9.2% in 2010."
• It has been 72 years since PKF recorded unit-level profit declines in excess of 20%. "Needless to say, profit declines in excess of 30% have a wide ranging impact on hotel values, debt coverage, default covenants, insolvency."

The operative word for the Lodging Industry is "RESET"

As expert after expert told us in May at our Meet the Money® 2009 conference, the operative word for the hotel industry today is "reset" (see Hospitality Lawyers present JEWELS from Meet the Money® 2009). This means a complete reset in hotel values, leverage and financing structure.

While Steve Rushmore of HVS is projecting a 45% decline in hotel values, bottoming out in 2010-2011 with a recovery in 2014 (see Hospitality Lawyer: What lies ahead for the hotel industry? When do values bottom? When do they recover?"), the de-leveraging of hotel investments, increased cap rates, and scarce financing will make hotel investments problematic for some time.

Good news for those who can last to 2011 and 2012

The PKF report forecasts an exceptionally robust recovery when it finally comes in 2011 and 2012. PKF foresees an average annual increase in RevPAR of 9.2% for those years, with profits rising 17.8%. They conclude with: "If you are an owner, investor, or lender that can weather this year and next, the return to prosperity should be strong and quick."

________________________

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.

One of my favorite presentations at the NYU hotel investment conference earlier this month was by Steve Rushmore, president and founder of HVS. His entire slides show is worth studying and you can view it in its entirety by clicking on the link at the end of this article.

But a few of the slides particularly caught my attention -- the ones on hotel values -- when they bottom, when they recover, best and worst markets for the next few years, and along with some good advice for buyers, lenders and owners.

We have all seen the statistics from Smith Travel Research and PKF Consulting. The numbers are nasty -- we are looking at an 18% RevPAR decline for 2009 year to date in the U.S. lodging industry, and even higher declines in certain geographic markets like New York, Las Vegas, and Hawaii, and in certain segments like luxury, resorts and hotels relying on group business. These RevPAR declines translate into even higher multiples of decline in revenue (roughly 1.5 to 2.0 times), meaning that operating revenues may no longer cover debt service coverage or even operating expenses like payroll and utilities.

But when do we hit bottom? And how long does it take to get back to hotel values we had in 2007 or 2008 before "the Crash"? This slide (#11 in the HVS presentation) shows that Steve thinks we bottom out on hotel values sometime in 2010 or 2011, and he predicts a full recovery to pre-Crash values by 2014. You may have noted that some experts think it could be a long slow recovery, with pre-Crash values not being recovered until the end of the next cycle after this one (with a typical real estate or hotel industry cycle of 7 or 8 years, that could be about 15 years)! So this is good news that Steve sees it this way.

Which markets will suffer most and recover first?

Steve also gave us his thoughts on where the pain will be greatest in the 2008-2010 period, which he calls the "worst period." As you can see from the slide below, he predicts that New York, Las Vegas, Oahu, Miami and Phoenix will be the worst markets during this period.

And while New York, Miami and Oahu will be amongst the fastest markets to recover in 2010-2013, they will not be joined by Las Vegas and Phoenix. Washington, DC is a unique market that is doing well now, and will also do even better when the industry improves.

What does this all mean for buyers, lenders, and investors?

The next two slides show Steve's recommendations, which largely correspond with our SAVE™ program's focus on unlocking value through a combined legal and operational approach.

To sum it up: This is time for serious strategic analysis, the SAVE™ program, and getting ready for opportunities of our lifetime.

For more information on how to unlock hotel value with troubled hotel loans or assets, see JMBM SAVE™ program.

For the entire slide show presented by Steve Rushmore at NYU, please click here.

Other related articles on state of the industry and unlocking hotel values

For other insights from the 31st Annual NYU International Hospitality Industry Investment Conference, please see

Hospitality Lawyer at the 2009 NYU hotel conference -- Sound bites

Hospitality Lawyer from the NYU Hotel Investment Conference

Hospitality Lawyer: What lies ahead for the hotel industry? When do values bottom? When do they recover. Which markets are worst and which will be the best?

For presentations from Hotel Industry thought leaders at JMBM's 19th annual Meet the Money® see

The PowerPoint presentations from a number of industry leaders at Meet the Money® 2009 are listed with hyperlinks at JEWELS from Meet the Money® 2009 -- the "best ever" hotel conference.

Commentary and observations from the hospitality lawyers of JMBM and other industry experts on some of the critical industry issues are available at Hospitality Lawyer Insights.

________________________

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.

JMBM hospitality lawyer Jim Abrams has been practicing law for 40 years, specializing in lodging and hospitality law and in representing and advising trade associations and other non-profit entities. Jim is the author of the book Laws Pertaining to the California Innkeeper, which is published by the California Hotel & Lodging Association.

Q. Which hotels need to know about laws that govern the use of security guards?

A. "Every hotel that has security guards -- either contracted for with a third-party private patrol operator or the hotel's own proprietary, employee security guards -- needs to be aware that California law contains a number of requirements that govern a hotel's use of security guards, also referred to as "private patrol operators," and "proprietary private security guards."

Q. What California agency regulates security guards?

A. "The California Bureau of Security and Investigative Services (BSIS), which is part of the Department of Consumer Affairs, is responsible, among other things, for regulating private patrol operators (e.g., Pinkerton) and the security guards that they hire, as well as proprietary private security guards (PSOs). BSIS's web site is www.bsis.ca.gov"

Q. If my hotel uses a private patrol operator and its security guards, do I need to be sure that the operator and its guards are all registered with BSIS?

A. "Yes, it is your responsibility to make sure they are properly registered with and licensed by BSIS at all times."

Q. What if I use my own employees as security guards?

A. "If your hotel uses its own employees as security guards and they meet the definition of PSOs, they need to be registered with BSIS. A PSO is an unarmed individual, (1) who is employed exclusively by a single employer, (2) whose primary duty is to provide security services for that employer, (3) whose services are not contracted to any other entity or person, (4) who is not exempt pursuant to Section 7582.2 of the Business and Professions Code, and (5) who meets both of the following criteria: (a) he or she is required to wear a distinctive uniform clearly identifying the individual as a security officer, and b) he or she is likely to interact with the public while performing his or her duties."

Q. Why is it important for hotels to know about laws that regulate security guards?

A. "Failure to meet the requirements can result in substantial liability for the hotel. If the hotel has proprietary private security guards, this can also extend to criminal liability."

Q. If my hotel hires a third-party private patrol operator, can it avoid liability?

A. "No. A hotel has a non-delegable duty to exercise reasonable care to protect its guests, employees, and others, and this means that it cannot avoid that legal duty by contracting its security out to a third party. If the third-party patrol operator and/or its guards do anything intentional or negligent that results in injury to someone, the hotel is liable. Although the hotel might be able to recover its losses resulting from such an incident from the patrol operator, that can take a long time, cost a lot of money, and is often unsuccessful."

Q. What specific issues should we be aware of if we contract with a third-party private patrol operator?

A. "A hotel should make sure that its agreement with its patrol operator has appropriate indemnification provisions, and should require the operator to maintain adequate insurance at all times that names the hotel as an "additional insured." You need to frequently monitor the license status of your patrol operator, and you can do this by going to the State of California Department of Consumer Affairs license lookup webpage."

Q. Who can become a private security officer?

A. "Any person wishing to register as a PSO must be at least 18 years of age, undergo a criminal history background check, submit an application to BSIS, and pay all necessary fees."

Q. What kind of training does a PSO need?

A. "PSO registration candidates need not provide any proof of training, but the BSIS is currently in the process of adopting regulations that will spell out specific training requirements that all PSOs will have to meet. BSIS has advised me that these training regulations are likely to become effective sometime this year. Once that happens, all PSOs will have to complete the necessary training in order to maintain their registration."

You can find more information about these regulations by visiting www.bsis.ca.gov or by clicking here.

Q. Does the hotel need to provide specific training to PSOs?

A. "Employers of PSOs may find that appropriate, job-specific training can provide significant benefits, including, increased awareness, shortened response times, overall improved security effectiveness and correspondingly improved customer satisfaction. There are three important things to note regarding PSO training.

First, it is strongly recommended that anyone hired to provide security have appropriate training before he/she starts working. Failure to have adequately trained security guards could well be considered to constitute negligence (i.e., a failure to exercise reasonable care), and if that results in an injury to someone, the hotel could be liable. Second, when the BSIS adopts specific training requirements, the hotel will need to make sure its PSOs comply with the training requirements. Third, PSO employees will need to be compensated appropriately when they take this training."

Q. I know that my PSOs need to be registered with BSIS, but does my hotel, their employer, need to be registered as well?

A. "At this time, the answer is "no." However, Senate Bill 741, which is currently pending in the California Legislature, would require employers of PSOs to register with BSIS as well."

Q. I know that in order for my employees to qualify as PSOs, they must "wear a distinctive uniform clearly identifying the individual as a security officer." What does this mean?

A. "On the one hand, if your PSOs wear a uniform that clearly designates them as security personnel -- for example, if they wear a white shirt that says "Security" on it and have a badge -- they will meet this qualification. But what about someone who just wears a shirt with the hotel's logo on it, just like the shirts that all other employees wear? Or what if the all the PSOs wear the same type of sports coat and slacks? It is clear from my discussions with BSIS that this is a grey area, and BSIS will evaluate each situation on its facts. BSIS feels that SB 741, discussed above, will help provide a bit of clarity on this point."

Q. What happens if one of my PSOs failed to get registered? What happens if one of my PSOs was registered but his or her registration was suspended or revoked by BSIS?

A. "Your PSO employee is guilty of a crime! Business and Professions Code Section 16240 provides:

Every person who practices, offers to practice, or advertises any business, trade, profession, occupation, or calling, or who uses any title, sign, initials, card, or device to indicate that he or she is qualified to practice any business, trade, profession, occupation, or calling for which a license, registration, or certificate is required by any law of this state, without holding a current and valid license, registration, or certificate as prescribed by law, is guilty of a misdemeanor."

Q. If a PSO changes employment, does he or she need to apply for a new PSO registration?

A. "No. However, the new employment must be exclusively for the new employer."

Q. Can a PSO work on a temporary registration?

A. "No. The PSO must have a valid registration before going on duty."

Q. Can a person carry a firearm and/or a baton while licensed as a PSO?

A. "No, a PSO cannot carry a deadly weapon."

Q. My hotel employs in-house security officers. I am confused about how this law affects my business. Can I request that a BSIS representative visit my hotel and help me comply with this law?

A. "Yes, BSIS has an outreach program for California hotels that fits your needs. Please contact Rolando Taeza at (916) 575-7055 or send him an email at rolando_taeza@dca.ca.gov to schedule an appointment."

You can contact Jim Abrams at 415-984-9679 or jabrams@jmbm.com if you have questions about any of the legal aspects of hotel operations.



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.

Earlier this week, we gave you our initial take on the NYU hotel conference. Now here are some of the things we heard that we thought worthy of note.

• RevPAR projections for 2009 range from STR's optimistic forecast of "only a -9.8% drop" to -20% drop (basically extending the year to date experience for 2009 for the rest of the year).
• This RevPAR decline translates into a 40-50% decrease in NOI at many hotels, and nonrecourse owners are deciding that they are not going to pay the negative carry on debt service, or increasingly, the negative operating losses.
• Rich Conti of the Plasencia Group: "We are in the "do nothing" stage now. Lenders are doing nothing other than 90 day extensions. There is still a huge disconnect of the bid and ask from buyers and sellers."
• A few lenders are taking properties back, or borrowers are handing them the keys. The prevailing practice up to now -- particularly in the CMBS world -- seems to have been "extend and pretend" (extend loan maturities and pretend everything is OK).
• Budgets are being revised downward on a monthly basis. Anyone looking at forecasts made last quarter (much less year end 2008) is "driving only by looking in the rear view mirror."
• Despite data suggesting that rate cutting does not raise occupancy, hotels are slashing rates as they try to "catch the falling knife" of declining occupancies and ADRs.
• Henry Vickers, AEW: "I think we will see a lot more defaults coming now as borrowers realize their equity is gone."
• Steve Van, Prism Hotels: "We are projecting that CMBS loan defaults will go from the current default rate of about 2% to an astonishing 8% by the end of this year. And the loan defaults will go from "technical" or maturity defaults to payment defaults as borrowers quit making loan payments. That is when CMBS lenders will start taking properties back."
• Generally speaking everything is still pretty much in gridlock with some sense (or is it hope?) that the bid-ask gap may be starting to close. There are lots of people making bids on properties, but as Bill Reynolds of Thayer Lodging said, "Basically, we are a buyer if you are ready to fall over dead as a seller."
• There is very little money for construction or development, except perhaps loans guaranteed by the SBA, Department of Agriculture, or some local banks. The few lenders that are making any loans can cherry pick sponsors and loan terms.
• Mark Lomanno of Smith Travel Research: "After years of educating consumers about the unique values of hotel brands and product, the price wars send the consumer a different message that says customers only need to worry about price. . . . This time the rate declines are more severe. This looks twice as bad as 2001. Last time it took 6 years to recover from rate declines. This time it will take longer."
• Anonymous 1: "How do you practice yield management in this environment? There is such a short booking window. We are down 57% in occupancy and we are going to do whatever we have to in order to sell room nights."
• Anonymous 2: "Our group customers are coming to us and saying, "Your competitors have slashed their rates and we want you to cut yours too if you want our business." What are we going to do?"
• Worst markets? - NYC followed by Phoenix, Chicago, Las Vegas.

For other insights from the 31st Annual NYU International Hospitality Industry Investment Conference, please see

Hospitality Lawyer at the 2009 NYU hotel conference -- Sound bites

Hospitality Lawyer from the NYU Hotel Investment Conference

Hospitality Lawyer: What lies ahead for the hotel industry? When do values bottom? When do they recover. Which markets are worst and which will be the best?

________________________

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.

The NYU Hotel Investment Conference is the grand daddy of them all -- Stephen Brener would be proud if he were alive today to see what his vision had blossomed into. And as much as I love our Meet the Money®, and the Phoenix Lodging Conference, this is the greatest hotel investment conference in the country. It is the place you have to be if you are in the industry and doing business.

The Conference kicked off tonight with its Grand Reception at the Waldorf=Astoria with the Who's Who of the industry present, and here is what we see.

As I said, if there is only one event you attend for hotel investment, and it is not our own Meet the Money® conference held every May, then NYU is THE event you must attend. This year, the organizers are expecting about 1,600 people which is down a little from the all time peak, but a very strong showing compared to other industry groups, and the truth is that there may be fewer people, but all the right people are here. Most companies are putting fewer people on the road for everything, so if they sent 10 people last year to this conference, maybe they are sending only 3 this year, but the most senior people are here -- the ones you want to see.

They have a great program and really deserve a lot of credit for industry leadership. We are very proud to be sponsors of this conference, and if you are in town, please come to the general session I will co-moderate with Frank Nardozza and an all-star panel on Tuesday morning at 10:00 am on "Economic Bailout and Restructuring: Impacts and Opportunities for Lodging."

The Grand Reception tonight (Sunday, May 31) was fabulous. The slightly lower attendance was a great positive from my perspective (and most people I talked to) who did not feel quite so "jammed" in the Grand Ballroom, and we were actually able to move around a little more easily and see some of the people we really wanted to connect with. This may go down as one of the best conference receptions ever.

The Lodging Industry Investment Council prelude.

I am privileged to be one of the co-chairs of the Lodging Industry Investment Council along with Mike Cahill and Sean Hennessey. This is the hotel industry "think tank" whose membership owns or operates many billions of hotel investments, and involves all aspects of the industry. Before the NYU, Phoenix and ALIS conferences, we hold our meeting to compare notes on a very candid basis, and to get an executive briefing from Mark Lomanno of Smith Travel.

This is usually a highly selective representation of the best insights to be gleaned from a hotel investment conference, and I trust that this one will be similar,

Tomorrow, I will pass on some of my notes from this brain trust and further notes from the conference.

The Mood of the NYU Hotel Conference

But for now, if you ask me about the "mood" of the conference, I would call it a resigned sense of having to deal with a new reality. The mandatory "RESET" of leveraging, values and approach is starting to become a reality. It has a very austere and unpleasant element to it, but realism has now washed away hopes of any easy fix or quick turnaround.

By the way, we all hope for the turnaround in the economy, and the sooner the better, but "recovery" to anything near 2007 pre-crash levels are years off. Owners are starting to say, "We are not going to feed the negative cash flow anymore." Lenders are realizing that borrowers have been carrying projects from their own cash reserves and may not do so much longer.

There are interesting opportunities beginning to show signs as everyone becomes realistic in this new environment.

For other insights from the 31st Annual NYU International Hospitality Industry Investment Conference, please see

Hospitality Lawyer at the 2009 NYU hotel conference -- Sound bites

Hospitality Lawyer from the NYU Hotel Investment Conference

Hospitality Lawyer: What lies ahead for the hotel industry? When do values bottom? When do they recover. Which markets are worst and which will be the best?

________________________

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.

What is one of the nicest acknowledgements of professional accomplishment a hotel lawyer might receive? In my book, being recognized by the New York Times as an expert in a core aspect of my legal and advisory practice is pretty close, and that is what happened yesterday in a Times article by Jonathan D. Glater about the increased friction between hotel owners and operators now erupting into litigation in the case of the Four Seasons Aviara and the Fairmont Turnberry.

As I said in another New York Times quote last month by Martha C. White, we are facing the prospect of hotel bankruptcies and foreclosures reaching levels not seen since the last big downturn of the 1990s.

And indeed, it is in difficult times like these when hotels fail to meet debt service -- or even operating expenses -- that owners and lenders become very frustrated with operators that prefer their own interests to those of the hotel. And that is why Jonathan Glater's article was looking at two high profile emerging battles where owners are standing up to operators and saying, "I'm mad as hell, and I'm not going to take it anymore."

Here's how we see it.

Sometimes desperate owners prematurely jump to the conclusion that a hotel management agreement should be terminated. Without the correct analysis, this is like the old joke about "fire, ready, aim." Do your analysis first. But more about that in a moment.

Struggling to carry an underwater hotel with a bad operator and an onerous agreement is "management agreement hell." We know.

We started our Global Hospitality Group® practice, focused on hotel owners and lenders, more than 20 years ago. It seemed like anyone who knew anything about hotel management agreements was on the operator side, so we started helping lenders and owners terminate or renegotiate long-term, no-cut hotel management agreements that purported to run for 50 or 100 years.

We have negotiated, re-negotiated, litigated or arbitrated and advised on many HUNDREDS of hotel management agreements -- more than 1,000. We understand how the contract relates to the operations of the hotel business associated with the real estate. We know the players, the norms and customs, and the practices of the industry. And our experience over many hundreds of management agreements helps us define and guide our client on what is "market" and an achievable result.

We have seen it all: Operators who insist on keeping 5 restaurants open 24 hours a day even though they are empty and losing a fortune. Overstaffed executive and line staff that inflate payrolls and sometimes are used to make your hotel a training ground or retirement center. Branded operators delivering only 5% of the hotel's business through its reservation and marketing systems. Operating standards that may maintain a brand image but don't contribute to profitability. Pricing rooms and services to maintain "rate leadership" in a market for the brand's perceived position, instead of getting a fair share of the available business for the hotel.

Does this sound familiar? Operators that are ineffective or fail to respond to critical needs

Most owners become very frustrated when they feel that their operator is not responding to a critical situation. The aggravation level escalates when the operator isn't proactive to drive business, cut costs and better manage capital expenditure issues. Sometimes the operators seem to tell you anything they think you want to hear -- month after month -- but do nothing, despite repeated promises. Whatever the reasons, bad financial results can severely wound owners and lenders who feel they are entitled to expect results from operators who proclaim their expertise and take their money "off the top" -- as a percentage of gross revenues, or through markups, purchasing fees, reservation fees, frequent traveler charges, and the like. They are dismayed when the operator is unable or ineffectual at getting results.

The operators run your hotel, hire and fire your employees, set the pricing and standards, and tell you when they want you to write checks to upgrade the carpet and pool furniture, make payroll or pay their fees.

That is the background that led to my quote in the New York Times article about how hotel management agreements structure the relationship of owner and operator:

"It gives the operators all the benefits of ownership with none of the burdens," said James R. Butler Jr., a lawyer at Jeffer Mangels Butler & Marmaro in Los Angeles. "It pushes to the owner all of the costs -- the capital costs of buying, maintaining and operating the property -- and lets the managing companies take most of their money off the top."

Why not just terminate a bad operator? What can you do?

Most branded hotel management agreements run for decades. They are not terminable at will nor just because the hotel is underperforming. And they usually have very tricky procedures requiring notice of perceived breach with an one or more opportunities for the operator to "cure" the default. So it is not usually easy to terminate a hotel management agreement. But if you terminate and do not have proper justification, you will be responsible for damages for breach of contract, which could amount to the present value of the income stream the operator would have received for the remainder of the contract term. This could be very expensive.

Of course there are other reasons not to terminate a hotel management agreement without due consideration. For example, although it may be convenient to blame the operator, a hotel's difficulties may not be the operator's fault at all. Even if an owner could terminate an agreement, it might not be the wisest thing to do. Maybe the present brand is the best brand and management for a property. The costs (and loss of momentum) of rebranding can be substantial. To do so if unnecessary would be very counterproductive. Besides, most brands will make a termination effort very expensive and time consuming unless they see it your way (and they probably won't without a lot of professional guidance).

When your hotel fails to perform, what should you do? The SAVE™ program

When things are not going well at your hotel, the first thing you need to do is find out WHY they aren't going right. And that is exactly what we designed the SAVE™ program to do. SAVE" stands for Strategies and Approaches for Value Enhancement" for a hotel.

The SAVE™ program is a cooperative and pro-active approach that brings analytical diagnostics to the troubled hotel or hotel loan situation and evaluates options to improve revenues, control costs, manage CapEx and deal with legal options. With lender encouragement, the goal is to help the owner/borrower to quickly develop a detailed plan and approach, gain lender approval for the plan, and then execute the plan with regular reporting and communications between the borrower and lender.

Along with the operational analysis, we give careful consideration to the operator's performance. What can be done cooperatively with the operator to improve results? Many operators are more responsive to owner requests in this environment. Is this the right operator or just difficult times for everyone? Has the operator breached either its express or its implied covenants under the hotel management agreement? Can the management agreement be terminated for any other reason, such as the fiduciary duty of the agency relationship created by almost all hotel management agreements? Is there some win-win for all parties other than termination?

For more on the SAVE™ program approach, and other materials on borrower and lender options in troubled hotel loans, see www.HotelLawBlog.com, or GOOGLE "JMBM's hotel SAVE program" and look at the articles cited.

Additional resources on Hotel Management Agreements and Troubled Hotel Assets
The Hospitality Lawyers of JMBM's Global Hospitality Group® recommend the resources available by clicking on the links for Hotel Management Agreements and Hotel Workouts, Receiverships and Bankruptcies -- available for free on www.HotelLawBlog.com. They can help you create millions of dollars of value with your hotel. The following are a few selections from these libraries:

• Ask the Hotel Lawyer: Hotel bankruptcy trump card. Terminating hotel management agreements without liability -- the alchemy of lead to gold for troubled hotels and hotel loans?

• Helping BORROWERS create value with distressed hotels to accomplish their objectives in the middle of The Great Recession of 2008
• How to get a great hotel operator
• Hotel Management Agreements 201
• How to terminate a hotel management agreement when an operator really deserves it!
• Hospitality Lawyer: Hotel Management Agreements: SNDAs or Subordination Agreements
• Ritz-Carlton breached contractual and fiduciary duties under hotel management agreement giving rise to free termination, $10.3 million in damages plus attorneys fees.
• Hospitality Lawyer -- Workouts and Special Servicing for Hotel Mortgage Loans: What is so different about TROUBLED HOTEL LOANS?
• Troubled Hotel Loan Solution -- JMBM's SAVE™ Program

________________________

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.