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Hospitality Lawyer – The “Comprehensive Situation Analysis” for troubled hotel mortgage loans and workouts

30 October 2008

Please see “troubled hotel loans – workouts, bankruptcies & receiverships” for the latest articles on troubled hotels.

Hospitality Lawyer: The Comprehensive Situation Analysis — Critical foundation for decisions on lender alternatives for workouts, receiverships, deeds in lieu and bankruptcies with distressed hotel loan

When CMBS special servicers (and other lenders’ special assets workouts teams) see more hotel loans pop up on their “Watch Lists,” it is important to perform a “Comprehensive Situation Analysis” of your “special assets” or distressed loans. Do you know why? Do you know how?

The “Comprehensive “Situation Analysis” is the cooperative effort by the lender’s special assets team, experienced hospitality lawyers and hotel consultants. It examines the business, legal and hotel-specific factors affecting the asset

The Comprehensive Situation Analysis is the critical foundation for a lender choosing among its alternatives of workout, receivership, deed in lieu or bankruptcy (seeking involuntary bankruptcy and appointment of a trustee).

Early Warning Signs

For the same reason a lender needs access to information, it needs an excellent early warning system. In addition to obvious items such as a default under a franchise agreement or material contract, knowledgeable industry people are likely to know or be able to detect when a geographic area, market segment or particular hotel is getting into trouble-long before it shows up in the profit and loss statement. A decrease in inventories, failure to maintain the property, a cutback in marketing and other changes in the annual plan, budget and marketing plan may all be early warning signs. Many prudent lenders have consultants watch their asset portfolios for significant trends and changes that indicate problems. The special assets team should become involved early in the process. But special assets generally also require availability and advice from industry-savvy consultants and counsel.

Information Update

The concept of updating all information for special assets is the same as for any troubled assets. However, in the case of a hotel, one will typically look for items such as hotel franchise agreements and amendments, management agreements and amendments, any agreements, leases and other arrangements with golf pros, concessionaires and the like, recreational use agreements for golf, tennis, aquatics, equestrian or other amenities, and tax information and returns including occupancy, sales and use, employment, personal property and real property taxes. A checklist approach is helpful.

Comprehensive Situation Analysis

What is the value of the asset and how do you optimize it? The “Comprehensive “Situation Analysis” is the cooperative effort by the lender’s special assets team, experienced hospitality lawyers and hotel consultants. It examines the business, legal and hotel-specific factors affecting the asset — the complexities of which are captured by the following update of what many know as Baltin’s Law:

“Each hotel or other special purpose asset is a unique combination of physical plant, available market, location, brand identification, management, contractual arrangements and capitalization. The mix of these factors is different for each asset, and therefore the value of a hotel or other special purpose asset will be optimized by implementing intelligent, property-specific plans and management for both the asset’s business and real estate.”

In other words, to understand the value, potential and problems with the hotel, one has to look at all these factors affecting the hotel real estate and business.

Physical plant assessment. In the physical plant assessment, one should look at the intrinsic value of the building, as well as how it enhances or limits operations, rebranding opportunities, and marketing alternatives. One has to look at inventories, FF&E, and a host of systems for food and beverage, labor management, reservations, marketing and other operations. The market and the property will each affect the other and the upside potential. Is this property properly positioned? Would value be optimized by taking it upscale or downscale? Are product improvement plans (PIPs) warranted to maintain a certain franchise? What capital improvements are necessary or valuable?

Rebranding and new management opportunities. Is the current brand or management right for this property? Can it be changed and what will it cost to change, both in terms of exit fees or damages and in terms of rebranding or repositioning? Who is a logical and optimal buyer of the property through foreclosure, a deed-in-lieu or bankruptcy? Can the universe of buyers be expanded and improved? In short, what is the highest and best use for this property and what are the costs and limitations on positioning the property for such use?

What are the contractual and business constraints? If the Situation Analysis is to be more than an intellectual exercise — if it is to have practical value — it must consider the web of complex agreements affecting the property: the franchise, management, amenity and use agreements, leases, licenses and the like. Management or franchise agreements tend to be very long term agreements (say ten to 50 years) and often have limited or even no termination rights. They are usually not assignable by the borrower without consent, and transfers to “competitors” are frequently prohibited, although there are usually exceptions for transfers upon foreclosure or deed-in-lieu.

Best use analysis. It is always important to look at alternate uses for the hotel or certain components of the hotel. Is it more valuable as an apartment complex, condominiums, corporate residential or something else? Particularly with failed condo hotel or troubled hotel mixed-use projects, this analysis should be very helpful.

Here are a few of the recent articles on troubled hotel loans and assets for your convenience:

Workouts and Special Servicing for Hotel Mortgage Loans: What is so different about TROUBLED HOTEL LOANS?

Do you know the 8 Dos and Don’ts of handling troubled hotel mortgage loans?

The “Comprehensive Situation Analysis” for troubled hotel mortgage loans and workouts

Lender and borrower alternatives for troubled hotel mortgage loans

Butler’s Matrix: Key to hotel mortgage loan defaults, workouts, bankruptcies and receiverships.

Special Servicers and Special Asset teams confer in Dallas for top special servicing conference

“Speed bumps” in the road to bankruptcy for hotels and resorts.

Making a bigger pie for everyone in defaulted Hotel Loan mortgage loan turnarounds, restructurings and bankruptcies

JMBM’s SAVE® Program for Troubled Hotel Loans

Restructuring distressed condo hotels

Hotel bankruptcy? Distressed hotel loan mortgage? Restructuring hotel debt? Troubled hotel asset? How about an Enhanced Note Sale™?

Hotel bankruptcy trump card. Terminating hotel management agreements without liability — the alchemy of lead to gold for troubled hotels and hotel loans?

Hotel bankruptcy trump card. Terminating hotel management agreements without liability — the alchemy of lead to gold for troubled hotels and hotel loans?

Terminating hotel management agreements when things don’t work? Not easy, but not imp
ossible either.

How did we get here?

If you are interested in reviewing how the hotel industry can be shocked from boom to bust overnight, you may find these articles interesting:

  • Hospitality Lawyer: Fortunes will be made . . . or lost . . . in the wake of The Financial Bailout and the Panic of 2008.

  • Hospitality Attorney with pearls from NYU, Part 5: Whither Lodging Demand, GDP and the Cost of Gasoline?

  • What’s the price of gasoline have to do with the future of the lodging industry?

  • Hotel Lawyer: As goes the economy, so goes the hospitality industry — the ineluctable elasticity of demand!

  • “Hotel Attorney on Hotel Cap Rates. What’s happening to hotel cap rates, values and financing?”
  • To see how little it takes to turn a hotel loan upside down, see the discussions and examples in the Section entitled “Benefits and detriments of leverage, and the vicissitudes of changing cap rates and LTVs” in the “Fortunes will be made . . . or lost . . “ article.

    JMBM’s Distressed Assets Expertise

    JMBM’s Global Hospitality Group® includes an experienced Distressed Assets Team that mobilizes quickly to address the complex issues surrounding distressed hospitality properties and stalled developments. Whether it is a solution to a lender’s troubled loan or the response to a buyer’s opportunity, we work quickly to preserve value and increase cash flow.
    Because hotels are special assets, with operating companies, numerous issues come into play in a workout or bankruptcy scenario. Because we have represented creditors, owners and investors in the hospitality arena for more than two decades, we do not need to “get up to speed” on the special issues.

    Regardless of where we are in the market cycle, JMBM’s Distressed Assets Team is involved, day in and day out, in restructuring and working out deals that go sideways. Our experience — together with our knowledge of the current capital markets where distressed assets often include complex deal structures and securitized loans — allows us to bring creative and effective strategies to the table. When aggressive litigation is the best strategy, we are effective, rigorous advocates for our clients’ interests.

    For information about how we can help, contact one of the senior members of the team, below.

    Jim Butler 310.201.3526 JButler@JMBM.com

    Neil Erickson 310.201.3516 NErickson@JMBM.com

    Robert Kaplan 415.398.9673 RKaplan@JMBM.com

    Guy Maisnik 310.201.3588 GMaisnik@JMBM.com

    David Poitras 310.201.3571 DPoitras@JMBM.com

    Richard Rogan 415.984.9606 RRogan@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?

    ________________________
    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.