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Congress approves landmark Stimulus Plan. What is the bailout plan? Hotel Lawyers insights on what Geithner has in mind.

14 February 2009

Hotel Lawyers on the Bank Bailout bill and implications for the hotel industry. With Senate approval late Friday night, Congress has now approved the bailout bill. President Obama’s approval is a foregone conclusion. But the details of the bailout plan still worry businesses around the country.


As the nation’s real estate and hotel industries sit frozen in financial grid lock, all eyes turn to Washington as we await a glacial thawing of our financial system, heated with trillions of dollars of taxpayer money.

What’s happening? What does the road ahead look like? Here are the latest updates and some considered views. . .

The stimulus package was approved by the House on Friday, then by the Senate in the late evening. It is now awaiting only President Obama’s signature, a foregone conclusion.

But while the headlines trumpet restrictions on executive pay at bailout institutions, there is still little detail on the provisions that most concern people in the real estate and hotel industries.

Stimulus plan lacking details

On Tuesday, Geithner “unveiled” the administration’s bailout plan. See Distressed hotel assets find no fast relief in bailout plan. Up to $1 trillion “bad bank” to take toxic assets. No critical details yet. His unveiling fell flat, because it lacked detail on critical points of how the “bad bank” would work, and how assets would be valued. Markets sagged and critics raged. The financial markets remained frozen solid.

Geithner shrugged. He said he wasn’t going to unveil a plan until it had been thought through, and did not want to change course after setting it.

In testimony before the Senate Budget Committee on Wednesday, Geithner testified, “”I understand the desire for details, and I understand the disappointment about the lack of details today.”

Geithner seemed oblivious to the country’s anxiety to know where he is leading us with the trillions of bailout dollars. He said, “But part of the disappointment is because people were hoping that we do things that, in my judgment, would have been too generous and not responsible for the taxpayers’ money . . . I do not want to compound the mistakes of the last 12 months, when things were rushed out before they were ready . . .”

The conclusion? According to Geithner, “If that means that there is going to be disappointment with the level of details until we get it right, I will live with that disappointment because it is better than the alternative.”

A cynic would ask, “What has the administration been doing since last November?” Did they just realize on Tuesday that they needed a plan? Come on! Who told us that this is the biggest crisis since the Great Depression?

Anyway, it appears that Geithner is OK with everyone’s disappointment, and apparently his boss is also.

What is the Geithner plan? Can it work?

President Obama and Warren Buffet seem to have a mutual admiration society. I think that is great! Every time, I get enough money scraped together, I like to buy some Berkshire Hathaway B shares because I think Warren Buffet is a financial investment genius. Obama has said something similar.

A few months ago, we speculated what a Buffet financial bailout might look like based on his then-current CNN interview. See Hospitality Lawyer: $700 billion bailout bill is now law! Warren Buffett insights

Some very smart guys, have tried to read the tea leaves on Geithner’s vague description of a the “bad bank” and using lots of “private capital” to figure out what the administration might really have up its sleeve. I found their analysis intriguing. Here are the highlights . . . and the assumptions required are instructive:

    • Assume that private capital is going to “buy” or manage these assets for a “market” expectation of return. For what price do the banks sell their toxic assets to these private capitalists? What returns do they expect? What does it take to make these transactions happen in terms of taxpayer money or government financing?

    • This group made a lot of assumptions. They assumed that banks will need a 20% “premium” over what the assets are worth today, and most of the assets are probably still on the books at something way over that. They also assumed that the private capital would look for an IRR of at least 25%. They assumed a 5-year hold of the investment, and a 40% appreciation in the value of the asset from the date of purchase.

    • To make these things happen, the experts calculated that it would take 85% LTV non recourse financing to the buyers of these assets — so if the deals bust out, there is no liability or downside other than loss of the investment. It would also take financing at a 5% interest rate.

    • In my view, this would be a rational program reflecting commercial realities, but it may not be acceptable to Congress, unless the returns to the private capital and the taxpayers are inter-layered, like a typical private joint venture real estate deal. In such deals, the developer or promoter gives first yield to the financing to recover the investment and some modest preferred rate of return (say 8%). Then, in increments or layers, there is a sharing of profits (say 80-20 for the first tranche) until the lender has recovered a higher yield (say 10-12%), and in increasing degrees, eventually, the profit share may go 20-80 (the other way) to the developer to “catch up” with the financing. We all hope that everyone catches up and gets a 25% or greater IRR. That is a great problem to have.

Of course, the next question is how do we pay for this “whatever it takes” program, but that is for next time.

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.