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

5 January 2009

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

Restructuring distressed hotels . . . hotel debt . . . and workouts of troubled hotel loans for profit opportunities now. Hotel lawyers on hotel turnarounds, workouts, restructurings, bankruptcies and opportunistic investment.

JMBM’s hotel bankruptcy lawyers and hotel workout teams are getting busy as the fallout from the global economic crisis hits the hospitality industry. In addition to traditional bankruptcy, workouts, turnarounds and receivership, we are finding a lot of interest in JMBM’s SAVE® Program, and expect a big roll out in 2009. You may want to check that out!

Otherwise, here is another useful tool for the SAVE® Program tool chest of techniques to help Lenders, Borrowers, and Investors with distressed hotel loans and hotel assets. We call it the Enhanced Note Sale™.


From the Hotel Lawyers of JMBM’s Global Hospitality Group®
The Enhanced Note Sale™ is the sale of a secured Promissory Note (secured by a troubled hotel) which is “enhanced” by a cooperative Borrower giving a deed-in-lieu of foreclosure to the Lender or a Buyer of the Note. The Note and security are left in place through a two-tiered subsidiary structure used by the Lender or Buyer, with title insurance endorsements to prevent merger of title when the affiliated parties acquire both the Note and related Mortgage or Trust Deed (by purchase from the Lender) and title to the property itself (by deed-in-lieu from the Borrower). The Note and security interest in the hotel are preserved to enable the Buyer of the Note to foreclose out junior liens and preserve a senior secured lien position in case the new owner of the hotel (the subsidiary entity) needs to deal with bankruptcy clean up or repositioning. (See JMBM’s SAVE® Program.) Here is how it works . . .

Enhanced Note Sale™

A Powerful Tool for Hotel Lenders, Borrowers, and Prospective Buyers
What are the Advantages to an Enhanced Note Sale™ transaction?

By selling the Promissory Note as part of an Enhanced Note Sale™ transaction, the parties can enjoy the following benefits:

  • Lender eliminates the distressed loan from its troubled assets without taking title
  • Lender maximizes sale proceeds for the Note by eliminating the risk of Borrower’s bankruptcy, loan defenses and typical lender liability claims
  • Borrower avoids a foreclosure
  • Buyer’s subsidiary obtains title to the property quickly so that it can manage and control the asset
  • Buyer retains the ability to wipe out junior lien holders through foreclosure of the Mortgage or Trust Deed acquired from the Lender

How does the Enhanced Note Sale™ work?

The “before” situation. The diagram below illustrates the typical lending relationship prior to an Enhanced Note Sale™.

Enhanced%20Note%20Sale%201.jpg

Initially, there is a Lender, a Borrower, and a Hotel (or other real estate collateral). The Lender has lent money to the Borrower, taking back a Note and a security interest in the Hotel (evidenced by a Mortgage or Trust Deed).

Then comes the Enhanced Note Sale™. The diagram below illustrates the essentials of the Enhanced Note Sale™ transaction.

The key is a Master Agreement that coordinates and ties together all the parts of the transaction. JMBM has significant experience with these Master Agreements and can help any of the involved parties with negotiations and documentation.

This transaction is a multi-party agreement with Lender, Borrower, Buyer, and Buyer’s subsidiary as parties — unlike a traditional deed-in-lieu transaction (with only Lender and Borrower as parties).
Enhanced%20Note%20Sale%202.jpg

This process is often started by the Lender, Borrower or an investor with a view to:

  • Start negotiating the Master Agreement in anticipation of marketing the Note, or finding a buyer for the property at a later time (who will then enter into the Enhanced Note Sale™ transaction contemplated in the diagram above), or
  • Proceed directly with the Enhanced Note Sale™ transaction with a Buyer who has already been identified and is ready to purchase the Hotel.

The parties to the Master Agreement include Lender, Borrower and Buyer. The Master Agreement is a critical document that must have a number of important provisions. Lender may use this opportunity to include certain releases and protections in favor of Lender. The Master Agreement should also set forth certain critical covenants, representations, warranties and indemnities that will flow from Borrower to Lender and also run independently from Borrower to Buyer.

Pursuant to the Master Agreement, Lender will sell the Note and Mortgage or Trust Deed to Buyer, and Borrower will concurrently convey to Buyer’s wholly-owned subsidiary the title to the property by deed-in-lieu of foreclosure. Because a subsidiary takes title to the property (rather than the party that buys and owns the Note and Mortgage or Trust Deed), the estates are not merged, and the Buyer can later foreclose on the real property, if necessary, to extinguish junior liens and other junior interests.

The “after” situation — when the Enhanced Note Sale™ is concluded. The diagram below shows parties’ positions after conclusion of the Enhanced Note Sale™ transaction.
Enhanced%20Note%20Sale%203.jpg

The Lender and the Borrower are no longer involved with the real property or the loan.

Buyer now owns the Note and Mortgage or Trust Deed as a result of the purchase from Lender. The obligations on the Note have been assumed by Buyer’s wholly-owned subsidiary (as the successor owner of the Hotel). Buyer’s wholly owned subsidiary has obtained title to the Hotel by a deed-in-lieu from the original Borrower. Thus Buyer has obtained immediate control of the real property asset through deed-in-lieu from the original Borrower.

This transaction structure should eliminate a substantial part of the discount that a Buyer would otherwise require to buy a defaulted note as a result of Borrower’s representations and warranties and the cooperation of all parties in the transaction. The delays, expense and uncertainty of Borrower bankruptcy, or Borrower-related litigation and claims are eliminated.

Meanwhile, the Lender avoids the delay, cost, regulatory and other problems involved in foreclosure, a deed-in-lieu and bankruptcy. With JMBM’s Enhanced Note Sale™, the Lender is also able to avoid making representations and warranties that it might have otherwise, because these representations come directly from the Borrower. And the Lender should not need to assume the risk of environmental and other liabilities that are incurred when taking title to real property.

Lender can also sell the Note and Mortgage or Trust Deed without the usual heavy “discount” for a distressed note, because the Enhanced Note Sale™ structure avoids the risk of Borrower filing claims and proffering defenses to enforcement of the Promissory Note and taking title to the property. Meanwhile, Borrower avoids a foreclosure, antagonistic litigation with Lender, and maximizes the pay down to Lender (minimizing Borrower’s own continuing liability and possibly resulting in guaranty or other relief).
The Enhanced Note Sale™ transaction will expand the universe of interested buyers willing to buy distressed Hotel debt, because the Buyer knows that at the conclusion of the transaction it will own the Hotel, the Note and the Mortgage or Trust Deed.

Cooperation brings advantages for all parties in an Enhanced Note Sale™ transaction.

We would be pleased to discuss how an Enhanced Note Sale™ transaction might work for you and other ways we might assist you in accomplishing your goals.

JMBM helping create value with troubled Hotels. Straight talk and a pragmatic approach to enhance hospitality asset value with SAVE® and the Enhanced Note Sale™. If there is a way to enhance your Hotel’s value, creating a win-win for the Hotel Lender and Borrower, JMBM will find it. If there is not, we will tell you. Our goal is always to find alternatives to increase hotel asset value. We usually succeed.

Additional resources are available at www.HotelLawBlog.com. Click on the “HOTEL LAW TOPICS” tab, and then select “Workouts, Bankruptcies & Receiverships.”

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?

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

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.