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Hotel Lawyer: The “Great De-leveraging,” a “financial panic” and unprecedented opportunities coming our way. Do you see them? Are you ready?

Hotel Lawyers | Authors of
19 November 2008
Hospitality Lawyer with updated thoughts from the latest commercial real estate finance program in San Francisco.

Many of my friends in the hotel industry are in denial. Others are consumed with the daily drama of the unfolding financial panic. I am excited that we are about to see some of the greatest financial opportunities of our lifetime.

Here are some thoughts that I presented yesterday as keynote speaker at the 6th Annual Bay Area Income Property Lending Conference.

Craig%20Sullivan%20and%20Jim%20at%20Bay%20Area%20IPC%2011-08%20.jpgCraig Sullivan and Jim Butler after Jim presented keynote speech at commercial real estate lender conference. Butler says, “Our attorneys represented a lot of players in this last ‘great redistribution of wealth’ which probably involved ‘only’ $300 billion or so. . . there will be a phenomenal opportunity to make money in the very near future. . . NOW is the time to get ready for the unprecedented opportunities.



The commercial real estate lender conference — 6th Annual Bay Area Income Property Lending Conference. What focused my thinking?

Many months ago, before the Financial Crisis hit, my friend Craig Sullivan of Old Republic National Commercial Title, asked me to be the keynote speaker at the 6th Bay Area Income Property Lending Conference that he and Arnie Garfinkel organized in 1992. The conference is basically a lender conference — in many ways like JMBM’s Meet the Money®. But this conference covers financing for all types of commercial real estate, with more of a focus on office and multi-family. Meet the Money® deals ONLY with hotel and hospitality product finance. Next session will be May 5-7, 2009 at LAX Sheraton.

Although my professional focus has been 100% on hotels for more than 20 years, I was intrigued that they thought a hotel lawyer had something to offer to commercial real estate people. Because we have long believed that hotel mixed-use is the key to the future of hotel development, I had some ideas.

Initially, those ideas revolved around the use of hotels as the “spark plug” for mixed-use projects. But as the Global Financial Crisis continued to engulf our economy and short term prospects, I found a new challenge. My topic was specifically “Who’s Making Money NOW in Commercial Real Estate.” And of course my keynote topic was prominently advertised in the San Francisco Chronicle, conference brochures, and other conference promotions.

By November 18 — the date scheduled for my address — the commercial real estate world was in the same kind of financial panic as the rest of the planet, and that limited a lot of my options. So with the indulgence of Craig and Arnie, I shifted tack only a little and talked about “The Greatest Opportunities of Our Lifetimes That Are Coming Soon In Commercial Real Estate.”

If you follow, you have heard the first part my thesis (see Hospitality Lawyer: Fortunes will be made . . . or lost . . . in the wake of The Financial Bailout Bill and the Panic of 2008. What happens AFTER the Bailout Bill . . .).

“Next to my children I love a good panic more than anything else.”

The Great De-leveraging . . . The Global Financial Crisis . . . The Panic of 2008

Whatever you want to call it, I believe that we are in the middle of a Financial Panic — probably the biggest meltdown since World War II. Many have resisted calling a spade a spade, hoping that things would get better and wanting to avoid adding to the panic.

I understand that approach. I don’t want to add to the panic either. I didn’t cause this mess, and I am very sorry for all who are hurt by it. But I do believe that things have reached a point that we can only move on if we admit where we are, are realistic about the situation, and make the best of it that we can. Being an ostrich will not improve our situation.

With the virtual revamping of our banking and investment banking industries, failures of Bear Stearns and Lehman, the nationalization of our housing finance mechanisms (Freddie Mac and Fannie Mae), the Fed guaranteeing money market accounts, and stepping in to buy commercial paper from GE because GE cannot sell its paper in the markets . . . Citibank laying off 50,000 employees worldwide, consumer confidence at the lowest point since records were kept . . . Where do I stop?

Have you talked to people losing their jobs, struggling to meet a mortgage or being wiped out by margin calls? People are scared. They are terrified. They are in a “panic” that I believe will go down as one of the most important financial disasters in the past 200 years (Yes. That was 200, not 20). So why pretend everything is fine? Even better, why not look for opportunity?

As I mentioned in one of my earlier posts, one of the most prominent investors of all time has summarized the opportunity. In fact, this person would be in the Top All Time 40 of Richest People in the U.S. And she was the only woman in this category with 39 other men. Her name was Hetty Green (not Henrietta. Hetty.). Hetty inherited some money, but took a few million to more than $100 million before her death, and in current dollars, her worth would be valued at more than $19 billion. How did she do it? Her answer is in a quote that says it all:

“Next to my children I love a good panic more than anything else.”

these government bailouts will cause a tectonic movement in the ownership of real estate assets

A seminal event . . . unparalleled opportunities to make a fortune

I hope the “downturn” is a short and shallow one, but that is not what the Fed is saying or the data indicates. The most optimistic experts are now looking to mid 2009 as a possible bottom, but others are looking to 2010 or beyond, and fear a weak recovery when it finally comes.

As I count, the current commitments of the U.S. government for bailout are well north of $2 trillion dollars . . . and the governments of the civilized world are throwing billions or trillions more at their economies. Although no one knows exactly what this means today, these government bailouts will cause a tectonic movement in the ownership of real estate assets. And whenever that much real estate changes hands in troubled times, fortunes will made that dwarf the fortunes built in the “RTC days” in the early 1990s.

Do your own research. Look at who made money then. You will find names like Bass Brothers, Fisher Brothers, J.E. Robert, Colony Advisors, and many more. Our attorneys represented a lot of players in this last “great redistribution of wealth” which probably involved only $300 billion or so. JMBM was one of the top 25 firms in the U.S. representing the FDIC and the Resolution Trust Corporation when the U.S. government stepped in to bail out failed financial institutions holding distressed real estate assets. Others now on our team represented many of the opportunistic investors that “cleaned up” from this situation.
We may still have some significant pain to suffer, but there will be a phenomenal opportunity to make money in the very near future. We are still having trouble accepting that things are this messed up. So every new piece of depressing data immobilizes us like we were for months after the 9-11 tragedy — frozen in front of our TVs, watching the twin towers getting hit over and over.

NOW is the time to get ready for the unprecedented opportunities. Somewhere in 2009 or 2010 the landscape will start to look different. You can hunker down until then or you can start looking for opportunities that will put you way ahead of the game.

We are on the verge of value opportunities that we haven’t seen for at least 20 years.

I didn’t cause this mess and I am very sorry for all who are hurt by it. But I do believe that things have reached a point that we can only move on if we admit where we are, are realistic about the situation, and make the best of it that we can. Being an ostrich will not improve our situation.

Here are some of the opportunities I see which I shared with the commercial real estate lender conference:

  1. Discounted notes.
  2. Opportunistic investors with capital will look first at discounted notes. Without regard to real value of the underlying asset (which may be compromised in varying amounts), many note holders will feel the pressure — maybe for reasons of their own capital or liquidity requirements, regulatory issues, or fund end-of-life dates. This is an area where we expect price and value will take bigger adjustment, faster. Look for the discounted debt to provide IRRs of 20 percent or more. Some are seeing what they believe are IRRs of up to 30 percent now.

  3. Recapitalizing distressed borrowers.
  4. One way to invest in the upside is to buy assets through participating or mezz debt, or outright equity in distressed owners needing capital to fund operations, meet maturity calls, or other financial challenges. The necessitous owner may give the new money a preferred position, or may even step back into a passive position with little prospect of economic gain other than delaying or avoiding tax recapture (of accelerated depreciation, tax credits) or forgiveness of indebtedness income. This is an area for creative and aggressive deal making with the assistance of a competent advisory team.

  5. Equity purchases or investment.
  6. It’s not “whether” it’s going to come back, it’s “when.” Cash is king, so if you are royalty, get ready to jump in the game. How long should you wait before you jump in? Don’t wait too long – a good deal is a good deal. I remember the 1992 NYU Investment Conference when the talk was: “We don’t know if it’s low enough to buy yet; how long can we carry it?” A few years later the talk was: “We should have bought everything we could.” Everyone who bought well made a bundle. (This was the era when the Waikaloa was purchased at 10 percent of its replacement cost.)

  7. Workouts.
  8. Workouts are an opportunity to harvest great value. A lot of this opportunistic activity is going to involve restructuring. Don’t let this stop you! Hook up with those who have knowledge, energy, and capital and have been through the workout drill before. There is a ton of capital on the sidelines. Workouts will help the deal flow.

  9. REITs.
  10. Some of the best REITs around, including hotel REITs, are showing phenomenal yields. But their stock is in the crapper. Some of the best hotel REITs are trading at 10 percent of their 52 week highs! REITs are reflective of opportunities. What would Hetty do? She’d carefully perform her due diligence (loans may be due, inflating the opportunity) and make a move if was warranted.

  11. Mixed use and hotel mixed use.
  12. Condo hotels, hotel condos and hotel mixed use will have an enduring place in real estate. If you have the stamina and the intelligence, those properties can be repurposed with great profit potential. Due diligence is particularly critical here. If you don’t know how to create a successful condo hotel regime, then you don’t know the right questions to ask to see if your potential investment can succeed, or to develop the exit strategies!

  13. Geographic gems.
  14. International gateway cities like San Francisco, Seattle, Boston, New York, etc. will continue to provide opportunities that outperform the norm. Ultimate destinations will continue to do well. Infill areas will have great value as populations shift due to changing values in the housing market.

I asked the audience of bankers, brokers, and property owners if they were optimistic about the future. At least 90% of them raised their hands! Those in the real estate industry are often accused of being cockeyed optimists. It’s a good thing, too. These are the people that will do the deals that will help get the economy back on track. Some of them will even make a fortune.

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

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

Hospitality Lawyer asks, “Do you know the 8 Dos and Don’ts of handling troubled hotel mortgage loans?”

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

Hospitality Lawyer: Lender and borrower alternatives for troubled hotel mortgage loans

<a href="

  • atrix_key.html”>Hospitality Lawyer — Butler’s Matrix: Key to hotel mortgage loan defaults, workouts, bankruptcies and receiverships.

    Hospitality Lawyer: 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.

    • Part 1 — Special Purpose Entities getting approval to file bankruptcy.
    • Part 2 — Can a hotel ever be a “single asset” for bankruptcy purposes?
  • Hotel Lawyer — Making a bigger pie for everyone in defaulted Hotel Loan mortgage loan turnarounds, restructurings and bankruptcies

    Hospitality Lawyer: Troubled Hotel Loan Solution — JMBM’s SAVE® Program

    Restructuring distressed condo hotels

    • Part 1 — the background and structure of the typical condo hotel,
    • Part 2 — critical differences between condo hotel restructurings and those with traditional hotels, and
    • Part 3 — a unique approach to working out some troubled condo hotel projects.

    CONDO HOTEL bankruptcies, workouts and turnarounds fill the headlines, the nightmares of lenders and the dreams of opportunistic investors

    • Part 1 — The magnitude of the opportunity and the first part of 100+ questions you should ask when looking for distressed condo hotel opportunities
    • Part 2 — the rest of the 100+ questions you should ask when looking for distressed condo hotel opportunities

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

    This is Jim Butler, author of 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 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 or 310.201.3526. For his views on current industry issues, visit