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Global Hospitality Advisor®: Opportunistic investment alert! What to watch for when buying distressed debt on timeshare, fractional and vacation club developments

24 April 2010

Hotel Lawyer with some advice for investors in distressed notes and receivables involving timeshares, fractionals and vacation clubs. How to buy vacation ownership notes and receivables.

One of the most profitable endeavors for savvy lenders has been acquisition and development loans and consumer receivable financing for vacation ownership projects — timeshare, fractional and vacation club projects. For various reasons that have little to do with the continuing sound fundamentals and continuing consumer demand for such project, the biggest lenders in this area have essentially stopped lending to deal with their other problems. And recently, some opportunistic investors have sought our advice on some potentially exciting loans being sold at a fair discount.

Due diligence is the caveat. (See What have we learned from “The Crash of 2008”? There are no shortcuts for due diligence! There is great opportunity here, but also significant risk that can be ferreted out and analyzed to provide great confidence about the investment. In this article, my colleague and timeshare lawyer David Sudeck, a senior member of JMBM’s Global Hospitality Group®, shares some of his insights on this subject.

In many ways, the issues are similar to those involving condo hotels (read our Hotel Law Blog articles on these topics at in that both vacation ownership and condo hotels involve not only an operating business but also third party stakeholders and their expectations (and their attorneys). (Click here for 100 Questions you should ask when looking for distressed condo hotel opportunities.

Navigating through the maze requires expertise, a solid plan, and an experienced team.

Sudeck%20David%20photo2%20.jpgHow to buy distressed notes secured by vacation ownership projects

Opportunities and pitfalls in buying debt on timeshare, fractional or other vacation ownership
A Good Time to Buy, But Proceed with Caution!

By David Sudeck, Hotel & Timeshare Lawyer | JMBM Global Hospitality Group®
A wide variety of loans secured by vacation ownership real estate are in distress as receivables financing lenders have pretty much cutoff most time-share, fractional and private residence club developers, leaving limited carry-back financing options to offer to consumers. At the same time, consumer confidence has been beaten down by the prolonged economic downturn and unemployment.

We are Seeing Timeshare and Fractional Loans Trade!

While there may be signs of recovery, we are seeing more timeshare developer construction loan defaults. In this distressed economic environment, a lender with a non-performing mortgage loan is faced with difficult choices. It may elect to pursue foreclosure, but this process can be long and expensive (especially if the borrower files bankruptcy). Furthermore, most lenders lack the desire or the expertise to own and manage a timeshare or fractional project or the related interval sales. In addition, many do not want to assume the liabilities and obligations of ownership, including real property taxes, environmental liability, and obligations to existing owners. Furthermore, if the lender has written-off some or all of the loan, then selling the loan may reflect favorably on the lender’s books. As a result of all of the foregoing factors, some lenders are selling off loans secured by timeshare, fractional and other vacation ownership developments at meaningful discounts. Other lenders are selling portfolios of loans that are performing because the lender has decided to exit the business or the market segment. In many cases, the decision to sell performing debt has nothing to do with the debt itself – the lenders may be focused on other problems that they or their affiliates have. For our clients with liquidity and patience, this means opportunity!

Due Diligence Is Critical When Purchasing a Loan Secured by a Vacation Ownership Property

The purchaser of a loan secured by any commercial real estate should conduct due diligence in connection with the loan (including the borrower under the loan) and the property that secures it. Conducting loan purchase due diligence is usually difficult because (1) the lender has often kept poor files, (2) the lender is hesitant to provide full access to its files to avoid claims of misrepresentation and in support of the “as-is, where-is” nature of the sale, (3) the borrower is uncooperative, and/or (4) the third party management company or broker responsible for handling project management and sales is, for one or more reasons, uncooperative. When you include all of the issues that are specific to a vacation ownership property, completing due diligence becomes a major undertaking.

Ask the right questions!!!

It is critical that a loan purchaser asks the questions below and understands the answers or that the purchase price of the loan has been risk-adjusted if these questions have not been answered:

  1. Are the loan documents enforceable? How much is owed?
  2. Do the borrower(s) and/or guarantor(s) have any claims against the selling lender?
  3. What is the financial condition of the borrower(s) and guarantor(s)? Have the guarantor(s) been released?
  4. What percentage of the project construction is complete? What remains to be done? How much will it cost to complete construction? How long will it take to complete construction?
  5. Do any contractors or other parties have rights to lien the property that are prior to the subject loan?
  6. Are there potential construction defect claims?
  7. Are there purchase contracts for intervals that will expire before the units can be completed?
  8. What commission obligations are there in connection with pending sales?
  9. Was the property sold in compliance with applicable laws? If not, what are the statutory rights of rescission of the timeshare/fractional interval purchasers?
  10. What representations and promises (e.g., promises of future benefits or amenities, guaranteed buybacks, exchange affiliations, etc.) were made to the interval purchasers?
  11. Were there any sort of violation or misrepresentations by the developer could result in a potential claims against the current and successor owners of the development or that may adversely affect public relations for the development or mire the project in litigation?
  12. Is the project phased? Are there any obligations or opportunities to construct future phases?
  13. Is the project operating? Are sales continuing?
  14. What approvals are necessary from state regulators under state timeshare registration laws where the project is being sold and where the project is being marketed for sale? Is there a temporary exemption for foreclosing lenders in the state where the project is registered?
  15. Has control of the Timeshare Owners Association been turned over to the purchasers?
  16. What rights are there to continue to sell timeshares on the property?
  17. Have assessments been paid on sold and unsold units? Does the borrower have a bond in place to protect the interval owners from its failure to pay assessments or subsidies on unsold units?
  18. Are existing interval owners facing foreclosure? If so, how will the shortfall from their unpaid assessments be funded?
  19. Is the current budget sufficient to fund the operations and maintenance of the project? If the lender forecloses on the property, how any deficiencies be cured?
  20. Can the property, after foreclosure, be modified based on the governing documents? If it is repositioned, will the current budgeted assessments be sufficient to pay for the operations and maintenance of the repositioned property?
  21. Who manages the association? What are the terms of the management agreement? Can the management agreement be terminated? See below regarding issues involving the lender’s right to terminate the management agreement.
  22. Is there a rental program in place? Does it comply with applicable securities and real estate laws?
  23. Is the property affiliated with the right exchange company(ies)? Can the affiliation agreements be terminated upon foreclosure or deed-in-lieu of foreclosure?
  24. Does the property and its operations comply with the Americans with Disabilities Act and applicable state access laws?
  25. Are the interval owners complaining or threatening litigation? Can relations with the interval owners be improved through clearer communications?
  26. Can the sold intervals be repurchased at a discount that makes sense and that would allow the lender to completely reposition the property after foreclosure and interval buyback? What would incentivize the interval owners to sell their intervals back if desired?
  27. Will the loan purchaser continue selling intervals post-foreclosure? If so, can the intervals be sold without seller financing? Are there sources of receivables financing available to the property?
  28. If the loan purchaser intends to change the use of the property, do applicable zoning laws allow for the intended use? Will the planning department support the change in use?
  29. Is the property adequately insured for losses and liability claims?
  30. Would the loan purchaser benefit from the appointment of a receiver pending foreclosure to take immediate possession of the property’s cash flow, if any, and secure the property?

Negotiating the Loan Purchase Agreement
We intend to cover the key terms of a Mortgage Loan Purchase Agreement or its equivalent in a separate article. We have significant experience from this downturn and previous downturns negotiating loan purchase agreements. Needless to say, because most lenders did not intend to be in the business of selling loans and because the sellers perceive these sales to be at highly discounted prices, the loan purchase agreement tends to be seller-oriented (as-is, where-is, etc.). Nonetheless, to the extent possible, we try to mitigate, through the provisions in the agreement, certain of the risks associated with purchasing a loan secured by a complex and regulated collateral like a vacation ownership property with intervals for sale.

Challenges Associated with a Bankrupt Borrower Involving a Vacation Ownership Project.

Another wildcard that a loan purchaser may need to deal with is a borrower bankruptcy before foreclosure is complete. Unfortunately, bankruptcies involving timeshare or vacation ownership properties are particularly challenging. They have a lot of stakeholders (e.g., receivables and other lenders, individual timeshare interval owners, management companies, brokers, and vendors), and the property, with its wide variety of components, may be very difficult to classify as a “Single Asset Real Estate” proceeding for purposes of securing an expedited relief from stay (to allow the lender to proceed with its pending foreclosure) pursuant to Section 362(d)(3) of the Bankruptcy Code. For a detailed analysis of this issue, read “Hospitality Lawyer – ‘Speed bumps’ in the road to bankruptcy for hotels and resorts. – Can a hotel ever be a “single asset” for bankruptcy purposes?” (from that article “The classic cases for single asset real estate involve a single office building or apartment house passively held for income. Properties involving an operating business, like hotels, are more problematic”). When there are many creditors, a borrower may be able to not only significantly delay the relief from stay, but it may be able to successfully secure bankruptcy court approval of a “cram down” pursuant to which the loan terms can be modified in a way that is unfavorable to the loan buyer as the new lender.

Understanding Obligations to Third Party Management Companies

Whether or not a timeshare or other vacation ownership property is operated sold using a branded affiliation, most such properties are managed by a management company. If a loan purchaser intends to foreclose on the property after buying the loan, that purchaser must be certain that the original lender/seller has not signed a non-disturbance agreement. If so, then it may not be possible to terminate the services of the management company except pursuant to the terms of the management agreement itself. For a detailed analysis of this issue, read our blog article on the topic “Hospitality Lawyer: Hotel Management Agreements: SNDAs or Subordination Agreements.”

What does it all mean?

Through careful due diligence and drafting, much of the above risk can be eliminated. However, in order to truly understand the nuances of a property and avoid the delays and costs associated with a borrower bankruptcy, it is best to have the full cooperation of the borrower. How can that be achieved? Sometimes an offer of guaranty relief or walking away money can result in a “friendly” transaction. If the borrower is cooperating, then a concurrent transfer of the property to an affiliate of the loan purchaser will also eliminate much of the risk of borrower bankruptcy during a foreclosure. For a detailed analysis of this issue, read “Hotel bankruptcy? Distressed hotel loan mortgage? Restructuring hotel debt? Troubled hotel asset? How about an Enhanced Note Sale™?”.

The hotel lawyers at JMBM’s Global Hospitality Group® have a rich library of free information on dealing with distressed hotels, vacation ownership and condo hotels correctly (visit and see “Timeshares” or “Workouts, Bankruptcies & Receiverships”).

This is Jim Butler, author of 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 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.