14 April 2009
Please see “troubled hotel loans – workouts, bankruptcies & receiverships” for the latest articles on troubled hotels.
Hotel Lawyer: Hotel borrower dilemma: the note is in default or coming due. Do you fight the land war in Asia or find a way to make love (not war)? This is the first article in a series of two about how lenders and borrowers need to work outside the box to accomplish their objectives in this down market. Today’s article focuses on the borrower perspective, and the next one will be on the lender perspective. I encourage lenders to read this article, and borrowers to read the lender article. There is a win-win here for many players. We have some ideas you may never have considered before.
The SAVE® program is a comprehensive analytical approach to all the critical business and legal aspects of troubled hotel assets to unlock or create value for the parties.
Borrowers, the lender does not have to be your enemy. We have a way you might profit by finding all the ways you can make your lender’s life (and asset value) greater, while greatly improving your own. How can that be?
A brief aside provided by Martha C. White and the New York Times
Please forgive me in a self-indulgent moment. Today was pretty exciting. Yes, I have been quoted in the Wall Street Journal and the New York Times before, but being mentioned twice in the first three paragraphs of Martha C. White’s New York Times article on hotels was pretty heady stuff. (Thank you, Martha!) When some friends sent me and e-mail saying they had seen the article, I just wished my mother could’ve seen it too. She would have been proud.
Unfortunately, the subject of the New York Times article was about the nuclear winter our hotel industry is going through and why the foreclosures and bankruptcies (in what the New York Times has now called “The Great Recession of 2008”) are likely to exceed the previous 2,000 mark reached in the last big downturn of the 1990s.
And those same considerations discussed by the New York Times today underlay our extensive writing over the past 6 months or more on the subject of distressed hotel loans, restructurings, bankruptcies and receiverships. There is extremely valuable information on www.HotelLawBlog.com. Just click on the “Hotel Law Topics” tab at the top of the blog, and then click on the “workouts, bankruptcies and receiverships” hyperlink to get all the articles on the subject. you can also click here.
You can also check out the extensive library of hyperlinks on distressed hotel assets at the end of this article.
A truly novel, value-creating approach that benefits BOTH borrowers and lenders
For the veteran hotel lawyers in JMBM’s Global Hospitality Group®, this will be the third major real estate downturn where we have represented both a small number of very large lenders (FDIC, RTC, and a few big banks) and special servicers, and quite a number of troubled hotel borrowers.
Working both the lender and the borrower sides of distressed hotel loans, has inspired us to create something that we call the hotel SAVE® program. SAVE® stands for “Strategies and Approaches for Value Enhancement.” The SAVE® program is a comprehensive analytical approach to all the critical business and legal aspects of troubled hotel assets to unlock or create value for the parties.
Even industry savvy lenders and borrowers can be too close to a situation or haven’t faced these circumstances before. They tend to give up when a hotel’s value is worth only a portion of the senior debt.
What do borrowers really want?
First, borrowers need to consider their own interests. What do they really want? Can they keep the hotel? Can they reduce or eliminate personal guarantees or get a release of other pledged collateral? How about a structure to defer or minimize their tax recapture or forgiveness of indebtedness income? Can they get (or keep) a paying contract managing the hotel or overseeing implementation of an agreed upon plan? Could there be a future upside above some minimum hurdles? Is there a way to work out of the hole, or even to get a substantial monetary payment from the lender — notwithstanding an impending loan default?
Even industry savvy lenders and borrowers can be too close to a situation or haven’t faced these circumstances before. They tend to give up when a hotel’s value is worth only a portion of the senior debt.
A fresh team of experienced professionals can often discover new ways to drive revenue, contain costs and deal with CapEx issues, and release value from burdensome legal contracts. Maybe you don’t need to change management or brands, or give the keys back to the lender, and if you do, maybe there is a win-win by a cooperative approach. Don’t have enough cash to fund proper analysis and plan preparation? In the right situation, the lender may fund the costs or analysis, planning and implementation.
But you already have a professional brand or manager and you (or the lenders) have asset managers who have been around a long time and know almost everything. But have they seen this kind of environment and do they understand both sides of the equation? Are they used to dealing with restructurings, or is that just their latest “gig”?
Think of it this way. If the borrower can help the lender create substantial hotel value that would be difficult or impossible for the lender to accomplish by itself, shouldn’t that be worth something? Could it be enough to accomplish some borrower goals that otherwise might be impossible?
What are the special needs of your lender?
The lender-borrower dance over distressed hotel loans is often antagonistic, but it doesn’t always have to be that way. Who is your lender or who is handling your loan? Is it a CMBS special servicer, a portfolio lender, the FDIC, or a loan-to-own operation? What special considerations does your particular lender have? Is it worried about taking a hotel back because it lacks staffing, wants to leave in place the (possibly irreplaceable) loan to facilitate a sale, or has documentation problems or lender liability concerns? How important to this lender is the timing and certainty for a note or asset sale? What are the politics and priorities of the bond holders or loan syndicate members?
Most of the considerations borrowers and lenders have in choosing alternatives for dealing with distressed hotel loans are no secret. (GOOGLE “Butler’s hotel workout matrix” or “hotel lender and borrower alternatives” for a hand discussion and summary). But there are some novel approaches. For instance, what if the borrower, proving itself trustworthy and reliable, took the initiative in presenting the lender with a program that could significantly improve the lender’s position and the value of the asset for everyone?
What special considerations does your particular lender have? Is it worried about taking a hotel back because it lacks staffing, wants to leave in place the (possibly irreplaceable) loan to facilitate a sale, or has documentation problems or lender liability concerns?
Finding the value proposition with the SAVE® program
While many borrowers traditionally have thought first of hindering and delaying a lender resolution, or resorting to lender liability claims, with the SAVE® program, there is another approach that we think is more likely to benefit all involved in The Great Recession we are enduring. It takes thinking outside the box.
Bad boy claw backs (springing personal liability for certain “bad boy” actions like bankruptcy, lender claims, environmental hazards and the like) are not a problem with this approach, because the SAVE® program is a cooperative effort where lender and borrower work together to accomplish more than they otherwise might on their own.
Think of it this way. If the borrower can help the lender create substantial hotel value that would be difficult or impossible for the lender to accomplish by itself, shouldn’t that be worth something? Could it be enough to accomplish some borrower goals that otherwise might be impossible? One key to this is understanding your lender — and your lender’s goals, issues and constraints. It is worth checking out! What do you have to lose?
For more on the SAVE® program approach, and other materials on borrower and lender options in troubled hotel loans, see www.HotelL
awBlog.com, or GOOGLE “JMBM’s hotel SAVE program” and look at the articles cited.
Here are a few of the recent articles on troubled hotel loans and assets for your convenience:
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.
JMBM’s SAVE® Program for Troubled Hotel Loans
Restructuring distressed condo hotels
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 have helped our clients as business and legal advisors on more than $125 billion of hotel transactions, involving more than 4,700 properties all over the world. Who’s your hotel lawyer?
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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 $125 billion of hotel transactional experience on more than 4,700 properties located all over the world.
Matters handled range from hotel workouts, restructurings and bankruptcies to public-private partnerships, mixed-use development and foreign investment.
JMBM’s troubled asset team members have more than 1,000 receiverships under their belts, along with the often related bankruptcies and restructurings. Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors with a virtual database of current “market” business terms. They are deal makers. They know who to call and how to reach them.
Contact Jim Butler at jbutler@jmbm.com or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.