Articles Posted in Workouts, Bankruptcies & Receiverships

Published on:

19 February 2021

See how JMBM’s Global Hospitality Group® can help you.
Click here for the latest articles on Hotel Finance.

The Global Hospitality Group® just hosted a very timely webinar discussing the state of the hotel and CMBS industries. Our program featured senior representatives from Argentic, Greystone, and Situs – three of the largest CMBS special servicers with the most distressed hotel debt – as well as leading data and analytics firm Trepp, HREC’s runway capital program, Manhattan Hospitality for hotel industry perspectives, and our own hospitality workouts and receivership expert to break down the current state of the distressed hotels market and CMBS special servicing.

Two of our panelists, Jack Westergom of Manhattan Hospitality Advisors and Manus Clancy of analytics firm Trepp, presented slides packed with useful information, and we wanted to make them available to those who were not able to attend the program. Jack’s update on the state of hotel industry, and Manus’ state of the CMBS industry presentation are both available for download below.

CONTINUE READING →

Published on:

10 December 2020
Click to see our category-killer experience with hotels. See also our distressed loan credentials and The Lenders Handbook for Troubled Hotels. And click here for the latest blog articles on loan modifications, workouts, bankruptcies and receiverships, and outlooks and trends.

Most of the receiverships in the United States are state court receiverships. But lenders seeking the relief and protection of receiverships are giving new consideration to filing in federal court.
Our partner Nick De Lancie took the lead in putting together this summary of some key factors in making this choice today.

Time for a new look at
Federal vs. State Receiverships

Many state courts are closed or backlogged

Due to the Covid-19 crisis, getting receivers appointed in many state courts may be difficult. Some state courts are effectively closed, others are backlogged, and still others have temporary restrictions on receivership or foreclosures proceedings that push receivership applications even further down the stack.

Federal courts are generally open and working. Federal courts, however, have generally been proceeding with their cases in a more-or-less normal fashion. Even though federal courts do not have the quick receivership hearings that some states permit in ordinary times, federal receiverships, which are not commonly used by secured creditors, can be a very useful remedy for defaulted loans. This is particularly true even when state courts are fully “open for business” where the borrower’s operations and the creditor’s collateral are located in multiple states.

Similarities to state receiverships. Federal receiverships are similar to traditional state court receiverships but they have nationwide scope and may avoid many of the problems that arise from seeking and using multiple receivers, each from a court in a different state. They are historically recognized by federal law and are recognized and governed by the Federal Rules of Civil Procedure. CONTINUE READING →

Published on:

13 July 2020

See how JMBM’s Global Hospitality Group® can help you.

Click to see our category-killer experience with hotels. See also our distressed loan credentials. And click here for the latest blog articles on loan modifications, workouts, bankruptcies and receiverships, and here for The Lenders Handbook for Troubled Hotels.

Meet the Money® Online: CMBS Special Servicing FAQs

It’s estimated that 20 percent of hotels in the U.S. have debt held in commercial mortgage-backed securities (CMBS). Among these hospitality industry borrowers are hotel owners needing financial relief due to the COVID-19 pandemic, many of whom are unfamiliar with working with master servicers and special servicers in the complex world of CMBS.

Unfortunately, there is much misinformation circulating in the business media about how special servicers work with borrowers needing debt relief.

On July 8, 2020, we addressed the myths and realities of working with CNBS special servicers in our Meet the Money® Online virtual roundtable, “CMBS Special Servicing FAQs.” The panel, moderated by JMBM’s Global Hospitality Group® Chair Jim Butler, featured CMBS experts including:

  • Andrew Hundertmark, CEO, Argentic Services Company
  • Curt Spaugh, Director, SitusAMC, Special Servicing Division
  • Lindsey Wright, Senior Managing Director, Greystone Special Servicing
  • Thomas J. Biafore, Partner, Kilpatrick Townsend
  • Robert B. Kaplan, Partner, Jeffer Mangels Butler & Mitchell

Frequently Asked Questions about CMBS Special Servicing for distressed hotel and retail projects

Roundtable Topics discussed include: CONTINUE READING →

Published on:

25 June 2020

See how JMBM’s Global Hospitality Group® can help you.

Meet the Money® Online: CMBS Special Servicing FAQs
for CMBS borrowers, investors and holders

A virtual roundtable of current perspectives, challenges and opportunities for hotel and retail projects

JMBM’s Global Hospitality Group® is excited to announce that next up in our Meet the Money® Online series is a virtual roundtable discussion among some of the top experts in the complex world of CMBS. If you are a CMBS borrower, investor or holder – or are involved in properties affected by CMBS – you will not want to miss this important conversation.

The online event will take place on Wednesday, July 8, 2020 at 10:30 AM PDT / 1:30 PM EDT. Register now.

Join our experts online for this 1-hour event which will answer the questions most frequently asked of CMBS special servicers and will also cover important considerations that CMBS holders, borrowers and investors often miss, including:

  • What are special servicers seeing now after the first wave of COVID-19 relief requests? How are forbearance requests being handled?
  • Which loans have larger underlying issues that will require a more complicated and protracted workout?
  • What are the critical appraisal and valuation issues today? What does stabilized value look like, and what assumptions are going to be used?
  • What are the most important effects of Pooling and Servicing Agreements? What do the documents say (or don’t say)?
  • What inconsistencies are showing up and where are they coming from?
  • What are the red flags for loan modifications (or purchase/sale) that could affect the all-important CMBS tax structure?
  • What impact does securitization structure—REMIC, Grantor Trust, CLR/QRS—have on workouts?
  • Can a “special purpose entity” file bankruptcy with independent directors and other bankruptcy remote features in loan documents or corporate structure?
  • Can a hotel be considered “single asset real estate” (or SARE) for streamlined bankruptcy purposes, and why do creditors care?
  • What should we anticipate moving forward?

The program will be moderated by Jim Butler, Chair of JMBM’s Global Hospitality Group®, a founding partner of JMBM, and one of the top hotel lawyers in the world. Devoting 100% of his practice to hospitality, Jim is author of www.HotelLawBlog.com and chairman of JMBM’s Global Hospitality Group® which focuses on representing hotel owners, developers, and capital providers. CONTINUE READING →

Published on:

17 May 2020
Click to see our category-killer experience with hotels. See also our distressed loan credentials. And click here for the latest blog articles on loan modifications, workouts, bankruptcies and receiverships, and here for The Lenders Handbook for Troubled Hotels.

 

Hotel Lawyer: Increasing Distressed Hotel Loans and Troubled Hotel Assets

Originally published in November 2008 on HotelLawBlog.com, then updated in 2010 for our Lenders Handbook for Troubled Hotels, we have updated this article through May 2020 to assist industry friends in dealing with distressed loans provoked by the COVID-19 crisis. 

How can a “special purpose entity” borrower ever file bankruptcy
if independent directors must approve the filing?
by
Jim Butler, Bob Kaplan, and Nick De Lancie

Since the mid-1990s, lenders on hotels and resorts have generally required their borrowers to transfer the asset being financed into a “single purpose” LLC or other “bankruptcy remote” entity sometimes respectively referred to as an “SPE” and “BRE.” The main feature of an SPE is that it owns only the single asset being mortgaged, is unlikely to become insolvent due to its own activities, and is generally protected from the effects of the insolvency of its affiliates. The main feature of a BRE is that filing bankruptcy is only a remote possibility because of various inherent or contractual legal requirements built into the very entity.

What is a bankruptcy remote entity? Why use one?

A BRE is an entity (usually an SPE) that has a structural layer of protection in its organic documents that makes it more difficult for the entity to seek bankruptcy protection. A number of approaches have been developed to create this “bankruptcy remote” structural layer.

Today, a BRE’s structural protection for the lender typically provides in its organic documents that in order to commence a bankruptcy case, approval must first be obtained from one or more independent directors or the equivalent, depending on the entity. Such a person must be independent of the borrower and is appointed by the lender, or approved by the lender. For simplicity, we will call such persons “independent directors.”

The lender expects that the independent director simply will not approve the entity’s commencement of any bankruptcy case. Thus, without a bankruptcy, the lender would be able to foreclose on the hotel or real estate without the delay and cost of bankruptcy.

Clashing fundamental principles – state corporate governance vs federal bankruptcy relief

At root, each BRE approach or strategy is based on the long-established, fundamental principle that, even though bankruptcy is a federal law matter, the entities in question are created under and governed by state law. Some believe that such corporations, limited liability companies, limited partnerships or other types of “corporate” entities can only be governed by the law of the state in which the corporate entity was organized. Therefore, the organic documents of the entity (adopted pursuant to that state’s law), govern who has the authority to decide that the entity will commence a bankruptcy case.

But this long-established principle of state law controlling corporate governance runs headlong into another long-established, fundamental principle of bankruptcy. The Bankruptcy Code (section 109(a)) expressly authorizes any “person” to file a bankruptcy petition. A person includes any corporation, limited liability company, and general or limited partnership. Waivers or attempts to contractually surrender this right are void as against public policy and, thus, unenforceable. CONTINUE READING →

Published on:

27 April 2020

Click to see our category-killer experience with hotels. See also our distressed loan credentials. And click here for the latest blog articles on loan modifications, workouts, bankruptcies and receiverships, and here for The Lenders Handbook for Troubled Hotels.

 

Hotel Lawyer: Increasing Distressed Hotel Loans and Troubled Hotel Assets

This article was published originally in November 2008 on HotelLawBlog.com and then updated in 2010 for our Lenders Handbook for Troubled Hotels. In light of the recent increase in distressed loans provoked by the COVID-19 crisis and resulting economic impact, we thought it might be important to bring the information current through April 2020.

Can a hotel ever be “single asset real estate” for bankruptcy purposes?
What is “SARE” and who cares?

by
Jim Butler, Bob Kaplan, and Nick De Lancie

Hotel Lawyers: Lender tips on forbearances, loan modifications, recapitalizations, receiverships, workouts, turnarounds, restructurings, and bankruptcies

CMBS lenders and others use SPEs for expedited remedies

Hotels, resorts, marinas, retail mixed-use, and other hospitality-related assets will likely continue to present challenges to lenders seeking expedited relief from bankruptcy stay provisions available to creditors in “single asset real estate” bankruptcy cases.

Since the mid-1990s, lenders on hotels, resorts, and other hospitality properties have generally required their borrowers to transfer the asset being financed into an entity (generally a corporation, limited liability company, or limited partnership) that was both “bankruptcy remote” (a “BRE”) and “special purpose” (also called “single purpose”) (an “SPE”). An SPE is an entity that owns only the asset being mortgaged, is unlikely to become insolvent due to its own activities, and is generally protected from the effects of the insolvency of its affiliates. A BRE is an SPE that has a further, structural layer of protection for the lender provided by provisions, such as the requirement for an independent director or manager who must approve the commencement of any bankruptcy case, that make its bankruptcy case more difficult.

Under the Bankruptcy Code, if a bankruptcy case involves “single asset real estate” (often called “SARE”), the proceedings will tilt greatly in favor of the lender/creditor secured by that SARE. Intuitively, then, an SPE that holds a single real estate asset would seem automatically to hold “single asset real estate” under the Bankruptcy Code. It is not, however, that simple.

This article will examine why this is important to lenders and borrowers, give an overview of the SARE determination, and provide some practical strategies.

The legal significance of SARE status (or not) for lenders

The determination that a borrower/debtor holds “single asset real estate” has important consequences for its bankruptcy case. In a SARE case, the creditor/lender secured by the real estate asset will be entitled to relief from Bankruptcy Code’s automatic stay as a matter of right unless the debtor does one of two things within 90 days (subject to extension) of commencing its case.

Under Bankruptcy Code section 363(d)(3), to avoid relief from the automatic stay being granted to a secured creditor (if it seeks it) with “single asset real estate” collateral, the debtor that holds that collateral must, within that 90 days, either:

  1. File a plan of reorganization in its case that has a reasonable possibility of being confirmed within a reasonable time; or
  2. Commence making monthly, interest-only payments to the secured creditor at the then-applicable non-default contract rate of interest on the value of the creditor’s interest in the SARE.

These are often difficult to accomplish unless the real estate asset is really viable and cash is flowing. CONTINUE READING →

Published on:

01 April 2020

See how JMBM’s Global Hospitality Group® can help you.
Click here for the latest articles on distressed hotel loans and here for The Lenders Handbook for Troubled Hotels.

Alternative Strategies
for Troubled Hotel Mortgage Loans
by
Jim Butler
JMBM’s Global Hospitality Group®

When a hotel loan gets in trouble, a lender should immediately perform a Comprehensive Situation Analysis. Borrowers should do the same and be fast to approach lenders with candor and an actual plan demonstrating what is needed and how it will work.

This Comprehensive Situation Analysis is the foundation for making some of the most important decisions that the lender and borrower will face on what to do with a distressed loan or asset.

When the Comprehensive Situation Analysis is completed, what’s next? What do the amassed facts indicate? How do they tell the parties what to do? What are the alternatives for dealing with a troubled hotel loan?

Basically, the alternatives for a lender with troubled hotel asset are:

    1. Do nothing (or sell the loan)
    2. Workout the loan
    3. Appoint a receiver
    4. Seek a deed-in-lieu
    5. Commence foreclosure
    6. Seek Relief in bankruptcy proceedings

The matrix below shows how many of the relevant factors will suggest the appropriate alternative to select.

Please let me know if you have seen any significant considerations we have missed.

CONTINUE READING →

Published on:

30 March 2020

See how JMBM’s Global Hospitality Group® can help you.
Click here for the latest articles on distressed hotel loans and here for The Lenders Handbook for Troubled Hotels.

The Comprehensive Situation Analysis should have gathered and considered all the relevant factors concerning the distressed hotel loan documents, the borrower, the hotel and their related considerations. Now it is time to consider these in light of the lender’s goals and the available alternatives. Given the complexities of the typical Special Asset, it is sometimes helpful to boil it down to a summary form that may over-simplify, but at least provides a grid or framework for analysis.

Over the years, I developed an analytical tool that we call “Butler’s Matrix” and it is set forth below: CONTINUE READING →

Published on:

23 March 2020

See how JMBM’s Global Hospitality Group® can help you.
Click here for the latest articles on distressed hotel loans and here for The Lenders Handbook for Troubled Hotels.

The Comprehensive Situation Analysis
for Troubled Hotel Loans
by
Jim Butler
JMBM’s Global Hospitality Group®

When Special Assets Teams and special servicers see troubled hotel loans coming onto their screens, they should quickly perform a “Comprehensive Situation Analysis.” The Comprehensive Situation Analysis forms the critical foundation for a lender choosing among its alternative strategies of workout, receivership, deed in lieu or bankruptcy (seeking involuntary bankruptcy and appointment of a trustee).

What is included in the Comprehensive Situation Analysis? Read on!

Early Warning System

For the same reason a lender needs access to information, it needs an excellent early warning system. In addition to obvious items such as a default under a franchise agreement or material contract, knowledgeable industry people are likely to know or be able to detect when a geographic area, market segment or particular hotel is getting into trouble-long before it shows up in the profit and loss statement. A decrease in inventories, failure to maintain the property, a cutback in marketing and other changes in the annual plan, budget, and marketing plan may all be early warning signs. Many prudent lenders have consultants watch their asset portfolios for significant trends and changes that indicate problems. The Special Assets Team should become involved early in the process. But special assets generally also require availability and advice from industry-savvy consultants and counsel.

Without good early warning systems, lenders are being surprised by borrowers calling to say, “We are giving the property back. Payroll is due Friday, and there isn’t any money in the account. . .” Lenders cannot rely on last quarter’s budgets or projections. They need current information to avoid these nasty surprises.

Information Update

The concept of updating all information for troubled hotel assets is the same as for any troubled assets. However, in the case of a hotel, one will typically look for items such as hotel franchise agreements and amendments, management agreements and amendments, any agreements, leases and other arrangements with golf pros, concessionaires and the like, recreational use agreements for golf, tennis, aquatics, equestrian or other amenities, and tax information and returns including occupancy, sales and use, employment, personal property and real property taxes. A checklist approach is helpful.

CONTINUE READING →

Published on:

19 March 2020

See how JMBM’s Global Hospitality Group® can help you.
Click here for the latest articles on distressed hotel loans and here for The Lenders Handbook for Troubled Hotels.
Hotel industry crisis: 8 Do’s and Don’ts
for distressed hotels
by
Jim Butler and Guy Maisnik
JMBM’s Global Hospitality Group®

As the COVID-19 crisis grows in the US and elsewhere outside China, hotels and restaurants are among the businesses hardest hit. In select markets like Seattle and San Francisco, hotels are reporting single digit occupancies and crushed ADRs. Many hotels do not have the cash flow to keep their doors open. The major hotel companies are talking of furloughs for tens of thousands of hotel employees and many properties are looking at closure or skeleton team maintenance operations.

This is a time for those with troubled hotel assets to “get back to the basics”.  Here is our time-tested list of Do’s and Don’t’s for distressed hotels and other special assets closely intertwined with operating businesses. There is a wealth of such materials available at HotelLawyer.com.

Here is our updated take on the 8 Dos and Don’ts for distressed hotels. If you just got a notice that your hotel asset is about to lay off staff and close, jump to #4 in the list below and then circle back.

1. Prevention.

Prevention is the first step in a well-planned approach to troubled hotel loans. Proper underwriting, documentation and provisions for access to information may help a lender facing a troubled loan. In the event the loan does get into trouble, the lender will be in a stronger position to protect its interests. Prevention includes careful underwriting of the collateral and the borrower. In underwriting the borrower, the lender should obviously look to the usual credit report and financial statements, but should often go beyond them to get a better feel for the borrower’s reputation, character, fortitude, expertise, consistency and creativity. The lender should ask: Has this borrower built or managed this kind of project before? Are the market and feasibility studies realistic? Are the projections consistent with these factors and do they provide adequately for a “worst case scenario”? Even on non-recourse loans, personal guarantees with “bad boy” carve-outs help assure borrow cooperation when things turn bad.

Once the credit decision has been made, the transaction should be fully and carefully documented with prevention in mind. Use the checklist approach to be sure nothing is overlooked. (JMBM’s Global Hospitality Group® uses our proprietary HIT List – acronym for “Hospitality Investment Task” list.) Be sure all desired title and liability insurance is in place, with endorsements to cover the lender’s interests. Particularly with construction loans, negotiate all necessary controls for the project – to cover both the ordinary course of building and the possibility of default. A lender will never have a better opportunity to protect its interests than the period before it has disbursed the loan proceeds.

2. Monitoring and early warning.

Information control is paramount. A lender must carefully monitor its loans until they are paid off. All documents and information needs to be gathered in one centralized place for security, analysis and continuous monitoring. Early warning systems should be established to alert the lender to problems with the borrower, the collateral, or the project’s feasibility. Is the property considering closing or layoffs? Is the construction or marketing of the project being delayed? Is the property being wasted? Are materials disappearing from the job site? Have the demographics and economics of the market changed adversely? If trouble signs appear, the special asset group should be consulted at an early stage, even if the project stays in the hands of the loan servicing department.

Many institutions have been “bitten” by their good faith efforts in a workout situation. The pre-workout agreement is designed to minimize these risks. CONTINUE READING →

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