1 September 2009
This is one of many articles on the subject of “troubled hotel loans – workouts, bankruptcies & receiverships” in the rich library at www.HotelLawBlog.com.
Do the math yourself! Run a present value analysis of likely cash flows on 3 alternate scenarios. Decide whether you have the stamina and capital for a long haul if you intend to hold.
Hotel Lawyer. As a hotel owner or lender with a distressed property in the worst business environment for more than 70 years, you have a decision to make. Do you sell the hotel now at a deep discount, or do you hold on for things to get better? How long does it take to market a property in this environment?
Owners and lenders of thousands of hotels in the United States and abroad are confronted with this decision. Here are a few thoughts from the pros.
What price can you get if you sell now? Market value or liquidation value?
When making the “sell now or sell later” decision, many hotel owners are concerned about the value they will realize on sale, and how long it will take to realize a “market value.”
Last week, Steve Rushmore, founder and CEO of HVS, presented a webinar on distressed properties. He said that there are at least two big differences between a seller realizing “market value” on a hotel property instead of “liquidation value.” According to Rushmore, today
“Anyone who talks about a 1 to 2 year marketing period is out of his mind. If you have not sold within 90 days of putting your hotel on the market, you’re toast!” ~ Alan X. Reay, Atlas Hospitality
- It takes 1 to 2 years to provide adequate marketing time to realize a market value price in today’s market.
- Liquidation value will be 20-50% below market value.
Mark Elliott of Hodges Ward Elliott, one of the premier hotel brokers in the country, agrees with Steve Rushmore that there is at least a 20% additional discount from 2007 values for “forced sale” transactions.
Mark Elliott also thinks that there will be a rush of sales over the next few quarters as more desperate owners and lenders come to the realization that values are not going to improve for a long time, and decide that they would rather cash out now at any cost. He believes lots of desperate sellers will likely start dumping properties and keep values low for a long time. His advice” Sell now and avoid the traffic jam!
How long to market in order to accomplish market value?
At an intellectual level, I understand what Steve Rushmore is saying. He believes it is going to take a long time before someone can realize a higher price than they can today — maybe up to 2 years . . . or even longer.
But as a practical matter, the concept of a 1 or 2 year marketing period is absurd. This is not a period for marketing. It is a refusal to deal with the abysmal economy that is our reality today. A 1 or 2 year marketing period is just a stall — waiting for the world to change. Can you actually imagine giving a broker a 2-year listing agreement on your property?
It takes 1 to 2 years to provide adequate marketing time to realize a market value price in today’s market. ~ Steve Rushmore, HVS
I decided I would test my reaction out on Alan Reay, the founder and CEO of Atlas Hospitality — the leading hotel broker in California. Alan’s Atlas Hospitality Group has sold more hotels in California than any other brokerage firm.
Alan takes a more pragmatic approach to the marketing period.
Alan Reay says lenders are asking him for the price they can realize on a property sale within 60 to 90 days. Alan believes that this the only feasible approach today. At least in the real world, Alan says “The price we give lenders today is based on 60 to 90 days closing, otherwise, they need to lower the price 10 to 15% at least.”
According to Reay, “The days of 6 to 12 month marketing timeframe (what you see in all appraisals) are long gone. Anyone who talks about a 1 to 2 year marketing period is out of his mind. If you have not sold within 90 days of putting your hotel on the market, you’re toast!”
Why is delay a problem?
When I asked Alan Reay what this means, he had two specific considerations:
We have a 10 year supply of hotels on the market at the present absorption rate — and that assumes no other hotels are put on the market. It is “highly unlikely” that more hotels will not be put on the market. Unless you are prepared for a fairly long term hold — say 3 to 5 years — “a hard present value analysis is likely to show that you are better off selling today at a realistic market price.” The alternative may be feeding a negative cash flow beast and waiting for a long time for value recovery.”
Reay says, “If you don’t like the market price today, you are really not going to like it 12 to 18 months from now.” Basically, Alan sees that sellers have been looking for “yesterday’s prices” and by the time they reconcile themselves to the price they were offered 6 months ago, that is no longer achievable.
What do the hotel lawyers at JMBM’s Global Hospitality Group® advise?
Do the math yourself! Run a present value analysis of likely cash flows on 3 alternate scenarios. Decide whether you have the stamina and capital for a long haul if you intend to hold. Or decide that you are a gambler.
Be realistic. And if you are going to be a seller, then sell quickly. Many experts see values continuing to decline until at least 2011 or, more likely 2012. Some think values recover peak levels by 2014 and others think recovery to 2007 levels is TWO real estate cycles from now (given that a typical hotel cycle lasts 7 to 8 years, this could possibly be 10 to 16 years, i.e. 2019 to 2025).
We would be happy to help you evaluate your options and develop the best plan from here.
Other articles on the Troubled State of the Hotel Industry
Other recent articles that relate to the state of the industry paint a pretty consistent picture of data and trends. Here are a few links to articles for your convenience:
- Closing that hotel may be the worst money-saving idea you ever had! Lenders, here’s why mothballing a hotel can be a very bad idea.
- Hotel Lawyer: Some practical alternatives to hotel closings – turning around operating results.
- Hotel receiverships, bankruptcies, restructurings, workouts, turnarounds and opportunistic investment
- Hotel Lawyer Marta Fernandez: The Labor Pains of Hotel Closings Optimal Strategies for Full or Partial Hotel Closings
- National implications from the latest hotel industry Survey
- Conditions for hotel industry “RESET” may be coming into alignment
- Hotel foreclosures on track to set new records in California and elsewhere.
- Special servicers: Busy now? Realpoint says work will double by year end! Implications for all CRE loans.
- Hotel delinquencies predicted to exceed 8% by year end. Red Roof defaults on $361 million in loans. Are there lessons for hotel lenders and investors in the latest California market report?
- PKF says 2009 worst year in lodging history. Robust recovery likely but years away
- What lies ahead for the hotel industry? When do values bottom? When do they recover?
- Hospitality Lawyer at the 2009 NYU hotel conference
- Hospitality Lawyers present JEWELS from Meet the Money® 2009
- Hospitality Lawyer Insights
- Hospitality Lawyer: The “amazing relationship” between GDP and hotel room demand. When the recovery comes, what will it look like for the hotel industry?
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 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 $87 billion of hotel transactions, involving more than 3,900 properties all over the world. For more information, please contact Jim Butler at email@example.com 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 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.