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Published on:

30 April 2020

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

Note: If you are an individual consumer with coronavirus-related travel issues, please do NOT contact us! We do not represent individual consumers. We advise businesses on major contracts, investments and financing. 

Hotels have seen substantial losses in revenue in the wake of the coronavirus, and face the uncertainty of an economy which may take months or years to recover. For many, insurance payments may assist in keeping their business afloat, but few hotel owners or lenders are making claims. JMBM partner Guy Maisnik explains how some hotels may qualify for Business Interruption insurance coverage for COVID-19.

– Jim

Business Interruption Insurance may cover hotel losses
from COVID-19 shelter with judicial claims

Many coverage exclusions focus on disease, not government shelter orders

by
Guy Maisnik

Hotel owners and underwriters have seen the economic prognosis for hotels for the next twelve to twenty-four months, and it does not look good. Modern America 2.0 will not be the America of January 2020 for a long time.

The “V” uptick in the U.S. and world economy will come when the world can pass the “middle aisle test,” as in when will you comfortably: 1) take the middle seat in public transportation and travel; 2) sit on a bar stool or restaurant counter between two others; and 3) attend sports or entertainment events or other public gatherings. Until then, the bottom of the economic “U” may feel like an eternity.

A mistake not to pursue claims

So, what does this have to do with insurance? Everything. Because insurance payments might sustain your business until your guests can pass the middle aisle test. By now, you have read a number of articles written by lawyers and consultants on business interruption insurance – some more measured and analytical and others more aggressive.

Many hotel owners (or their lenders, surprisingly) are not bothering to make insurance claims at the advice of their insurance agents or counsel. These advisors believe there is a low likelihood of making a successful claim based on the 2006 Insurance Services Office (ISO) circular – Form CP 01 40 07 06, which excludes from coverage the loss or damage caused by “virus, bacteriaum or other micororganism that induces or is capable or inducing physical distress, illness or disease.”

In our view, this is a mistake. We believe hotel owners and capital providers should carefully review their insurance policies and coordinate with their consultants, lawyers and brokers to determine whether an aggressive approach is possible.

Policy exclusions are narrowly construed

First, all business interruption insurance policies are not the same. A sophisticated buyer of insurance services – and its legal counsel – will have their policies carefully analyzed. Depending on the policy and applicable law, there can be meritorious arguments in support of coverage, even if a hotel is open and operating.

Second, history and case law are replete with apparently so-called airtight policy exclusions only to find a court holding an insurer liable for coverage. Katrina is the most notable example, with insurers paying out approximately $900 million in coverage notwithstanding flood exclusions. Recently, the Seventh Circuit held that a manufacturer’s insurer must cover its insured, a designer and builder of anaerobic digesters, under its errors and omissions policy for claims alleging breach of contract, despite an express exclusion in the policy for claims arising out of a breach of contract. Similarly, the Ninth Circuit held that a war exclusion did not apply when an entertainment production company incurred damages as a result of Hamas rocket attacks.

The point is that insureds who purchased business interruption insurance and paid expensive policy premiums, should strongly consider pursuing coverage, even if not apparent under the precise language of a policy, particularly taking into account the policy terms, applicable law – both case and statutory – and prior judicial decisions.

The case for income loss coverage

The coronavirus pandemic caused states, cities and counties throughout the U.S. to impose social distancing measures in the form of stay at home, shelter in place and other executive type orders, and required businesses to close and remain closed until otherwise directed. Excluded from such orders were so-called essential businesses, which often included hotels. Regardless of whether a hotel is open or not, such closure and limited closure requirements seriously crippled virtually all hotel revenue demand drivers (i.e., businesses, restaurants, entertainment venues, schools, and so forth). This has had led to disastrous consequences for hotel businesses, severely reducing demand, disrupting operations and supply chains, causing a loss of income. The income losses will extend well beyond the date such orders are removed.

Hotels are suffering damages in a variety of ways as a result of COVID-19 and the shelter orders, most notably income loss, fixed expenses during partial or total closure, structure contamination, reputation damages and third-party claims.

Insurers will aggressively defend

True, there are hurdles to overcome. Given the state of the insurance industry and the large number of claims being made, it is unlikely that your insurance company will simply roll over and write a check. The insurer’s first (and not only) defense will likely be “virus, bacteriaum or other micororganism” exclusion from coverage under its policy, and that further the 2006 circular specifically addresses loss of business income. Hotel policies may also explicitly exclude coverage for property damage and loss resulting from viral and bacterial contaminants such as SARS, MERS, avian flu and the coronavirus. Insurers may even bring their own claim in a separate suit for declaratory relief that there was not an insurable event, which under a business interruption policy is generally defined as a direct physical loss or damage. Regardless, courts may well determine that business interruption and losses were caused by governmental order and not a viral pandemic.

CONTINUE READING →

Published on:

17 March 2020

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

 

Hotel owners, operators and lenders are under stress – hotel defaults, layoffs, and shutdowns loom. Prompt action is critical.

For the last three to five years the pundits have increasingly speculated that the longest economic recovery in history could not endure and that we were due for a recession. We hope that the extraordinary measures being taken now may defer some of the worst fears, but clearly the US economy has been plunged into distress, and the pain is particularly acute in hotels, restaurants and related travel and tourism businesses.

The shelter at home edits of the Federal, state and local governments are literally requesting that people stay at home for the next two weeks. Many hotels have plunged into single-digit occupancies and slashed revenues to cover fixed and operating expenses. Restaurants struggle to see if they can survive on takeout and delivery services alone. Furloughs and layoffs are imminent.

Lenders and borrowers alike are seeking relief, clarity, and resolution. It feels like some blend of the 1990s and 2008. And it is time to go back to the basics or distressed loans: Quick assessment, preparation of plans, transparency, communication, and cooperation for mutual benefit.

The lawyers who comprise JMBM’s Global Hospitality Group® have extensive experience and resources that can help hotel stakeholders answer these questions. The issues involved are too numerous to address in one article, and the answers will vary widely depending on each hotel asset and how it is structured.

Today’s article will address how the “structure” of hotel ownership and operations impact the interests of the various stakeholders.

  
Coronavirus: Creative strategies to mitigate financial impact
Loan defaults, lender rights & recapitalizations
by
Jim Butler and Guy Maisnik
JMBM’s Global Hospitality Group®

 

Facing the realities of low hotel occupancy and dwindling operating revenue

Lenders, equity providers, borrowers and operators are facing hard realities regarding the performance of their hospitality assets due to the Covid-19 pandemic.

What are the parties’ rights? What remedies can be pursued? What is the best approach for both the short term and the long term?

Understanding the structure of the hotel asset will help stakeholders answer these difficult questions.

The “operating business” is key

It is often said that hotels are a special real estate asset with an operating business. It really is the other way around: hotels should be thought of as a unique operating business first, within special purpose real estate. This is true not just for hotels, but for assets like timeshares, casinos, gasoline stations, movie theaters, and restaurants. The operating business comprises a large component of the asset’s value.

It is also the operating business that raises thorny problems when cash flow drops dramatically due to matters outside the control of any party – such as a global pandemic or a declaration of national emergency.

Identify and work with all stakeholders

It would be a serious mistake for any stakeholder to believe it holds all the cards in directing the final outcome on asset direction following a calamity. CONTINUE READING →

Published on:

11 January 2015

Click here for the latest articles on EB-5 Financing. 

 

JMBM is a Platinum Sponsor of the EB-5 Investors Conference in Las Vegas on January 17, 2015 and will moderate and talk about EB-5 for hotel development

JMBM’s Global Hospitality Group® is pleased to be a Platinum sponsor of the upcoming EB-5 Investors Conference at the Wynn Encore Resort in Las Vegas on January 17, 2015. This is one of the premier conferences on this subject in the entire United States.

Partner, Jonathan Bloch and I will moderate and participate in a panel on Hotel Development – Jonathan as a speaker, and myself as a moderator. In addition, JMBM’s Global Hospitality Group® Vice Chairman, Guy Maisnik and Partner, David Sudeck will be attending to meet with potential clients and friend to help explore this opportunity.

Our panel on EB-5 for Hotel Development will be from 11:30 am to 12:30 pm on Saturday, January 17, 2015. We hope you will join us for our session and reach out to us if you would like to get together to explore the EB-5 financing opportunity. We are able to help qualified premier developers source low-cost EB-5 financing for their project.

Why EB-5 and this Conference?

EB-5 financing is being used widely by some of the largest owners of hotels and restaurants, and we will be discussing how developers are taking advantage of this capital. EB-5 financing has provided developers with low-cost, non-recourse, five to six year financing for construction and development of new projects.

Whether you are new to EB-5 financing or have used it in the past, this one-day conference has something for everyone. CONTINUE READING →

Published on:

28 November, 2014
Click here for the latest articles on Condo Hotels
Condo hotels: Don’t forget the secret sauce!

by

Jim Butler, Bob Braun and Guy Maisnik
Condo Hotel Lawyers

Condo hotels are back in vogue as “securities”

Developers particularly like the “new model” where condo hotel investments are offered as a “securities” using the new SEC Rule 506(c) for private placements with public solicitation.

Unfortunately, in their enthusiasm for this new model– which is well deserved – many developers will create dysfunctional structures that will be difficult or impossible to correct once they are put in place. These issues can all be avoided with an experienced team of experts who know and understand condo hotels.

What is right about this “new model”?

Condo hotels make sense in many situations. (See Condominium Hotels are hot! What is a Condo Hotel?) They can be a great financing device for developers, particularly at the luxury and high-end spectrum of hotel development. The “new model” of selling condo hotels as securities will clearly be the way to go in most situations. SEC Rule 506(c) is the key to this approach. (See: The “new breed” of condominium hotels — Key to financing new hotel development? Selling condo hotels as “securities” under new SEC Rule 506(c) . . .)

So what’s the problem?

With the right team of experienced experts, there is no problem. But some people don’t recognize the legal and business complexity of a condo hotel. Every mixed-use project introduces new dimensions of issues for development, design and operation. And a condo hotel adds an entirely new dimension of issues related to hotel operations, condo hotel operations, integration of the project components, design of the rental program and terms of participation by condo owners in that program. Who owns what? Who pays for what? Who gets to use what? How are these terms implemented in CC&Rs, HOA articles and bylaws, rental agreements, maintenance agreements, and the like? CONTINUE READING →

Published on:

05 November 2014
Click here for the latest articles on Condo Hotels

High end hotel development in 2015

Almost every developer of a high end or luxury hotel in 2015 will at least consider using the condo hotel approach as a financing technique for new development, conversion or adaptive reuse projects.

Anyone evaluating a condo hotel structure needs to know, that with recent changes in the law, there are now two different approaches available:

(1) Non-Security Approach — This is the traditional approach used for almost every condo hotel offering for the last 50 years. It requires that the offering avoid characterization as involving a “security. ” The article below (Using condo hotels for financing new hotel development: The traditional condo hotel structures as “non-securities”) describes this approach. It explains the original formula for condo hotels and, although published in 2005, it continues to provide accurate guidance as to what developers will have to do if they want to avoid treating the condo hotel units as securities.

(2) Security Approach (as a private placement) — The new approach, resulting from the recent change in SEC Rule 506(c), now makes if feasible for most developers to offer condo hotels in private placements to accredited investors with mandatory rental programs and other features that render them “securities.” (see Condo hotel revolution and resurgence: Why developers are using “new breed” of condo hotels for financing.)

We think that most developers will now take advantage of the second approach under the SEC’s new Rule 506(c). They will treat their offerings as private placements of investment contract securities, and avoid all the challenges they otherwise face in avoiding securities status under the traditional condo hotel approach. But look at both approaches and you be the judge!

CONTINUE READING →

Published on:

01 November 2014

Click here for the latest articles on Condo Hotels
What is a Condominium Hotel (or Condo Hotel)?
Definition of a real estate legacy

by

Jim Butler, Bob Braun and Guy Maisnik
Condo Hotel Lawyers

A rebirth of the condo hotel phenomenon

Condominium hotels (or “condo hotels” as they are commonly called) are back in the news again. It seems like every high-end or luxury hotel development is at least considering using the condo hotel approach. The renewed interest is fueled by recovery of residential real estate markets, high construction costs for high end hotel rooms, and the recent change in SEC Rule 506(c) that has completely changed the “securities” dynamics on condo hotels. (On this latter issue, see “The “new breed” of condo hotels — Key to financing new hotel development? Selling condo hotels as “securities” under new SEC Rule 506(c) . . .“)

There are many important issues to discuss about condo hotels – whether they make sense, whether to structure them as real estate or securities, what regime structure best ensures a sound hotel operation, who owns what and who pays for what, and much more. But the first question many people ask, is “What is a condo hotel?”

What is a condo hotel?

Condo hotels enjoyed their first wave of popularity in the United States in the 1970s and 1980s. And the term “condo hotel” is often applied (or misapplied) to a wide variety of real estate structures.

The Condo Hotel Lawyers in JMBM’s Global Hospitality Group® think of condo hotels in the following terms, and condo hotel veterans generally agree:

What is a condo hotel?

Definition: A condo hotel is a hotel where some or all the rooms have been legally transformed into condominium units which are sold to purchasers, and where it is intended that the condominium units will be part of the hotel’s rooms inventory to be rented to the public and operated by the hotel management.

CONTINUE READING →

Published on:

30 October 2014

Click here for the latest articles on Condo Hotels.

Condo hotel revolution and resurgence:
Why developers are using “new breed” of condo hotels for financing

One “little” legal change has revolutionized and revitalized condo hotels

by

Jim Butler, Bob Braun and Guy Maisnik
Condo Hotel Lawyers

The condo hotel lawyers at JMBM have helped clients with more than 100 condo hotels and hotel condos. Our experience proves that well-structured condo hotels play a valuable role and have earned an enduring legacy in the hospitality industry. They make new hotel development feasible where limited financing and high construction costs would otherwise be prohibitive. And now one recent legal change sweeps away some of the knotty issues that have hampered condo hotel growth, and reignites the popularity of this approach with a “new breed” of condo hotels.

We are now at a pivotal point for condo hotels. We are witnessing the complete turnaround in the way developers will structure condo hotel deals — particularly for high-end and luxury properties. This 180 degree turnaround in approach is creating a new and better breed of condo hotels that builds upon past successes and takes a giant step forward.

This was all accomplished with the stroke of a pen late last year when the Securities and Exchange Commission (SEC) adopted Rule 506(c) in response to the express requirements of the JOBS Act. The JOBS Act required the SEC to eliminate the prohibition on using “general solicitation” in private placements under Rule 506 where all the purchasers of the securities are “accredited investors.” Effectively, this single legal change has suddenly made it feasible for most hotel developers to structure and sell their condo hotel projects as “securities.”

This is a big change! Over the past 50 years or more, with only a few isolated exceptions, all condo hotel deals were tortured monstrosities of legal convolution. Because of the prior securities laws, it was not practical for most developers to have their offering be considered a “security” because it was not practical to register the securities with the SEC (as in an IPO), and general public solicitation is essential to the sale of real estate like condo hotel units. However, under the prior law, achieving the critical “non-security” status imposed some nonsensical legal requirements.

Most of these absurdities resulted from the fact that investors typically buy condo hotels as an investment and want the kind of information that would be relevant to making an intelligent investment decision. However the prior SEC rules effectively prevented developers from selling condo hotels as an investment with the relevant information and structure to provide the greatest prospects of success. This created the practical paradox that it was illegal for developers to sell condo hotels as an investment, but it was not illegal for buyers to purchase condo hotels as an investment (and most buyers did so).

Practical implications of the new approach

In other articles, we intend to provide more background and detail for those who are new to the condo hotel scene. But this piece is designed for those who already know the basics, and perhaps even struggled with the limitations of condo hotel structure under the old rules. Thus, we move straight to the key considerations that hampered condo hotels under the old rules, and explore how the “new breed” of condo hotels (structured as securities to take advantage of the latest legal changes) is now positioned to become the dominant approach for this entire niche.

The table below summarizes some of the most significant requirements or features that distinguish the old approach of avoiding security status (and the old SEC rules on private offerings), from the new approach of accepting security status and complying with the new Rule 506(c). The critical requirement for the new approach is that all buyers of condo hotel units must be “accredited investors.” Generally speaking, this means that each purchaser must meet the requirement of either (1) a minimum net worth of $1 million (excluding primary residence), or (2) a minimum income of more than $200,000 per year (or $300,000 for a married couple) for each of the last two years, and reasonably expects the same for the current year.

So here it is in a nutshell, or in this case, a table. CONTINUE READING →

Published on:

25 August 2014

Lately, it seems like everyone wants to buy — or sell — an independent hotel management company. And this may be one of the best times to do so in a long while. Here are some thoughts on this timely subject by two of our hotel lawyers who have just completed a successful sale of an independent operator.
Why this may be the time to buy or sell a hotel management company
A hot trend and five key issues
by
Guy Maisnik | Hotel Lawyers

One of the hottest trends right now is buying (or selling) independent hotel management companies. The demand is coming from all directions – existing management companies, investment funds and foreign buyers. Existing management companies are scrambling for market share, economies of scale and strategic markets. Investment funds are looking for the direct control over their hotel investments through a captive management company as well as attractive economic returns that a great independent operator can achieve with limited capital investment and risk compared to hotel investment. And foreign owners share many of these goals, and see the acquisition of a hotel management company as a solid way of entering into the hotel market in the United States.

From the potential seller’s standpoint, the timing may be optimal for a sale at this point in the cycle. A management company’ sale price is typically negotiated as a multiple of earnings. Traditionally, this multiple is four to six times earnings before interest and taxes, after making adjustments for expenses that would not continue to the buyer, and deducting from the price any interest-bearing debt that the buyer assumes. However, in this market, hotel management companies with a proven track record of performance, and a high quality (sustainable) earnings stream  can command a price well in excess of six times earnings before interest and taxes with multiple suitors. The demand is there, but the process is complex.

And here are five key issues or questions you should consider before buying or selling a hotel management company. CONTINUE READING →

Published on:

18 August 2014

Today, the Hotel Lawyers in JMBM’s Global Hospitality Group announced our 25th Annual Meet the Money® conference to be held May 4-6, 2015, at the Sheraton LAX. It’s hard to believe we are marking the 25th year of getting together with our friends in the industry for a couple of days where all participants share information, meet leaders in the industry and make deals. It will be an exciting conference and if you have not joined us at Meet the Money® in the past, we hope you will come find out what all the buzz is about in 2015! If you are a regular participant, I promise that 2015 will not disappoint!

 

JMBM’s Meet the Money® marks its 25th anniversary in 2015
National Hotel Finance & Investment Conference – May 4-6, 2015 in Los Angeles

LOS ANGELES – Meet the Money®, the premier national hotel finance and investment conference will convene for its 25th annual event on May 4-6, 2015 in Los Angeles. Since 1990, the conference has connected attendees with the industry’s top executives and leaders.

“When we established Meet the Money® 25 years ago, our purpose was to provide hotel developers and owners with a forum to meet capital providers and to gain insight on debt and equity financing,” said Jim Butler, Chairman of JMBM’s Global Hospitality Group®. “This milestone signifies our continued commitment to that vision.”

Each year, Meet the Money® brings together 400 hospitality executives and capital providers to discuss the latest trends in hotel finance in a casual and lively atmosphere.  Meet the Money® 2015 will provide the latest information on hotel industry fundamentals and numerous panel discussions by the industry’s top thought leaders and innovators. The conference will include two evening receptions, two breakfasts and lunches, and plenty of networking time to meet leaders and make deals. CONTINUE READING →

Published on:

22 January 2014

Hotel Developer Forum in Los Angeles

With hotel development beginning to blossom in many national markets where the cost to buy a hotel substantially exceeds the cost to build one, JMBM’s hotel lawyers recently held a Hotel Developer Forum focused on the City of Los Angeles. The program was moderated by Jim Butler, Ben Reznik and Guy Maisnik. Bud Ovrom and Michael Santana were guest speakers.

Bud Ovrom is the General Manager of the LA Convention Center and is charged with figuring out how to get 4,000 more hotel rooms to support the Convention Center, which is at the heart of the remaking of Downtown Los Angeles. Santana was appointed as the Chief Administrative Officer for the City by former Mayor Antonio Villaraigosa in 2009, and recently agreed to continue in that position at the request of newly elected Mayor Eric Garcetti. Santana is the Budget Chief for Los Angeles and has negotiated all the development incentive deals made by the City since he took office.

There were a number of interesting take aways for the developers attending this gathering. One is that the City of Los Angeles wants to see 4,000 new hotel rooms developed in the downtown area serving the Los Angeles Convention Center — and the City is willing to provide economic incentives to make it happen (up to 50% of the property specific revenues from transient occupancy taxes, sales takes, property taxes and the like).

But these City incentives come with strings attached, which developers will have to weigh against the benefits of the incentives. Read on for the details.

CONTINUE READING →

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