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This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer. Please contact me at Jim Butler at jbutler@jmbm.com or 310.201.3526.

Published on:

15 June 2014

Concerns over a real estate bubble in China

For decades, China was referred to as the “sleeping giant.” This reference is to the great potential impact of the country, its vast population, and its economy, but also to the fact that this potential was largely unrealized for hundreds of years. Well, the sleeping giant is awake! And the world financial press is now full of analysts following China and the international ramifications of its every action on the world economy.

Recently, great concern has been raised by some over the impact of the stalling Chinese economy as it drops from double-digit growth in GDP to 7.5% or less. Alarm has been raised about the bubble in the Chine real estate markets, particularly the housing, and now commercial real estate as well. And most recently, financial analysts worry about the shadow banking system (financing and loans by non-banks) and Chinese real estate companies’ interest in purchasing banks or substantial interests in them.

Some suggest that Chinese construction companies’ investments in banks may be with a view to getting easier loans on more questionable deals, and that when real estate projects sour, they could take down both the construction companies and their banks. Is this reminiscent of the S&L crisis and the Japanese bubble of the 1980s?

Let’s separate the issues — real estate company investment in banks and shadow banking

To begin with, one must clearly define the activity being analyzed, who the players are, and the market in which the activity is taking place. For example, current reports detail investments by Chinese real estate development companies in banks located in mainland China, Hong Kong, Australia, the United States, and elsewhere. Some of these investments are modest. Some of them are significant. Some of them appear to be newly capitalized banks with IPOs financed largely by the real estate construction companies (taking the “p” out of “IPO”).

Each country has its unique set of government and regulatory controls. It is difficult to generalize the motivation of the Chinese real estate companies in making banking investments, whether and how they will attempt to deal with the banks they have invested in, and how regulators will respond in each affected jurisdiction as to particular investments and related activities.

Will this be like the Japanese investment bubble of the 1980s or the S&L crisis?

At least two situations may serve as case studies to provide some historical perspective on the new phenomenon of Chinese real estate companies investing in banks, and the shadow banking situation. One is the US real estate bubble of the 1980s followed by the Savings and Loan (S&L) and banking crisis with more bank failures than any time since the Great Depression. The other somewhat intertwined event is the Japanese investment (by banks and related Japanese construction companies) of up to $120 billion in United States real estate (primarily in Hawaii, California, and New York), and subsequently “disinvestment” in the collapse of the early 1990s. Many believe that the Japanese investment was made at what otherwise would have been the peak of the US real estate bubble (carried by loose S&L lending and tax-driven investments that made no economic sense). The Japanese investment propelled the U.S. real estate bubble even higher for several years until the it finally became unsustainable, and collapsed in a worse crash than might otherwise have resulted.

Both the S&L crisis and the Japanese investment phenomena displayed cozy relationships of real estate companies and lenders. The Japanese banks owned significant holdings in their borrower clients, and encouraged them to buy market share with below-market loans. When the real estate market soured, the Japanese banks were hit with the double whammy of huge loans on real estate now worth a fraction of its cost, and stock investments in companies with huge losses. The leverage increased the pain for everyone participating and the lost decade (or two) has followed for Japan.

CONTINUE READING →

Published on:

6 June 2014

As the significance of Chinese investment in the US continues its rapid growth, news articles regularly document new details of this major trend. And in today’s Los Angeles Times, Tiffany Hsu provided some interesting facts in an article entitled “Chinese tourism and investment in Southern California surges.” Her article led off with the example of a 15% increase in Chinese travelers at the Sheraton Gateway LAX Hotel. We served as lawyers and business advisors to Shenzen Hazens Real Estate Group (a large Chinese construction company) with its $96 million purchase of the hotel. The article explains that the new owner has put up billboards in China promoting the 802-room hotel near the main entrance of the Los Angeles International Airport. As an example of how important such Chinese investors have become in the United States, Tiffany Hsu also noted that JMBM launched its Chinese Investment Group® in 2011 to orchestrate deals for Chinese investors in the United States, like the purchase of the Sheraton Gateway, the Crowne Plaza Los Angeles Harbor, the Regent hotel brand and other real estate, solar and business investments. Here are a few highlights on the big surge in Chinese tourism and investment in Southern California reported by the Los Angeles Times:

  • Tourism from China into Los Angeles roughly quadrupled over the last five years, growing from 158,000 in 2009 to 570,000 visitors last year, and is expected to almost quadruple again to 2,000,000 by 2020 according to a new report from the Los Angeles County Economic Development Corp. (LACEDC).
  • The LACEDC reports that Chinese investment interest in Southern California is also very strong. The travel is not just for tourism, but for Chinese people buying homes, businesses and other investments.
  • More Chinese students attend universities in Southern California than any other group of American universities — 10,000 pupils last year, up from 3,000 in 2009.
  • The number of Chinese-owned businesses in Los Angeles county doubled in the last six years.
  • And Southland trade with China is booming. The Los Angeles Customs District saw record trade volume last year valued at $414.5 billion. Of that, imports and exports from China made up more than half — $221.4 billion, up 4.5% from 2012.
  • The Los Angeles-Long Beach ports, which make up part of the district and constitute the ninth busiest port system worldwide, now attribute 60% of their activity to China.
  • Exports to China through Los Angeles grew by 52% in four years to $25.3 billion last year. Instead of the waste and scrap common in the past, those shipments are increasingly made up of electronics, machinery and other valuable goods destined for a fast-growing Chinese middle class.
  • The LACEDC report aptly summarizes the situation as follows: “The futures of Los Angeles and China are inextricably tied together.”

CONTINUE READING →

Published on:

2 June 2014

2014 NYU Hotel Investment Conference

Last night (Sunday, June 1, 2014), the NYU hotel conference kicked off with its gala grand opening party. With about 2,300 people attending this year, the energy is high and a grounded optimism prevails. The increased conference attendance generally reflects the health of the hotel industry, and these numbers do not count the hundreds of “lobby lizards” who hang out at the conference hotel for meetings without registering.

Mike Cahill of HREC, co-chairman of the Lodging Industry Investment Council (“LIIC”) summed it up well at a pre-conference meeting of the hotel industry think tank. According to Cahill, the best way to describe the hotel industry right now is “The window is wide open and it is beautiful outside!”

According to Jan Freitag of STR, who made a special presentation to the LIIC members, life in the hotel industry is good or very good. “STR has been surprised by the continued growth in demand and has increased its projections of RevPAR growth for 2014 and 2015.”

According to Freitag, the room supply/demand ratios are still in balance and RevPAR growth for the US is hitting 7%, until the last few weeks when it spiked to 9%. He says, “We just did not see that room demand would be that strong.”

Chart after chart of STR’s data blinked green lights for continued improvement in the hotel industry: occupancy growth has kicked back up, the RevPAR growth situation is very healthy, supply growth is still well under control in most markets, group business is rebounding, hotels are getting more pricing power with group business.

Is 2014 “ground hog year”?

On another positive note, Cahill observed that in the most recent LIIC survey of its members announced a few weeks ago at JMBM’s Meet the Money® conference in Los Angeles (see “Lodging Industry Investment Council’s Top 15 Member Quotes“), most LIIC members felt that the hotel industry is in the 5th or 6th inning of the ballgame, in terms of how much longer the good times continue. CONTINUE READING →

Published on:

28 May 2014

The Lodging Industry Investment Council (LIIC) is the hotel industry “think tank” whose membership includes the hospitality industry’s most influential investors, lenders, corporate real estate executives, REITs, public hotel companies, brokers and significant lodging equity sources. More than 80% of surveyed LIIC members have purchased a hotel in the last 12 months. Together, the members of LIIC represent ownership, control or disposition of well over $20 billion of lodging real estate.

Along with Mike Cahill of Hospitality Real Estate Counselors (HREC) and Sean Hennessey of the Lodging Investment Advisors, I am privileged to be one of the co-chairs of the Lodging Industry Investment Council (LIIC).

LIIC Annual “Top Ten” Survey

LIIC’s annual survey of lodging investment trends and challenges is a highly-regarded profile of investment sentiment and attitudes for the hotel industry for the next 12 months.

The 2014 LIIC Survey was compiled by Mike Cahill and he presented the results to more than 350 attendees of the 24th annual Meet the Money® conference in Los Angeles earlier this month. What do LIIC members think about hotel property values, transaction volume, access to capital, and hotel development?

The complete presentation of the LIIC Top Ten is available on www.HotelLawyer.com. Click on “RESOURCE CENTER” and then “Hotel Industry Presentations.”

By the way, all the other presentations from our 24th annual hotel conference are also available at www.HotelLawyer.com on that same page (RESOURCE CENTER/Hotel Industry Presentations).

In addition to the LIIC Top Ten Survey, this year we are publishing the “Top 15 Member Quotes” collected in connection with the survey. There are some interesting thoughts here. Please see below.

The 2014 LIIC Top Ten Survey’s Top 15 Member Quotes

By Michael Cahill, CEO & Founder, and Michael Torres, associate; HREC- Hospitality Real Estate Counselors

Behind the scenes of the annual LIIC Top Ten Survey, lies an extensive and comprehensive survey filled in by the leading hotel investment executives in North America.  In addition to the many multiple choice questions, optional space is provided for “write in” comments.  For the first time in the history of the Survey, we have decided to publish some of these quotes.  As will be seen in the quotes, LIIC member thoughts range widely, from pithy “tongue-in-cheek” to prophetic.  Attitudes range widely from “Polly Anna” to “Negative Nelly.” Clearly, the views of today’s most influential hotel investors (the people with great influence on all our professional lives) range widely in terms of seeing the “glass as half full or half empty.”

CONTINUE READING →

Published on:

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26 April 2014

Some are calling it the “distressed real estate gold rush in Europe.” Others who have been expecting 1990s-style opportunistic investment opportunities for several years, now are seeing a change in European banks’ willingness to sell distressed loans at discounts to clean up their books. Several significant deals have been announced with big name investors and more are underway.

What is happening? And what is the opportunity for investors? Is it too late already?

Troubled European banks with soured real estate loans

Following the U.S. economic crash, Europe fell into recession and largely remains mired in a sluggish economy, high unemployment and depressed real estate values. European banks have suffered greatly along with their customers as real estate loans have soured.

According to a recent PricewaterhouseCoopers report, European banks were finally recognizing approximately $1.4 trillion in nonperforming loans at the end of 2013, up from $715 billion in 2008. For years after the financial crisis, the European banks were not marking down the loan collateral and classifying their loans. They took no decisive action to deal with their bad loans.

But now that is changing. European banks are at an inflection point. According to the PwC report, in 2013, banks sold $90.5 billion worth of troubled debt to investors, compared with $64 billion in 2012, an increase of more than 40%. The European Central Bank is the driving force in this new development and 2014 is likely to set new records.

Troubled loan purchases or restructuring deals are on a dramatic rise. Deals have been announced by the likes of Oaktree Capital Management, Apollo Global Management, Centerbridge Partners, Angelo Gordon, Kohlberg Kravis Roberts and Goldman Sachs.

CONTINUE READING →

Published on:

15 April 2014

LA-Skyline-winter-Jan-2022-med-res--150x150The coolest new downtown in America

If you haven’t been to what the cognoscenti now call “DTLA” (downtown Los Angeles) for a while, you might not recognize it. Gone are the days the sidewalks were rolled up at 5:00 pm and you had to go to Hollywood or Santa Monica for drinks or some fun. Earlier this year, Brett Martin of GQ magazine dubbed it “the coolest new downtown in America.”

In fact, the introduction to Brett Martin’s article is a great summary of the miraculous change in the demographics of DTLA that provide part of the reason that everyone seems to want to buy or build a hotel in Los Angeles today. Here is what it said:

America’s Next Great City Is Inside L.A.

For decades, Downtown has been the dark center of L.A.: a wasteland of half-empty office buildings and fully empty streets. But amid the glittering towers and crumbly Art Deco facades, a new generation of adventurous chefs, bartenders, loft dwellers, artists, and developers are creating a neighborhood as electrifying and gritty as New York in the ’70s. Brett Martin navigates his way through the coolest new downtown in America.

What does this “renaissance” mean in terms of the LA market for hoteliers?

Expanding markets are good for the hotel business. DTLA has become a destination and a hub of activity and excitement. Los Angeles has had so little hotel development over the past few decades, that it is one of the most underserved markets in the US now. And as hotel room rates jump, it is suddenly feasible to buy or build hotels that made no economic sense just a little while ago.

CONTINUE READING →

Published on:

2 April 2014

There is a new HMA Handbook! Actually, it is the HMA & Franchise Agreement Handbook (3rd edition), which makes some major updates to the “old” HMA Handbook (2nd edition).

A fundamental shift has taken place in the realm of hotel management agreements (HMAs) and we decided we could just not wait any longer to update our popular handbook on this important subject. So, it is with great excitement that my partner and co-author, Bob Braun, and I announce the publication of the 3rd edition of The HMA & Franchise Agreement Handbook.

Like all the handbooks in our We Wrote the Book™ series, it specifically addresses the needs of hotel owners, developers, investors and lenders. The news release below explains what all the commotion is about and will tell you how to get your free copy of The Handbook. As always, we invite you to share your comments and thoughts about the book with us.

Along with all the latest financing sources, and deal technology, we will be talking about HMAs and franchise agreements at the Meet the Money® national hotel finance and investment conference the first week of every May. We hope you can join us there!

CONTINUE READING →

Published on:

7 March 2014

Comfort letters are more important than ever as franchising continues to be a dominant form of branding hotels. As many of our recent articles have noted, there has been a sea change in the hotel world. Franchise agreements have become the dominant means of branding most hotels in the US, except for a few of the most upscale and luxury brands.

This popularity of franchising has made comfort letters more important than ever simply by the predominance of the franchise model, and lender’s desire to get certain protections that they feel comfort letters offer.

In today’s article, my partner, hotel lawyer Robert Braun, explains what comfort letters are and the kind of provisions they usually contain.


Comfort Letters – Comfort for Whom?

by
Robert E. Braun | Hotel Lawyer

If you are buying, building or refinancing a hotel, you’ll almost certainly be looking to a bank or other lender to finance the hotel, and when you do, you’ll need to negotiate dozens of documents, some long, some short, but all of them necessary to get your loan. In other articles, we have talked about the importance of subordination, non-disturbance and attornment agreements (SNDAs). SNDAs are used in the context of a hotel management agreement (HMA) — usually only long-term branded HMAs — to define the rights of lenders vis a vis the hotel operator in the event of the owner’s/borrower’s loan default, breach of the HMA, foreclosure by the lender or a deed-in-lieu of foreclosure.

But what about franchised hotels? Lenders who take security in a franchised property will want a “comfort letter,” an agreement between the lender and the franchisor that defines the rights of lenders and franchisors if the hotel owner defaults on its loan obligations, the franchise agreement or other related arrangements. In other words, lenders seek SNDAs to deal with their rights and obligations with respect to HMAs. They use comfort letters to deal with their rights with respect to franchise agreements.

CONTINUE READING →

Published on:

6 March 2014

Meet the Money® National Hotel Finance and Investment Conference will focus on hotel development and deals

LOS ANGELES–Meet the Money® 2014 will bring owners, operators, developers, consultants, investors, brands, lenders and other capital providers together in Los Angeles to explore the opportunities of what is predicted to be a breakout year for hotel development and deals. Held May 5-7, the annual national hotel finance and investment conference will focus on ground up development, expansion, repositioning and rebranding as well as the big increase in hotel acquisitions and financings, refinancings and recapitalizations.

“Now is a great time to be in the hospitality industry,” said Jim Butler, founder of the conference and Chairman of the JMBM Global Hospitality Group®, which hosts the two day event. “Improving economics for the last 4 years has laid the groundwork for an even bigger 2014, with a big increase in new development and transactional activity.”

Experts also expect to see a continuing increase in value appreciation in all hotel markets for at least the next three to five years, creating a wave of new development as it becomes cheaper to build new rooms than buy them.

Over 100 hospitality industry insiders are confirmed as speakers in Meet the Money® 2014 panel discussions on this year’s most urgent topics, new development, successful strategies for buying or selling hotels, Chinese investment, hotel-residential and other mixed-use projects, the ADA, labor and employment issues, and public-private partnerships. Separate panels will explore luxury, select service and full service hotels, as well as the ins and outs of financing large and small deals.

“Meet the Money® provides essential information for getting the most out of the upcoming year, and our attendees are able to network with some of the most successful leaders and creative minds in the industry,” said Butler. “The conference is a valuable resource for anyone looking to make smart deals or plan new development.”

Meet the Money® is held at the Sheraton LAX. Registration fees are $950. For more information about the conference and to register, please visit MeetTheMoney.com or contact Carol James at (415) 984-9654 or CJames@jmbm.com.

CONTINUE READING →

Published on:

2 March 2014

Hotel Lawyer with a guest column from an operator of independent hotels

A growing number of hotel owners are facing the question of whether and how to brand their hotels, and who should operate them. The New York Times recently estimated that more than 2,500 hotels were reflagged in a single year, and that does not count the growing wave of new hotels coming on line through the development pipeline.

The hotel lawyers of JMBM’s Global Hospitality Group® think the branding and management decisions faced by anyone reflagging a hotel or developing a new one are among the most important a hotel owner will ever make, and we have written a fair amount to share our experience gained over more than 1,000 hotel management agreements and many hundreds of franchise agreements. [See links at the end of this article.]

After some of our articles were published on this subject, our friends at Benchmark Hospitality International started a dialog with us about their views on this subject. After a robust exchange of emails and a telephone conversation or two with Alex Cabanas, CEO of Benchmark, I don’t know that we have any significantly different approaches, but Benchmark did have a different way of putting it, and some of their terminology may facilitate clearer thinking. In any event, we thought this “voice” should be heard, and accordingly, we offer this guest column for your consideration.

CONTINUE READING →

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