Critical Basis for Decisions on Lender Alternatives for Distressed Hotel Loans – Blog Law Hotel – March 23, 2020
March 23, 2020
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Global analysis of the situation
for distressed hotel loans
JMBM Global Hospitality Group®
When special asset teams and special services see troubled hotel loans appear on their screens, they need to quickly perform a “full situation analysis.” The global analysis of the situation constitutes the essential basis for a lender choosing among its alternative strategies of reorganization, receivership, deed in lieu or bankruptcy (search for involuntary bankruptcy and appointment of a trustee).
What is included in the overall situation analysis? Read on!
Early warning system
For the same reason that a lender needs access to information, they need a great early warning system. In addition to the obvious things such as a default on a franchise agreement or major contract, knowledgeable people in the industry are likely to know or be able to detect when a geographical area, a market segment or a private hotel is in difficulty long before it appears in the income statement. Decreased inventory, poor property maintenance, reduced marketing, and other changes in the annual plan, budget, and marketing plan can all be warning signs. Many conservative lenders ask consultants to monitor their asset portfolios for trends and significant changes indicating trouble. The Special Assets team should be involved early in the process. But special assets usually also require the availability and guidance of knowledgeable industry consultants and lawyers.
Without good early warning systems, lenders are surprised by borrowers who call to say, “We are giving the property back.” Pay is due Friday and there is no money in the account. . . “Lenders can’t trust last quarter’s budgets or projections. They need up-to-date information to avoid these nasty surprises.
The concept of updating all the information for hotel assets in difficulty is the same as for any asset in difficulty. However, in the case of a hotel, one will usually look for things such as hotel franchise agreements and amendments, management agreements and amendments, agreements, leases and other agreements with professionals in the field. golf, dealers and others, recreational use agreements for golf, tennis, water sports, horseback riding or other amenities, and tax information and returns, including occupancy, sales and use, employment, personal property and property taxes. A checklist approach is useful.
Global situation analysis
What is the value of the asset and how to optimize it? The “Big Picture Situation” is the cooperative effort of the lender’s Special Assets team, experienced hospitality lawyers and hospitality consultants. He examines hotel-specific business and legal factors affecting the asset – the complexities of which are captured by Bruce Baltin of PKF Consulting and which many of us know as Baltin’s Law:
“Each hotel or other special purpose asset is a unique combination of physical facilities, available market, location, brand identification, management, contractual arrangements and capitalization. The combination of these factors is different for each asset and therefore the value of a hotel or other special purpose asset will be maximized by implementing smart and property-specific plans and management, both for the activity and the real estate of the asset.
In other words, to understand the value, potential, and issues of the hotel, one needs to look at all of these factors affecting hotel real estate and the operating business itself.
Physical assessment of the plant. In the physical assessment of the plant, one should consider the intrinsic value of the building, as well as how it improves or limits operations, rebranding opportunities and marketing alternatives. You have to look at inventories, FF&E and a multitude of systems for food and beverage, workforce management, reservations, marketing and other operations. How healthy are the building, elevators, furnace, HVAC, roof and other systems? Is there water infiltration and mold? Are there cracks in the walls, floors, driveways and parking lots? How dated or modern is the design? Market and ownership will each affect the other and upside potential. Is this property correctly positioned? Would the value be optimized going up or down? Are product improvement plans (PIPs) justified to maintain a certain franchise? What capital improvements are needed or valuable?
Rebranding and new management opportunities. Is the current brand or management appropriate for this property? Can it be changed and how much will it cost to change, both in terms of exit costs or damage and in terms of rebranding or repositioning? Who is a logical and optimal buyer of property through foreclosure, deed in lieu, or bankruptcy? Can the universe of buyers be broadened and improved? In short, what is the highest and best use for this property and what are the costs and limitations of positioning the property for such use?
What are the contractual and commercial constraints? If situation analysis is to be more than an intellectual exercise – if it is to have practical value – it must consider the web of complex agreements affecting ownership: franchise, management, licensing and licensing agreements. use, leases, licenses, etc. Management or franchise agreements tend to be very long term agreements (say 10 to 50 years) and often have limited or no termination rights. They are generally not assignable by the borrower without his consent, and transfers to “competitors” are frequently prohibited, although there are generally exceptions for transfers in the event of foreclosure or deed in lieu.
Analysis of optimal use. It is always important to research alternative uses for the hotel or certain hotel components. Is it more valuable as an apartment complex, condominium, corporate residence or something else? Particularly in the case of failed condominium hotel projects or struggling mixed-use hotels, this analysis should be very useful.
What does all this mean?
Before determining which alternative to look for for a troubled hotel loan – reorganization, receivership, deed in lieu, or bankruptcy – lenders should understand all of the issues and variables involved by performing a comprehensive analysis of the situation. Failure to perform a full analysis may result in the pursuit of a course of action that does not maximize the value of the asset.
It is Jim butler, author of www.HotelLawBlog.com and founding partner of JMBM and JMBM’s Global Hospitality Group®. We provide business and legal advice to hotel owners, developers, independent operators and investors. This advice covers critical hotel issues such as buying, selling, development, financing, franchise, management, ADA, and intellectual property issues. We also have compelling experience in hotel litigation, union avoidance and union negotiations, as well as cybersecurity and data privacy.
JMBM’s Global Hospitality Group® has been involved in more than $ 87 billion in hotel transactions and in more than 3,900 hotel properties located around the world. contact me at + 1-310-201-3526 or [email protected] to discuss how we can help you.