Originally published in AAHOA Lodging Business, March 2009

Seek Advice Before Stressing over distressed loans

Where can hoteliers go for consultation in a troubled lending climate?
Interviews by Dan Marcec

The first notions of the current recession saw the subprime mortgage crisis lead to a wave of residential home foreclosures. With the recent collapse of the capital markets affecting hotel and other real estate under construction, hotel owners need to understand the issues their own hotels might face due a lack of available financing. Lodging Operator interviewed consultants with a variety of expertise — brokerage, investment banking and law — for their opinions on what hoteliers can expect in the current financial climate. 

ALB: What types of consultation should hoteliers seek with respect to managing their loan -situation, given the current climate in capital markets?

Jeff Davis, Jones Lang LaSalle Hotels: In terms of dealing with hoteliers, we’re coming along three different types with respect to financing.
     First, we’re looking at refinancing where debt is terming out, and we work with our real estate investment banking group in terms of going out and soliciting financing from lenders and non-traditional lenders.
     Second, we’re being hired by banks to sell hospitality related notes, both performing and non-performing.
     And third, we’re advising our clients on the right strategies to approach servicers or lenders if they have a near-term maturity coming up or an extension on the loans.

Matt Comfort, Jones Lang LaSalle: Still to this point, we really haven’t seen the cases where hotels aren’t performing to the point where they can’t cover their debt service. So, right now we’re still dealing with our owners and operators that have a maturity of their debt coming up in the next 6 months, looking at what their options might be at this point in time.

Lou Plasencia, The Plasencia Group: We’ve been brought on in a number of situations by lenders as well as by borrowers essentially to be a middle man, or a buffer, both in restructuring existing loans and working out the existing mortgages that are in place. In that sense we act as an independent third party looking out for everyone’s best interest to make sure that the borrower can do everything to preserve the value of the asset, and that the lender is being realistic in their expectations. We have found that lenders don’t want to take back properties, and thus far they have been pretty flexible in working with their borrowers, as long as the borrowers are working and acting in good faith and doing everything they can to pay their mortgage. We are doing a lot of restructuring and workouts.

Jim Butler, JMBM’s Global Hospitality Group: When a hotel owner first -realizes that he is in trouble, it is time to do a comprehensive situation analysis, evaluating the business and legal rights and obligations. Is the loan recourse or non-recourse? Are there personal guarantees? Has the loan been securitized? Who is in charge of “workout”?
     In general, it is always in the owner’s/borrower’s interest to be proactive — to take the lead in putting together a plan to present to the lender that shows the lender why a forbearance is in everyone's interest, and why the current owner is the best one to “drive the bus” through the minefield.

Emil Iskander, HVS: If hoteliers find themselves in a situation where their loan is distressed, their options are to extend loan maturity, bring in new equity/debt (recapitalize), or sell the hotel. At this point, the main source of refinancing is going to be  private equity.

ALB: What advice do you give -hoteliers who are concerned about meeting their debt requirements?

Jeff Davis: First and foremost, we understand that net operating income (NOI) is under pressure going forward right now, and RevPAR is decreasing in all sectors and across the market. As a result, one of the first things that we would do for clients who think they may have trouble meeting their debt service is to come in and conduct a diagnostic of their operations along with them. We analyze their operating procedure through our asset management capacity, looking at possible cost savings opportunities and revenue management control, really rolling up our sleeves and working with owner/operators to identify areas where they can improve the bottom line.

Lou Plasencia: It really depends on the situation, and for us, on which side of the loan we’re working on. When it comes to what I’ll call asset preservation — preventative action and maintenance — we start looking to go into different departments to maximize revenue as much as we possibly can, maybe by redeploying sales staff, by instituting different practices that may not be in place, through labor cost controls, by shutting down restaurants during slow hours, by cross training employees to handle a variety of jobs, or a number of other options. There are a variety of steps that hoteliers can take to enhance revenues and cut expenses.

Jim Butler: The worst case scenario is that a hotel owner loses the hotel — the entire investment — and then the bank comes after the owner on a personal guarantee or under the recourse terms of the loan.
     Therefore, at the first sign of trouble, call someone who understands the business, strategic, and legal aspects of hotel loan workouts, bankruptcies and receiverships.

Emil Iskander: A distressed loan can lead to foreclosure by creditor, deed-in-lieu of foreclosure — basically, hoteliers can lose their assets. Furthermore, they can still be “on the hook” for the personal guarantee/recourse in some cases.
     Options other than foreclosure would be filing for bankruptcy — but be forewarned, this is not for every situation nor it is for everyone. A safer option is to modify the existing loan terms: pay down the loan balance, extend the loan maturity, etc.

Geoffrey Davis, HREC Investment Advisors: Be aware of loan maturity dates and put a strategy in place today. There is also an opportunity now to refinance at current debt and in many cases get a significant -discount on a current loan.
     A workout is one solution. Refinance options are available, but  they are expensive and usually require recourse.

ALB: What options are out there if a hotel loan becomes distressed or if an asset needs to be sold?

Matt Comfort: The central question  in this case is: where is the debt going to come from, and if they are facing expirations, what are their options and where can they turn? The very quick overview of what we’re seeing in the debt capital markets is that there is some awakening of the slumbering giants — the larger institutional real estate lenders — and we are getting some large allocations. But, a large portion of those allocations are dealing with existing debt, so whether it’s maturities that they have impending in 2009 or extensions, we anticipate that most of the allocations we have received will go to existing customers.
     That leaves new originations with a much smaller potential for capital, and as a result we’re seeing some non-traditional alternative lenders coming into that space looking for opportunities, and these are essentially mezzanine and originating secure debt. These are opportunity funds and equity funds as well as specialized high-yield debt funds targeting opportune environment to put out secure debt. It’s generally short term, and it’s going to allow borrowers to avoid their impending issues, looking to bridge out to what we hope will be a better economic situation.

Jeff Davis: In terms of clients that are looking to dispose of assets, I’d offer three highlights.
     First, if they’re thinking about it, and they’re not ready right now, they can seek asset management services to ensure that they store up their bottom line. Then, when they do take the asset to market, they can get the most favorable valuation.
     Now, if someone is in the market today, the key word is flexibility from a seller’s point of view — being willing to come up with creative structures to affect that transaction.  A seller must be willing to provide financing, perhaps some joint venture equity structures, and the gap is still so wide that I would advise the client if they aren’t realistic about pricing expectations in the market that they should consider waiting until the market loosens up.
     The biggest question out there is how to deal proactively with an impending situation. That’s what we’re hearing from all our clients right now: ‘How do we get in front of the right person to avoid a train wreck at the other side?’ People are wondering — if they approach their servicers now before they have a problem, how are the servicers going to react? Will they play hardball?

Lou Plasencia: Believe it or not, there are a number of investors out there seeking to acquire properties right now. This is the advice we give owners of hotels, and lenders, if financing is doable — if they need to sell, there are buyers. If they don’t need to sell, our advice that they should hold their assets, and they probably will be holding for 18 to 24 months. If they need to sell, the best way is to ensure that lending is doable; therefore, the lender will be dealing with new credit, and hopefully the creditor is as strong as the previous one.
     The other way to get it done is through seller financing. Typically, it’s a tri-party deal, in that it involves not only the buyer and the seller but it also involves the current lender. And that lender plays a very big role. Our goal is to bring in investors to replace the existing borrower, or bring in investors that are well capitalized and capable. We need to preserve the value of that asset to make sure it doesn’t decline over time.

Jim Butler: From more than 20 years experience, our team has developed a unique comprehensive approach to finding solutions. From this comprehensive analysis, we formulate alternate strategies to maximize the value of the asset for both the owner and lender to create an "win-win" situation for all. In this situation, we normally seek to create substantially greater value in the asset from stakeholders beyond the lender and borrower, and by doing so we make more time for everyone.
     The key is recognizing ways to create value, formulating this into an action plan, and getting both lender and owner to buy into a clearly delineated program and executing it.

Emil Iskander: Don’t sell now unless there’s no other way out — the bid-ask spread is still way too wide.  Instead of selling, owners should look for other ways to raise capital and buy time from lenders.
     If the assets are distressed due to market fundamentals, then owners should closely review the operations of these assets and look for ways to cut costs.

Geoffrey Davis: If the asset is not making debt service it might be best to work with lender or a debtor in possession sale, or bring in preferred equity and restructure deal. Be realistic on value and get rid of your bad assets.

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