News for the Hospitality Executive
Hotel Borrower Dilemma: the Note
Is in Default or Coming Due
Helping Borrowers Create Value with Distressed Hotels
|By Jim Butler, April 16, 2009
Borrowers, the lender does not have to be your enemy. We have a way
you might profit by finding all the ways you can make your lender's life
(and asset value) greater, while greatly improving your own. How can that
For the veteran hotel lawyers in JMBM's Global Hospitality Group®, this will be the third major real estate downturn where we have represented both a small number of very large lenders (FDIC, RTC, and a few big banks) and special servicers, and quite a number of troubled hotel borrowers.
Working both the lender and the borrower sides of distressed hotel loans, has inspired us to create something that we call the hotel SAVE™ program. SAVE™ stands for "Strategies and Approaches for Value Enhancement." The SAVE™ program is a comprehensive analytical approach to all the critical business and legal aspects of troubled hotel assets to unlock or create value for the parties. Even industry savvy lenders and borrowers can be too close to a situation or haven't faced these circumstances before. They tend to give up when a hotel's value is worth only a portion of the senior debt.
What do borrowers really want?
First, borrowers need to consider their own interests. What do they really want? Can they keep the hotel? Can they reduce or eliminate personal guarantees or get a release of other pledged collateral? How about a structure to defer or minimize their tax recapture or forgiveness of indebtedness income? Can they get (or keep) a paying contract managing the hotel or overseeing implementation of an agreed upon plan? Could there be a future upside above some minimum hurdles? Is there a way to work out of the hole, or even to get a substantial monetary payment from the lender -- notwithstanding an impending loan default?
A fresh team of experienced professionals can often discover new ways to drive revenue, contain costs and deal with CapEx issues, and release value from burdensome legal contracts. Maybe you don't need to change management or brands, or give the keys back to the lender, and if you do, maybe there is a win-win by a cooperative approach. Don't have enough cash to fund proper analysis and plan preparation? In the right situation, the lender may fund the costs or analysis, planning and implementation.
But you already have a professional brand or manager and you (or the lenders) have asset managers who have been around a long time and know almost everything. But have they seen this kind of environment and do they understand both sides of the equation? Are they used to dealing with restructurings, or is that just their latest "gig"?
Think of it this way. If the borrower can help the lender create substantial hotel value that would be difficult or impossible for the lender to accomplish by itself, shouldn't that be worth something? Could it be enough to accomplish some borrower goals that otherwise might be impossible?
What are the special needs of your lender?
The lender-borrower dance over distressed hotel loans is often antagonistic, but it doesn't always have to be that way. Who is your lender or who is handling your loan? Is it a CMBS special servicer, a portfolio lender, the FDIC, or a loan-to-own operation? What special considerations does your particular lender have? Is it worried about taking a hotel back because it lacks staffing, wants to leave in place the (possibly irreplaceable) loan to facilitate a sale, or has documentation problems or lender liability concerns? How important to this lender is the timing and certainty for a note or asset sale? What are the politics and priorities of the bond holders or loan syndicate members?
Most of the considerations borrowers and lenders have in choosing alternatives for dealing with distressed hotel loans are no secret. But there are some novel approaches. For instance, what if the borrower, proving itself trustworthy and reliable, took the initiative in presenting the lender with a program that could significantly improve the lender's position and the value of the asset for everyone?
What special considerations does your particular lender have? Is it worried about taking a hotel back because it lacks staffing, wants to leave in place the (possibly irreplaceable) loan to facilitate a sale, or has documentation problems or lender liability concerns?
Finding the value proposition with the SAVE™ program
While many borrowers traditionally have thought first of hindering and delaying a lender resolution, or resorting to lender liability claims, with the SAVE™ program, there is another approach that we think is more likely to benefit all involved in The Great Recession we are enduring. It takes thinking outside the box.
Bad boy claw backs (springing personal liability for certain "bad boy" actions like bankruptcy, lender claims, environmental hazards and the like) are not a problem with this approach, because the SAVE™ program is a cooperative effort where lender and borrower work together to accomplish more than they otherwise might on their own.
Think of it this way. If the borrower can help the lender create substantial
hotel value that would be difficult or impossible for the lender to accomplish
by itself, shouldn't that be worth something? Could it be enough to accomplish
some borrower goals that otherwise might be impossible? One key to this
is understanding your lender -- and your lender's goals, issues and constraints.
It is worth checking out! What do you have to lose?
About the Author
|Also See:||Does this sound like one of your Loans? You Made a $100 million Loan on a Luxury Hotel When the Hotel was Appraised at $130 million. Today, this Hotel Would Sell for $65 million / December 2008|
|Do You Know the 8 Dos and Don'ts of Handling Troubled Hotel Loans? / Jim Butler / November 2008|