Hotel Online  Special Report
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The Global Hospitality Advisor

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Living in the Wake:
Predictions & Practical Implications


December 2001
 
Jim Butler is Chairman of JMBM’s Global Hospitality Group. He leads a team of more than 50 lawyers who work on virtually every aspect of hospitality — a team with more than $20 billion in transactional hospitality experience. Jim is more than “just a lawyer.” He is a “hospitality consultant and businessman with legal expertise” with more than 30 years of focus on hospitality, real estate and finance. In the wake of the September events and their aftermath, Jim predicts a delayed recovery for the industry, and “pockets” of severe difficulty for some and opportunity for others. In this exclusive interview, we also received Jim’s eight predictions for “living in the wake” of the September 11 events.


James R. Butler, Jr.

GHG Advisor: Jim, the entire nation is struggling to move beyond the terrible losses of September 11, and heed the President’s call to “get back to work.” Beyond the sheer enormity of these events, what are some of the practical implications of the terrorist attacks and the ensuing events for the hospitality industry?

Jim Butler: It is hard to get past the tragic loss of human life and the devastation. But there are significant practical implications of these awful events, America’s war against terrorism, and the sometimes paralyzing uncertainty and fear that haunt the country.

What has happened? We have events with the financial impact of the S&L Crisis—with immediate costs alone soaring over $100 billion. We are fighting a war of unknown duration and scope. And, we are living under the uncertainty of ongoing terrorist threats. In the immediate aftermath of September 11, more than 100,000 people were laid off by the airlines and travel was down by more than a third. The travel, tourism and lodging industries were hardest hit.

One respected national firm predicted the worst performance for the hotel industry in 33 years. Most hotel stocks lost between 20% and 70% of their value in the first week of trading after the attack. Many hotels and restaurants have laid off or furloughed sizeable portions of their workforce as they watched their business fall by 40% or 50%. Conventions, meetings and vacations were canceled or postponed.

GHG Advisor: We will undoubtedly be sorting out the implications of the terrorist attacks and America’s response for months to come, but can you share any predictions or observations with us?

Jim Butler: On a macro level, these events have aggravated a recession already in progress and delayed recovery at least until the end of 2002 or even 2003. The impact is uneven, disproportionately affecting the luxury and high-end segments, tourist destinations such as New York, San Francisco, Orlando and Hawaii, and certain convention and meeting businesses. 

GHG Advisor: And what specifically do you predict will be the impact of these events on the hospitality industry from a business and legal perspective?

Jim Butler: A few trends have already emerged. I see the following eight developments for our near term:
 

Workouts, receiverships and bankruptcies loom for many. Generally, the experienced workout teams of the 1980s and 1990s have moved on. Lenders and servicers are scrambling to staff up with expertise for troubled loans on special purpose real estate with operating businesses, such as hotels, senior living facilities, franchised gas stations, restaurants and convenience stores. Initially, borrowers and lenders hope the slowdown will be short-term and that only marginal properties will falter, but if business continues to be slack, many properties will be unable to meet operating expenses and debt service. 
Securitization has changed how troubled loans are processed and what can be done with them. Since 1993, Wall Street has fueled billions of hotel financing. It has been securitized and placed into REMICs governed by restrictive federal tax rules, servicing agreements, and rating agency guidelines. There is no friendly local banker to talk to about a workout, note sale or deed-in-lieu. These structured finance entities are highly regulated as to when and what they can do with troubled loans, and may induce otherwise unnecessary bankruptcies. A premium will go to those who understand securitization issues in the next downturn. 
Bankruptcies will raise difficult cram-down and valuation issues. There will be valuation and cram-down issues of first impression for Chapter 11 cases involving the hospitality industry. Debtors trying to ride out the current downturn may well be able to convince bankruptcy courts to extend maturity dates on debt for as much as five to ten years, and may seek principal reductions of the creditor’s secured claim. The success of such cram-down plans will hinge on the court’s view of the current economic dip and the debtor’s future cash flow projections—what are permanent or long-term effects of our circumstances and what are relatively short term consequences. Impatient lenders should expect more successful cram-downs than in past downturns.
Focus on management and franchise issues. Massive lay-offs and restructurings will affect the ability of many operators to deliver expected results to owners. Uneven application of brand standards and demands for major capital expenditures will stress owner-operator relationships as properties fail to make debt service or meet operating expenses.  Heightened concerns over contractual and fiduciary duties will test relationships and lead many owners and lenders to consider terminating or renegotiating management and franchise arrangements. Troubled loans and bankruptcies will enhance other business and legal grounds for owners to restructure or terminate their management and franchise obligations. 
Labor and employment issues will become even more important. Cutbacks in workforce will raise WARN Act and other troublesome issues. Workers often see lay-offs and cutbacks as emanating from discrimination, harassment, whistle-blowing, or other perceived employer evils. Many employers will seek more flexible work rules and schedules, and may encounter work force or union resistance. This is a good time to review arbitration programs, employment policies and procedures and be sure that management is well trained. 
Asset management regains importance. In stressful times like these, there will be great value to wisdom in developing and overseeing the implementation of sound strategies, marketing, pricing, and working with operators. How can revenues be maximized and expenses cut without permanent damage? Is this the time to cut or boost advertising and sales efforts? How do you handle a brand’s lack of attention and support, or senseless capital demands? What do you do about uneven application of standards? 
Opportunistic investing is back. Funds are already in place, and staffing is being refocused. Preferences run to complete buyouts, but control positions or even minority investment may be possible in limited situations.
“Force Majeure” will be tested in many contexts. This legal doctrine excuses performance by a party when there have been Acts of God, war, and certain other acts. The doctrine will be tried with new vigor in contexts ranging from insurance claims and management agreements to union contracts and group bookings. What events are covered? What is excused and for how long? What is the impact of a contractual provision dealing with the subject or the absence of any provision? The stakes will be high.

The Global Hospitality Group(r) is a registered servicemark of Jeffer, Mangels, Butler & Marmaro LLP

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For more information:
Jeffer, Mangels, Butler & Marmaro LLP
web site: http://www.jmbm.com
Email Jim Butler at [email protected]
Or contact 
Jim Butler at the Firm
 Jeffer, Mangels, Butler & Marmaro LLP
  2121 Avenue of the Stars
 Los Angeles, CA 90067
     Phone: 310-201-3526 
The premier hospitality practice
in a full-service law firm
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Also See: New Rules for Hotel Workouts: REMICs for Dummies / The Global Hospitality Advisor / Decmber 2001 
Avoiding Liability for Lay-Offs / The Global Hospitality Advisor / December 2001
The Worker Adustment and Retraining Notification Act: Impact on the Hotel Industry / JMBM 
When is an Apartment a Hotel ... and Who Cares? / The Global Hospitality Advisor / JMBM / September 2001 
The 'Perfect Storm' / The Global Hospitality Advisor / JMBM / September 2001 
Richard Kessler's Grand Theme Hotels - Interview with GHG Chairman  Jim Butler / March 2001
Stephen Rushmore's  Industry Trends / Top Markets, Predictions & Opportunities  / Jan 2001
Outlook 2001: A Roundtable Discussion The Global Hospitality Advisor / Jan 2001
Perspectives on Hotel Financing in 2001; Jim Butler, JMBM's Global Hospitality Group Chairman, Interviews Two Active Players in Hotel Finance / Jan 2001 
Robert J. Morse: Millennium’s New President / Interview with GHG Chairman Jim Butler / Nov 2000 
Special Reports / Jeffer, Mangels, Butler & Marmaro LLP

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