News for the Hospitality Executive
Lenders, Here's Why Mothballing a Hotel
Can be a Very Bad Idea
August 4, 2009 - Sometimes there seem to be no alternatives. You can't beg, borrow or steal more capital to advance in order to meet operating costs to keep a hotel open. A stubborn union won't relent of ruinous work rules, or an operator won't reduce staffing and facilities to reflect depressed occupancies.
And initially it seems like a fire sale liquidation of a failed hotel is a poor alternative to suspending operations until the hotel market returns to some sense or normalcy. Many lenders will be shocked to learn how dramatically hotel values can crash -- literally over night -- once a hotel is closed. Here is some food for thought.
Closing down hotel operations to staunch the negative cash flow. As more hotels fail to earn enough gross revenue to cover operating expenses, underwater borrowers are giving the keys back to lenders. They are leaving it up to the lenders to decide if they want to advance operating shortfalls to keep the hotels open. Increasingly, frustrated lenders are thinking of suspending hotel operations to stop the negative cash flow. This alternative to a liquidation sale is deceptively attractive. It can look like the best of two evils before you dig down to do the hard present value analysis.
Record hotel failures and record hotel closings. The hotel lawyers of JMBM's Global Hospitality Group® believe that this recession will bring several thousand hotel failures. In contrast to past economic cycles where most hotels continued to operate through receiverships, foreclosures and bankruptcies, it looks like things may be different this time.
We foresee a record number of hotel "closings" -- situations where the hotels cease ongoing operations as hotels. Someone "turns off the lights." The hotels "go dark." They are closed down and "mothballed" because neither the defaulting borrower nor the lender will pay the shortfall in cash necessary to meet payroll, utilities and other operating costs to keep the hotel open.
How closing a hotel can be the biggest mistake you make . . .
As discussed below in greater detail, there are two warnings we give lenders confronted by this challenge:
Rule #1 for lenders: If you are thinking about closing a hotel, you need to run a present value and holding cost analysis.
Weigh your alternatives carefully. If you cannot afford to keep the
hotel open, you may be better off with a liquidation sale. Here is a recent
What does every hotel veteran know about closed hotels that you need to know, too?
If you weren't working with troubled hotels in the early 1990s, you may wonder how you could possibly be better off making a fire sale disposition rather than mothballing the hotel.
Here are 8 bad things that happen when a hotel closes:
There certainly may be cases where a careful present value analysis demonstrates that it makes economic sense to close an operating hotel rather than operate it at a loss for an unknown period. But we think that a third alternative is likely to be even more attractive than closing a hotel through a protracted downturn and slow recovery. In most cases, a sale of an open hotel at a realistic market price will be preferable to mothballing the hotel.
What does it all mean?
Conclusions and situations will vary. But we believe, as a general matter, prudent lenders will run a proper cash flow analysis, sharpen their pencils, and find some interesting results.
About the Author:
Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why. He devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group®—a team of 50 seasoned professionals with more than $40 billion of hotel transactional experience, involving more than 1,000 properties located around the globe. In the last 5 years alone, they have brought their practical advice to more than 80 “hotel-enhanced mixed-use” projects, a term Jim coined to fill a void in industry lexicon. This term describes one of the hottest developments in real estate-where hotels work together with shopping center, residential, office, retail, spa and sports facility components to mutually enhance the entire project’s excitement and success. Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done. Jim is the author of the Hotel Law Blog, www.HotelLawBlog.com. He can be reached at +1 310.201.3526 or firstname.lastname@example.org.
|Also See:||Do You Know the 8 Dos and Don'ts of Handling Troubled Hotel Loans? / Jim Butler / November 2008|
|Workouts and Special Servicing for Hotel Mortgage Loans: What Is So Different About Troubled Hotel Loans / Jim Butler / November 2008|