RSBA & Associates 
Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
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 Lenders to Lodging Industry Must
Come Out of Their Foxholes
by Rick Swig, ISHC, January 2010

There has been speculation on major shifts in the hotel ownership landscape as a result of the current market conditions. Average yearend 2009 hotel revenues are expected to be 17% to 20% lower than the previous year, which may result in net operating income or EBITDA declines of between 30% and 40%, depending on whether the hotel is limited service (lower decline) or luxury (higher decline). Values have plummeted, ensuring that a large percentage—and maybe a majority—of hotels are now worth less than their total debt levels as equity has disappeared.

With the aforementioned declines in NOI, hotel owners are finding themselves in negative cash flow positions, especially during the lowest demand periods. Many were able to survive the traditionally weak first several months of this year thanks to summer and fall vacationers. But what will happen after November, with seasonal tourism declines, as well as historically low demand in convention and business travel?

It is obvious that hotel real estate values have plunged, debt levels exceed the values of many hotels and continuing the “new normal” is unsustainable. But the question remains, what will shake the system loose and recalibrate value and ownership structures? The answer lies with hotel lenders, many of which are hiding in foxholes, knowing that life will change once they poke their heads out.

The CMBS and syndicated loan formats, which supplemented traditional loans, were not ultimately based on the success of the underlying real estate value, but on the amount of fees that could be generated for the related participants. Few lenders apparently understood the potential to “loan to own,” as many of them have no financial reserve infrastructure to manage distressed real estate. These lending structures depended on continued growth without acknowledgment of potential market corrections, which, of course, eventually occur.

The inevitable correction has occurred and the process of unraveling the tangled kite strings of debt structures is daunting. There is little incentive for owners or lenders to unwind the mess because it will be painful with the departure of participating entities and resulting financial loss. Somehow nobody volunteers for prospects like these.

Some hotel owners are actually forcing the issue with their lenders by initiating the transfer of assets to them, realizing they will never recoup their cash losses or asset value. Many lenders are resisting the transfer, realizing they have overstated the values of the same assets on their own books and will face serious financial circumstances. Others may just “extend and pretend,” hoping distressed owners will magically resolve their financial challenges.

Forecasts from firms such as Smith Travel Research and PKF Consulting indicate that there will be little or no revenue growth in 2010. During the first few months of next year, lenders or their servicers will have to come out of their foxholes. Financially challenged hotel owners will no longer have the reserves to sustain their debt service obligations, not to mention their operations.

There is also the billions of dollars worth of CMBS debt scheduled to mature in 2010 and 2011. From what source will the replacement debt emerge, or will current lenders become instant owners? Questions remain about what structures will be in place to handle what could be a massive transition in hotel real estate. Can syndicate lenders become effective owners? Will current owners be asked instead to become custodians on behalf of their lenders? Will debt miraculously appear to complement vulture equity, which is waiting on the sidelines? And…what is a hotel asset actually worth these days, anyway?

The hotel real estate sector has always been alluring for investors and lenders, even those without a grasp of how these businesses function. As a result, there has been consistent weaning of owners and lenders when cyclical downturns occur. While this cycle will be no different, it is critical that some steps must be taken to mitigate financial disaster. Hotel businesses will still require oversight, expertise and financial subsidy to continue their operations. Lenders and borrowers must resolve their financial relationships before the entire industry is plunged into chaos.

The views expressed in this column are those of the author and not necessarily Real Estate Forum.

Rick Swig is president of RSBA & Associates, a hospitality industry consulting firm based in San Francisco. He may be
contacted at [email protected].

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RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
E:mail:   [email protected]
Tel:  (415) 541-7722
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Rick Swig Article Index:
Hotel Real Estate Owners Face a Brave New World / Rick Swig / June 2009
Hotel Operators Will Face Many Challenges As Economy Continues on Downswing / Rick Swig / June 2008
With New Supply at a Near Standstill, Now Is the Time to Buy Hotel Assets / Rick Swig / December 2007
This Year’s Critical Issues Will Escalate If the Hotel Industry Doesn’t Address Them Now / Rick Swig / September 2007
CapEx Discussions Require Balancing Brand, Owner Needs; The current fervor of standard compliance may simply be a reasonable process to catch up on postponed necessities / Rick Swig / June 2007
Lack of Human Capital Is Becoming Serious Issue for Hotel Owners, Operators / Rick Swig / December 2006
Successful Hotel Brand Differentiation Means Connecting With Customers / Rick Swig / RSBA Associates / June 2006
Shortage of Sites, Rising Expenses Should Keep Hotel Development in Check / Rick Swig / RSBA Associates / February 2006
In Today’s Hotel Acquisition Market, How Much Do Cap Rates Matter? / Rick Swig / RSBA Associates / January 2006
Lodging Business in Transitional Year, But Challenges Will Remain After ’05; A Hotel with Truly Unique Attributes Is Worth a Premium / Rick Swig / October 2005
Despite Lack of Long-Term Data, Hotel Developers Favor Hybrid Projects; The Fractional and Condominium Component Not a Proven Solution to Development Prosperity / Rick Swig / June 2005
Travelers Prefer Innovation, Creativity Over Predictability, Discount Pricing / Rick Swig / March 2005
Recent Occupancy, ADR Growth Still Do Not Spell Post-9/11 Relief; Total 2% revenue growth over four years has not kept up with national annual average inflation growth of 2.5% / Rick Swig / RSBA Associates / November 2004
Hotel Success Hinges on Relationship Between Owner, Asset Manager, GM / Rick Swig / August 2004
Hotel Operators Can Gain Market Share Through Distinctive Brand Images; A 100-room boutique hotel can develop more identity within a market than its 1,000-room competitor  through customer impact points / Rick Swig / May 2004
Hotel Operators Must Share Blame with the Economy for Stagnant Performance / Rick Swig / RSBA Associates / January 2004
Investors Seeking Opportunistic Hotel Buys Are Likely to Come Up Empty Handed  / November 2003
Hotel Sector Remains in the Game Despite Reaching Strike Three; Occupancies are now beginning to improve compared with last year and a poor first half of 2003 / September 2003
Some Stability Has Returned to the Hotel Sector, But Its Staying Power Is in Question; The Plundering of Lower Market Tiers Has Cost Upscale Hotels / May 2003
New Business Practices Essential to Lodging Companies’ Success / February 2003
Unreliable Market Trends Yield an Uncertain Direction / October 2002
The Bigger They Are, The Harder They Fall / September 2002
News of Boutiques’ Demise Is Greatly Exaggerated  / May 2002
Management by Spreadsheet Erodes Full-Service Hotel Core Values / Feb 2002
Hotel Lenders Face Challenges In Tough Climate / October 2001
Where We Are Now Depends on Starting Point / Summer 2001
Solid Management Practices Can Improve Franchise Value / May 2001
Hotel Market Stagnation To Continue / January 2001
Here Today…but Tomorrow? / November 2000
Ready, Willing, and Unable? / August 2000
Independent Hotels: The New Brand Alternative / June 2000
Ankle Biter Syndrome / January 2000
Redefining a Mature Hotel Sector / November 1999
Focus On Operations Is Not Enough / August 1999
What’s Next?? / May 1999
Growth Through Management  / Feb 1999
Expect a Subdued Market in 1999 / Feb 1999
Hotel Real Estate: Back to Fundamentals / Nov 1998
The Hotel Investment Barometer For Institutional Investors / 1998
The State of Independents / 1998
Success (or Survival) of Boutique Hotels and Resorts / 1998

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