How to Avoid Hotel Bankruptcy
By Andrew Glincher Office Managing Partner, Nixon Peabody LLP | October 28, 2008
Today, we have the added factor of the fear of terrorism causing many would-be travelers in the United States and around the world to feel more secure staying closer to home - placing the entire travel and hospitality industry in a precarious position.
Although the stronger properties seem to be managing, and will likely survive to see another upswing, many others - independents, smaller hotels with less defined brands, properties where margins were lower and vacancy rates were higher even during good times - are feeling the economic pressure. This is particularly true of hotels that may have taken on too much debt and are now faced with insufficient cash flow.
How should they deal with these financial woes? The most important advice one can give to a property owner in this situation is first and foremost to be honest with yourself and confront the problem directly, proactively, and as early as possible. Wishing the problem away will not work, expenses are not going to go down, nor will revenues increase on their own, and ignoring your bankers is not going to make them go away.
Following are a few steps hotel owners need to take when they begin to recognize the signs of financial distress:
Take a hard look at operating cash flow and match it up with debt service. It's important to be very comfortable with projections for the foreseeable future and feel secure in your ability to make these payments.
If cash flow is insufficient, initiate discussions with your lenders. Don't wait until you've missed payments and they come to you. In most cases, if you can provide reasonable justification, they may prefer to work with you to restructure the debt rather than to force you into bankruptcy. Maybe the term of the loan can be lengthened, maybe it can be refinanced at a lower interest rate, maybe payments can be made based on cash flow, maybe they'll be willing to defer certain payments for a period of time in return for larger payments of interest or some form of shared appreciation down the road.