The Musical Chairs of a Hotel Loan Workout: Who Will Be Left Sitting When the Music Stops?
By Paul Courtnell Director, Leisure & Resorts Group, Gunster LLP | June 04, 2010
The hotel industry is experiencing a severe down turn. Many hotel loans are in monetary default. A significant number of hotels are not even able to pay operating expenses, let alone service debt. What should the borrower do when the loan goes into default? This article explores strategies for dealing with lenders in this most difficult economic climate.
What to Do
Most industry experts agree that the hotel industry is experiencing its most significant downturn in generations. The gross revenues for the entire hotel industry are off nearly 30% with the luxury hotel market even more distressed. Although experts are in agreement that the industry will eventually recover, most are of the opinion that it will take a long time to return to 2007 levels. Given this rather bleak prognosis, what is a hotel owner to do in the interim if the cash flow from the property is insufficient to cover both the operating expenses and debt service?
Unfortunately, there is no "one size fits all" approach when addressing under-performing hotel loans. In most cases, the workout process will be initiated by the lender. Also at the negotiating table will be the borrower, possibly an equity investor and/or mezzanine lender, the operator, the franchisor (if different from the operator) and, in the case of securitizations, the loan servicer(s). In a traditional, non-securitized commercial real estate loan, the hotel lender essentially has three choices when dealing with a hotel loan default:
1) sell the loan as is;
2) leave the owner/borrower in control of the property and explore workout
3) push to get a third party to take control of the asset.
How the lender elects to proceed will oftentimes depend on several factors, including: