Checking in to Bankruptcy & Workouts: Options for Your Distressed Hotel While the recently popular lender/borrower game of "extend and pretend" has allowed lenders and hotel owners to play nice with each other while hotels have faced these unprecedented economic times, this game may be winding down as lenders begin to take a more aggressive stand on loan maturities/defaults. This article provides insights into some of the practical and legal options for the hotel owner when the lender begins to exercise its legal remedies. First, let's examine some of the cards that the hotel owner-borrower holds. For one thing, troubled hotel loans are more difficult for lenders due to the myriad of management and franchise affiliations, licenses and permits, extensive vendor relationships, marketing efforts, significant workforce involved, etc. These contracts and relationships typically do not factor into the "normal" non-operational real estate workout and/or foreclosure (for example, warehouses or strip retail centers), but are common in hotel ownership and are critical to the value of the hotel asset. In addition, the lender's lien position may be subordinate to the hotel management and franchise agreements, another reason for the lender to compromise and attempt to work with the existing borrower and hotel manager even when the loan is in default. Workouts & Related Options
Given these unique advantages, what are the possible approaches a hotel owner can take when facing the lender's attempts to collect on the loan or enforce its liens against the property? The most obvious answer is a loan workout/modification/extension. Many industry experts have observed that banks do not want to write down loans because this action requires an increase in their bad debt and capital reserves. If the owner-borrower can move the lender toward a workout scenario, the first step is normally the negotiation of a pre-workout agreement (PWA). A PWA is an agreement outlining the current situation faced by the parties and the parameters of the parties' respective rights and obligations in attempting to negotiate a consensual resolution. The PWA may be a lender's attempt to protect itself during negotiations of the existing loan. Perhaps such protections are reasonable, but the owner-borrower should not admit any defaults or waive any rights in the PWA. Sometimes lenders will attempt to use the PWA to obtain concessions from the owner-borrower before allowing workout negotiations, and the owner-borrower must decide whether the requested concessions are necessary, prudent or will impair the owner's ability to exercise rights or undertake actions that might be necessary if the workout negotiations fail. Sale of Hotel
A hotel owner might also consider a sale of his hotel. Though this article will not examine this option in depth, a sale may be good approach if the owner is not willing or able to retain the hotel for another three to five years, when industry pundits believe values may return to more normal conditions. If there are no guaranties of the hotel loan by the owner-borrower's principals or if the bank is willing to reduce or eliminate any guarantor deficiencies, the owner-borrower and lender might also want to consider an agreed upon "short sale," which is a sale of the hotel for less than the loan balance. In addition to eliminating the debt of the owner-borrower to the lender, the benefit of a short sale is that the borrower stays involved with the hotel until the sale is consummated, such that the lender does not have to get involved with the ownership and management issues that arise from a foreclosure or deed in lieu of foreclosure. Receivership
A hotel owner may seek the appointment of a receiver if it does not operate the property and determines that the property’s distress is caused by current management. In the hotel context, most receivers are hotel management companies (or in states like Texas that require that individuals serve as receivers, officers at hotel management companies that hire their management companies to manage the hotel asset). Termination of the current management agreement may result in a breach of contract claim from the current management company, but oftentimes in these circumstances the current management company and the lender are both in a state of frustration and the appointment of a receiver and termination of current management can be orchestrated on a consensual basis, allowing a fresh face and approach to hotel management and, from the lender's perspective, an independent third party managing the hotel for the mutual benefit of the owner and the lender. ... more |
