Graham & Dunn Establishes Hotel Asset Resolution Task Force
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Graham & Dunn Establishes Hotel Asset Resolution Task Force
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Category: Worldwide - Industry economy
- Trends / Expert's advice
This is a press release selected by our editorial committee and published online for free on 2009-01-22
Responding to the impact of the financial crisis on the hotel industry, Graham & Dunn’s Hospitality Industry Group has formed a Hotel Asset Resolution Task Force. The Task Force is an interdisciplinary team with the specialized legal and industry skills, experience, and resources to meet the needs of clients who own, hold, manage, or will take control of troubled hotel assets. The Task Force will assist hotel owners, lenders, special servicers, their asset management firms, and other stakeholders with the restructuring of hotel loans and the positioning, transition, and disposition of distressed or foreclosed hotel assets. The Task Force will also assist new investors seeking to acquire and reposition troubled hotel assets in anticipation of the eventual recovery.
The hotel industry is bracing for a predicted RevPar decline of 7.8% nationwide in 2009. Because the still-unfolding economic downturn has no recent historical equivalent, even this projection may be understated, and certain markets will certainly suffer greater damage than the nationwide average. The declines, combined with increasing cap rates, will result in a substantial reduction in the value of hotel assets. Leveraged hotels will face difficulty meeting debt service, and a significant percentage of all hotels will fail to satisfy debt ratio requirements and other loan covenants. Hotel owners with significant equity still at risk will need to employ a coherent strategy to protect their investments. Lenders, special servicers, and other stakeholders will need to do the same, and, if they inherit and assume direct responsibility for hotel assets, they will need to stabilize, manage, and market these complex businesses. New investors will need to exercise intelligence and diligence to navigate the hotel industry, make good choices, and avoid dangers as they seek to acquire and turn around troubled hotel assets.
Owners’ Challenges
Hotel owners must take a hard look at their hotel assets and determine the effect of a substantial decline in RevPar and an increase in cap rates. They need to assess whether they potentially face monetary loan defaults. They also need to carefully evaluate their loan documents and determine whether there is a risk that their hotels may fail to satisfy debt coverage ratios or other loan covenants. In either event, they need assistance in establishing a business and legal strategy to protect their equity.
If defaults must be cured, or even if, more simply, loan renewal dates are imminent, owners need to understand the new realities of the lending environment. In many cases, an influx of significant new equity will be needed to protect existing investments, and owners need assistance to understand and access new sources of equity in the troubled national and global environment.
Owners also need to understand available legal rights and remedies, including insolvency laws, correctly weigh them, and, if necessary, pursue them.
Challenges facing Hotel Lenders and Investors
If, because of the declines in values and performance, a hotel owner’s equity must be considered lost, or if the owner is unable to access new sources of equity or debt, then the hotel’s lenders or investors will themselves need to assert control over the hotel.
Hotels are complicated assets in almost all respects. Without access to industry knowledge and experience, these new owners have little hope of achieving satisfactory results. To adequately exert control and then stabilize, manage, and market these assets, lenders and investors will need the assistance of legal and other advisors who know the hotel industry, are experienced with all aspects of hotels, can apply this industry, legal, and business knowledge for best advantage.
* Dealing with Partially Completed Hotel Projects. In some cases, a hotel project may be in a state of partial completion at the time of foreclosure. To determine forward progress to proceed, the foreclosing lender, special servicer, or investor will need to confront and understand the hotel’s specific entitlements and structure. If a decision to complete the project is made, then doing so will also often require the settlement of lien claims, enforcement of warranties, and many other construction issues.
* Repositioning and Maximizing Realization of Operating Hotels. Other distressed hotels may be completed and operating, but may be performing poorly. The stakeholder considering foreclosure will need to address decisions and issues that are unique to the hotel business. Before foreclosure, the stakeholder will need to be fully aware of the unique aspects of the hotel business, including such things as the need to transfer the hotel’s liquor licenses and the specialized state and local disclosure and licensing laws that must be addressed and satisfied. The use of receivership laws must be considered and understood, and, if this route is selected, a qualified, industry-experienced receiver must be engaged and authorized by court order that is informed by both legal and hotel-specific knowledge. The stakeholder will need to analyze the terms of any branded management contract, the relationship with the branded management company, the ability to change brands and the effect of doing so, the hotel’s operating budget, and scheduled capital expenditures. The stakeholder will then need to position the hotel for a satisfactory disposition. All of these steps will require specialized, hotel-specific legal and business knowledge and access to resources in the hotel industry.
* Addressing Legal Risks of Hotel Operations. Stakeholders who lack hands-on hotel experience will face a number of legal issues they are not accustomed to addressing. These may include employment and union problems and issues, environmental law risks, specialized hotel contracts such as group contracts, intellectual property and e-commerce concerns, and litigation relating to guests, tenants, or contractor agreements.
* Handling Unique, Multi-faceted Hotel Assets. The foreclosing lenders, special servicers, or investors may also confront complex hotel assets, such as condo hotels. Condo hotels trigger special risks. See Trouble Condo Hotel Workouts – The Time Has Arrived. For example, if the foreclosing lender sells a condo hotel unit without following specific, well-considered procedures, the foreclosing lender may inadvertently violate federal or state securities laws.
Concerns for Branded Management Companies
Branded management companies’ most valued assets are their portfolios of long-term, branded management contracts.
Managers must analyze their performance clauses to see if their contracts are at risk. They also need to review their Subordination and Nondisturbance Agreements (SNDA) to see what rights they have if a loan default occurs and the lender begins foreclosure. If the SNDA was not well-negotiated, the branded management company may have trouble accessing the hotel’s revenues to meet payroll or perform brand-mandated capital improvements.
Branded managers need assistance in this analysis as well as experienced counsel to anticipate and address risks both inside and outside of receivership and bankruptcy.
Challenges for New Investors
In this diverse, complex global economy, there are those who are looking to invest. These investors will help initiate the economy’s recovery by providing owners with equity or liquidity and allowing lenders to move assets off their books. These new investors include private equity sources (both foreign and U.S.). Also, pension and other equity funds will be in the process of revaluing their real estate portfolios. When that has occurred, they will need to rebalance their portfolios and, once again, will need to invest in real estate.
Real estate investors who become interested in hotels quickly learn that special, industry knowledge and skills are required to avoid costly investment and operational errors. Complexity and risks are multiplied in a troubled environment.
Special skills are required to determine which hotel assets are troubled because of the current economic environment and which will be troubled even when the environment improves. Once the good assets are identified, investors must adeptly handle a very broad range of industry-specific issues. These include the special due diligence and legal concerns of hotel acquisitions. In addition, the investor must understand how to handle multiple liens and claimholders and, potentially, receivership or bankruptcy procedures. Simultaneously, the investor needs to engage the industry resources to establish and execute the strategy to reposition the hotel assets and minimize losses while the recovery takes hold.
Meeting the Needs
To help clients successfully address these challenges, the Task Force employs Graham & Dunn's nationally recognized Hospitality Industry Group. Its members have assisted the industry since 1990, and, in previous down-cycles, have successfully addressed the very legal issues and challenges facing the industry today. The Task Force is further enhanced and combined with the extensive banking industry resources of Graham & Dunn’s Financial Services Group and the firm’s bankruptcy/insolvency, real estate, labor and employment, litigation, and construction practices.
The Hotel Resolution Task Force is led by Hospitality Industry Group partners Irvin W. Sandman and Russell C. Savrann, in close coordination with Financial Services Group and bankruptcy partner Mark D. Northrup, Real Estate Group partner Douglas J. Smart, and litigation partners Doug Berry, Stephen H. Goodman and Steven A. Miller.
The Task Force will also provide clients advice about, and access to, the Hospitality Industry Group’s wide-ranging contacts and resources in the hotel industry. These resources include, among many others, the advisory, economic, and disposition services of CBRE Hotels, the real estate services of Graham & Dunn affiliate Orion Real Estate Advisors, and companies that can assist with a broad range of segments and brands, including independent hotel management companies such as MTM Luxury Lodging, Coastal Hotel Group, The Dow Hotel Company, Northview Hotel Group, and Hay Creek Hospitality.
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