Lenders' Dilemma: Work out or Foreclose

A hotel is a retail business that depends on continuous patronage to survive. Any publicity that even hints of a financial difficulty may have an adverse effect on attracting future business. A foreclosure or bankruptcy can devastate a hotel's occupancy rate and seriously erode a lender's security. Here are a few situations in which negative publicity can be particularly harmful to a lodging facility:

  • The hotel has a significant group orientation that depends on meeting and conference business. Meeting planners are usually aware of situations that could jeopardize their success and will steer clear of hotels having financial difficulties.
  • Hotels dependent on business from travel agents will quickly feel a decline in referrals from agents who may be wary of their ability to collect commissions.
  • In addition, negative publicity could place the hotel on C.O.D. delivery basis with most purveyors, cause employees to seek more secure employment and generally create an operational nightmare.
  1. Implement the plan

    When a lender takes back a hotel, it assumes an ownership position that requires significantly more supervision than was previously required. Lenders that aren't equipped to handle this burden in-house can use asset management services to take over some of the ownership responsibilities.

Lenders looking at a loan with a curable problem but an uncooperative borrower are generally forced into using foreclosure to gain possession of the property. Depending on the state in which the property is located, a foreclosure can take from as little as a month to as long as several years. Faced with an imminent foreclosure, a militant hotel owner may put the hotel into bankruptcy, which could extend the timetable another one to four years.

In addition to these primary issues pertaining to the handling of distressed hotel loans, there are other considerations worth mentioning:

  • If the problem is largely due to incompetent management, don't hesitate to terminate the management contract.
  • Lenders need to keep a low profile. Publicity usually doesn't enhance distressed hotel situations.
  • Since history has shown that most hotels will turn around over time, lenders should stay with a hotel and attempt to improve its operating results rather than dumping it on the market at a significant discount.

Now that you understand how hotel lenders will evaluate your request for relief, you should be better prepared to present your case in a way that will show how your lender would be better off working with you rather than against you by resorting to foreclosure.

*Stephen Rushmore is president and founder of HVS, a global hospitality consulting organization with offices around the world. Steve has provided consultation services for more than 12,000 hotels throughout the world during his 35-year career and specializes in complex issues involving hotel feasibility, valuations, and financing. He can be reached at srushmore@hvs.com or 516 248-8828 ext. 204.

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