It’s been a very tough time for hotel owners. Starting in the fall of 2007 with the collapse of the housing finance industry, followed by a number of failed financial institutions, massive layoffs and record high unemployment, travel came to a grinding halt. Hotel occupancies declined and room rates spiraled downward. No market or hotel product type was spared, and everyone suffered. If you were one of the many hotel owners swept up in the refinancing binge that preceded the 2007 collapse and took advantage of the highly leveraged loans at that time, these last three years have been particularly painful.

Measuring the industry pulse at New York University Hospitality Industry Investment Conference in June, most prognosticators were optimistic that the recovery would come on strong starting early 2011. Today, with the dreaded “double dip” being mentioned all too often, a quick and robust recovery doesn’t look as likely.

Up until June it appeared most hotel lenders were taking the “pretend and extend” point of view. They pretended the hotel wasn’t in default and they extended the term of their loan so they didn’t have to realize a write-down or potential foreclosure. Essentially, they worked out a solution with the borrower.

Today, it appears many hotel lenders are starting to become much more hard-line and aggressive, not working out solutions with their borrowers but rather commencing foreclosure actions. This sudden change in heart seems to coincide exactly with the point in time when most industry experts believe we’ve hit the bottom and an upturn is just around the corner. The old adage of buying low and selling high springs immediately to mind. Would your lender be looking to steal your hotel by essentially foreclosing (buying) now (at the lowest point in the cycle) and turning a huge profit when they sell your hotel two to three years from now?

Today, there are literally hundreds and maybe thousands of hotel owners facing the threat of foreclosure. After surviving three years of this economic disaster and probably going out-of-pocket to pay part of the debt service, now is not the time to give your hotel back to the lender when recovery is almost a certainty. So what should you do?

Essentially, you have three choices: You can negotiate with your lender and attempt to convince them they would be better off (financially) if you kept the hotel; you can put the hotel into bankruptcy and convince a judge that your creditors would be better off if you kept the hotel; or you can convince a new capital source they can make money if they refinance the property.

All three approaches require a very detailed financial analysis showing all the unexpected challenges the hotel faced subsequent to the closing of the original mortgage debt. This needs to be combined with a third-party review of the current economic condition of the hotel and surrounding market and a forecast of future operating results. A current estimate of value, along with a projected value three to five years from now, is the best approach for documenting the hotel’s upside potential. This valuation is critical when dealing with both your lender and bankruptcy court.

Because many lenders tend to cut corners when they hire appraisers and opt for someone with limited hotel valuation expertise, we often find they seriously underestimate the value of the property because the appraiser doesn’t appreciate the vast upside potential that comes from a hotel’s operating and financial leverage which kicks in during a recovery. When you can show your lender the true value of the hotel asset and the potential value improvement during the recovery, they tend to become more agreeable to a loan restructuring solution.

When you retain a highly qualified hotel appraiser to perform the valuation, the lender also quickly realizes their negotiating position in a bankruptcy court is greatly diminished, making this route a very unattractive alternative. All this due diligence is also very helpful in attracting new capital from sources such as private equity firms that would refinance the property and make an equity investment.

The key to a successful loan restructuring is to demonstrate to your lender there is a reasonable expectation their loan can be paid off in the foreseeable future. In addition, your lender needs to know you have an alternate plan of action to get your way, which is through the bankruptcy courts. Obviously, you should get competent legal representation sometime during the process to properly position your case for a successful bankruptcy action.

After declining more than 40 percent to 50 percent, HVS projects that in many U.S. markets hotel values will recover to the record levels of 2007 by 2013. Since you endured the painful downside, you and not your lender should be reaping the benefits of the recovery.

It is always helpful during a confrontational situation to understand the thoughts and perspectives of your opponent. In 1990 I wrote an article entitled, “A Guide for Lenders Holding Distressed Hotel Loans,” which explains what a lender needs to consider when dealing with a problem hotel. Drop me an e-mail at srushmore@hvs.com and I will send you a copy of this still-pertinent article.

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 516 248-8828 ext. 204.