The Ashford Hospitality Trust joint-venture acquisition of Highland Hospitality’s 28-hotel portfolio earlier this month reveals how far the hotel transaction market has come. The $1.28 billon deal alone was more than half the $2.1 billion transacted in the Americas through all of 2009, according to Jones Lang LaSalle Hotels, which tracks asset sales $10 million and higher.

The hotel investment services firm forecasts the deal volume to reach at least $13 billion this year after a fivefold increase to $11.9 billion last year. Attorney Jim Butler, a partner and the head of the global hospitality group for Los Angeles-based law firm JMBM, calls Jones Lang LaSalle’s prediction “unbelievably low” and believes the total could double last year’s volume and reach $24 billion.

Ashford Hospitality’s acquisition of 19 full-service and nine select-service hotels came through a consensual foreclosure. The Dallas-based REIT’s contribution of $150 million in cash and the assumption of $786 million in debt secured a 71.7% interest in the venture with an unnamed institutional partner.

The $158,000 per-room purchase price represents a significant discount from the $244,000 price in 2007 when the portfolio was acquired in a privatization of then publicly traded Highland Hospitality.

Butler believes more portfolio sales like this are coming as the lodging sector regains its footing. He recently discussed why the transaction market is poised for a big turnaround and how recapitalizations are becoming an answer for much of the hotel distress remaining.

Stoessel: Are you optimistic about the hotel industry’s recovery?

Butler: I still have some concerns, but yes, at this point there really is a consensus the worst is behind us. The biggest problems are in the rear-view mirror. Fundamentals are continuing to improve. And despite the slow recovery of average daily rate, values have also improved.

Stoessel: What challenges remain for owners and investors?

Butler: Expenses were cut to the bone during the Great Recession, and staffing levels are at unsustainable and low levels. Added labor and energy costs and the resurgence of property improvement plans for deferred maintenance will be the big challenges going forward.

Stoessel: Has the buying opportunity of a lifetime we’ve heard so much about arrived yet? Will it ever?

Butler: It won’t get any better than this. We are not at the levels people dreamed of and salivated over. It’s not 10 cents on the dollar like in 1992 and ’93, and we’ve seen some deals approaching [peak pricing] levels of 2007, but by and large there are properties available for less than they were at the peak.

There is virtually unlimited equity on the sideline that has been holding back for close to three years in expectation of the bargains of a lifetime. And with that pent-up demand, buyers are starting to see prices trending up, improving fundamentals, little new supply, and they’re jumping in. Whatever they hoped for and think value is, it won’t get any better than this.

Stoessel: When was the bottom of the cycle?

Butler: The real bottom of hotel values was 2009. I’ve seen several studies on this — HVS has done a great one (see chart). Hotel values increased 10% to 15% in 2010. I don’t think it will take much to get transactions going once people get a sense of where values are.

Stoessel: How big of an increase in transaction volume do you expect this year?

Butler: After a five-fold increase in hotel transactions totaling $11.9 billion for 2010, Jones Lang LaSalle Hotels is projecting an unbelievably low number of $13.9 billion for 2011. I don’t think it’s out of line to double the total of 2010.

Stoessel: Will there be more large deals like the recent Ashford Hospitality Trust joint-venture acquisition of the 28-property Highland Hospitality portfolio for $1.28 billion?

Butler: Last year was boosted by [Blackstone’s $3.9 billion] Extended Stay America acquisition, so you had these big whales in last year’s total too. We’ll see more whales this year. Life is beginning to happen again.

Stoessel: Will REITs continue to be the biggest buyers?

Butler: Yes, but as we return to normalcy and more transactions, there are a lot more smart people who will figure out how to get deals done. I was just meeting with equity funds that would like to buy properties and are considering note sales.

Stoessel: Are we going to see more distressed hotel assets transacted this year?

Butler: Distress will continue for a lot of people for a long time. We’re less likely to see as many bankruptcies and foreclosures as we saw in the 1990s, but we’re more likely to see recapitalizations — meaning fresh capital investments, discounted payments, note sales, restructuring arrangements — where the new investor gets the lion’s share or all the equity.

Stoessel: Why can note sales be preferable to a lender over a foreclosure?

Butler: Once lenders foreclose, they could trigger a bankruptcy. Or if they take [the hotel] back, they’ve got to satisfy their regulators or shareholders and put the property on the market and go through the process to maximize value. It’s all present value analysis. They could get their money three years from now and have to spend money to get there, or get some money in cash today.

Stoessel: How can a recapitalization work?

Butler: On a $100 million loan the borrower has problems with and can’t handle, for example, the borrower might say, “Give me a 20% discount on the note, and we’ll pay cash and be out of this.” Where does the borrower get the capital if they couldn’t pay the mortgage? It comes from savvy investors who get the preferred position and are in line to get their money back first. They might get a return of X, and if there’s anything left after that, the borrower might get a piece. There’s a realignment in the ownership structure that favors the capital coming in.

Stoessel: Why can this be a good option for the distressed borrower?

Butler: It may prevent the borrower from having tax consequences, or offer some forgiveness of indemnity. Or sometimes the original borrower is left in some capacity for a real economic interest. It’s very much a negotiated situation, but clearly the new capital is in the ideal position to own the asset.

Stoessel: How do the new investor and distressed borrower typically come together?

Butler: Sometimes the borrower will find new capital, but that tends to be with the more sophisticated owner. The new capital may have a whole office or group that does nothing but search for these types of opportunities. We’re also seeing a lot of situations where an operating company finds these deals and brings them to a capital partner. I’m not sure if there is a typical situation. Sometimes a broker brings the parties together. We’re not brokers, but have been able to connect deals, operators and capital.

Stoessel: Do most capital sources prefer larger dollar amounts with this approach?

Butler: If there is a regular partner and deal pattern and you can stamp out a couple of these a month, $10 million may be a little small, but probably not too far out of range. During these times, you’d be surprised how low capital and operating partners would go on these transactions.

Stoessel: Are these recapitalizations replacing more traditional buyer-seller transactions?

Butler: No, those are increasing too. There’s something for everyone right now.

Stoessel: What advice would you have for buyers of distressed real estate?

Butler: Really do your due diligence. There are reasons for distress. Yes, it may be overleveraged and maybe just because of the economy, but that may ripple and have an impact on the physical property, its licenses and permits, or with management and franchise agreements. If it sounds too good to be true, it probably is.

In this market there’s almost a feeding frenzy, and no time for due diligence: We’re hearing, “Go hard and close in five days.” There’s a lot of pressure to act quickly, but you can’t forget your fundamentals. Management and franchise agreements are clearly one of the most important things affecting the value and profitability of any hotel. Someone who knows what they’re doing needs to look at all those issues to understand what you’re getting into.