Closing a hotel—once a nearly unheard-of option for an owner—has entered the industry conversation as a possible alternative for properties performing so poorly they can't meet the payroll or pay the electric bill, let alone the mortgage payment and franchise fees. While I've yet to hear of any hotels that have permanently closed their doors, Internet buzz in the legal community has produced lots of commentary on the pitfalls of doing so, as well as the legal considerations if it becomes a necessity.

Until the recent downturn, the owner of a hotel in trouble could usually find a buyer who would often either de-flag the property and/or move its market profile to a lower segment and lesser brand. As many pundits have said over the years, the hotel industry hasn't been overbuilt; it's been under-demolished. Shutting the doors and walking away was never a consideration because other options always existed. Not so much anymore.

Another problem with hotels is that they're hard to convert to other uses. A few can become housing for college students but, of course, that possibility is location-specific. Some owners have tried and generally failed to convert their hotels to nursing homes or other healthcare facilities. The costs to meet facility codes for those uses are usually prohibitive, if it can even be done.

The stagnation of the hotel transactions market is what's stalling the typical migration of ailing hotels from distressed owners to eager and opportunistic buyers. Many hotel loans originated in the last five years wound up in the CMBS aftermarket where they were carved into so many wedges that it's very difficult for an owner to locate the one person or entity with which to negotiate for relief. The result is a slow, painful march toward bankruptcy, insolvency and a locking of the doors (not an easy task at most hotels since by their nature hotel properties are 24/7/365 businesses with no locks on the front doors).

And while there are many anecdotal reports of cash-rich investors waiting to swoop into the market to buy debt and/or equity in struggling hotels, it has yet to materialize on a wide scale. Meanwhile, an increasing number of hotel properties fall into default or foreclosure.

Despite the urge to do so, hotel lawyer Jim Butler advises strongly against closing a hotel, calling it in his Hotel Law Blog "the worst money-saving idea you ever had." His breathless commentary details a variety of reasons why closure is a bad idea, but they boil down to one primary consideration: Butler says, "The day a hotel closes, it will be worth less than half the value it had the day before." Plus, he says even minimal upkeep (utilities, security, insurance) on a vacant building can be costly, and closing a hotel often terminates franchise and management agreements or throws these questions into dispute and possible litigation.

While he doesn't completely rule-out the need to close a hotel, Butler says it's important to do a thorough value and holding-cost analysis  in order to weigh your options. The bottom line, however, is that unless there is no other alternative and the wolves are figuratively at the door, the best advice comes from American naval hero James Lawrence, who said, "Don't give up the ship!"