Auctions Redux

Since I wrote about the auction as a viable alternative to conventional sales of hospitality properties (LH, November 2003), a number of transactions have occurred in this arena. Some recent ones span individual timeshare or interval ownership units to an entire company's hotel assets. Arlington Hospitality is an Illinois-based, publicly held hotel development/management company and was the nation's largest owner and franchisee of AmeriHost Inn hotels. Its auction involved 30 hotels along with Arlington's rights in certain contracts, leases and agreements, including the development agreement, royalty sharing agreement and individual hotel franchise agreements. The proceeding, according to Steve Miller, Interim CEO of Arlington, “gave the buyer a new company.”

In this instance, the auction culminated a three-month bankruptcy court ruling, funding the creditors in one-tenth the time bankruptcies typically take. A bankruptcy involving 30 hotels resolved in less than 90 days? Miller says the benefit of the auction process is that “we were facing long, drawn-out litigation that would have killed the assets. We tried for six months — spending a lot of money and only making the attorneys rich.” Instead, using Section 363 of U.S. bankruptcy laws rather than the typical Chapter 11 proceedings, the Aug. 31 bankruptcy filing was finalized on Nov. 28, 2005. Arlington enlisted the services of Chanin Capital LLC as its exclusive financial advisor in connection with Arlington's efforts to restructure its debt and equity capital.

In fact, the matter would have been resolved two weeks sooner but for the stalking horse bidder: Sunburst Hospitality, a Maryland-based company. A stalking horse bidder is an interested buyer selected by the bankrupt company who makes an initial bid on a bankrupt company's assets. From a pool of interested parties, the bankrupt company chooses the stalking horse to make the first bid. In this way, the bid floor is established.

Sunburst successfully petitioned the court for a two-week extension following seemingly intense two-day negotiations with a hedge fund, the apparently successful bidder. Granted the additional time due to the court's charge to return the greatest amount to the creditors, Sunburst was successful, resulting in a substantially greater return. As reported by Arlington Hospitality, the final transaction approved by the bankruptcy court was for $32.4 million versus the original stalking horse bid opening at $21.3 million. In this case, there were two gavels to drop, first from the auctioneer and finally from the judge, but according to Miller, this was a much cleaner transaction.

One of the hottest commodities in the hospitality industry, and most popular way of financing new or conversion properties, is condominium, timeshare or fractional ownership. When the American Skiing Company completed the 320-room full-service Grand Summit Resort Hotel in Park City, UT in 2000, the units were offered for sale as interval (13-week) ownership condominiums. Sales proceeded well through mid 2002, but by year-end 20 percent of the units remained. This auction was a joint effort by Sheldon Good & Company, experienced real estate auctioneers, and Michael Fox International Auctioneers, a machinery appraisal/auction firm. The auction was planned to use buyer's choice bidding. This type of bidding, initiated by Sheldon Good & Company for real estate auctions, pools similar real estate parcels. One pool at a time is offered; bidding is for the right to select the property of one's choice from the pool. In each round of bidding, the winning bidder's choice is removed from the pool, and the auction continues with additional rounds.

In a creative twist to the collaborative accelerated marketing campaign, a live auction simulcast to three states was conducted in February 2004. The intent was to complete that auction, generating new interest, followed by traditional marketing for a season, and finish with a second auction to sell off any remaining ownership units. To generate interest in what had become a very slow market, the auctioneers packaged four interval ownerships, creating a new product — fee ownership of a single hotel condo unit. Following an intense marketing campaign, it was a “standing-room-only” crowd of bidders.

For American Skiing Company and the Grand Summit Resort, the results of that first planned auction far outpaced the owner's expectations. With original plans to withhold some product, the five-hour auction resulted in all but three units being sold. Total sell-out occurred within 60 days of the auction date at market pricing with no discount — resulting in far more revenue in a much shorter time frame than the owners hoped for.

For decades, names like Sotheby's and Christie's have been synonymous with the sophisticated world of high-end estate and art auctions, with market perception matching the reality of the process — a timely, effective and elegant way to dispose of estate items, antiques and precious artworks. Conversely, real estate auctions conjure the image of courthouse steps and an option of last resort for a dog property.

What about those perceptions that: Auctions are just for liquidation situations and bring bargain-basement prices? Auctions are offensive? Auctions imply a panicked seller? Auctions are for second-rate hotels? Auctions are a little sleazy? Fortunately, that perception is changing.

According to Louis Fisher of Fisher Auction Co., Inc., institutional sellers, i.e., public and private REITS, are becoming increasingly interested in the auction alternative. “They are tiring of putting a product on the market, having it tied up for 90 or more days with buyers circling around, and too often at the end of the 90 days, the seller is stuck and the property comes back to the market. “

Sellers are becoming increasingly sophisticated about the services provided by auctions. One major difference — a benefit to both buyer and seller — is that the due diligence is performed by the auction house or its affiliates. While the seller pays for this up front, it eliminates having a potential buyer perform due diligence, a vulnerable down time for the seller because the property is typically taken off the market and does not have continuous market exposure to others. To the buyer, there is confidence in the data compiled by a professional auction house. Due to their experience, the volume of transactions and refinement of the processes over the years, most of the auction companies compile a more comprehensive offering/due diligence package than a buyer does for a once-in-a-lifetime or once-every-few-years experience.

Confidence in the process and confidence that a disposition will occur are the overriding advantages to the seller. The confidence that disposition will be made on a date is certain: whatever form the auction takes, the wait time is up-front. Once the auction occurs, closing is within hours or days. The confidence that potential buyers are capable of making the transaction: because of the auction dynamics, buyers are inherently pre-qualified. Funds are in place before a bid is made. The confidence that the pricing paradigm is out of the picture: Fisher says, “In a conventional transaction, the buyer negotiates against the seller; with auctions, the buyer is negotiating/bidding against other buyers.” Fisher calls auctions the “purest form of a third-party transaction.” In a conventional sale, an asking price is established and the price goes down from there; with an auction, the price goes up.

Finally, and belying the most critical of misperceptions, more and more sellers are realizing that the auction option often brings more than the desired or asking price in a conventional sale. The Grand Summit Resort story is one of many that Sheldon Good & Company offers where the price at auction was more than the seller hoped for.

Fisher Auction Co. recently sold a hotel that was closed down following damage by a 2005 tornado. Since the property was so hard to value, a sealed bid option was used. In the sealed bid scenario, bidders submit bids and the seller has sole discretion to accept or reject the offer. The multiple sealed bids came from two groups: hoteliers and developers, and they ranged from a low of $150,000 to the winning bid of $1,855,000 by a developer interested in a commercial use. In this instance, the owner's strike price — the price he was willing to accept — was bested by $300,000, or nearly 20 percent.

Another example was a former Knight's Inn in Ocala, FL. Warsaw Capital was the beneficiary of the auction option in this sale. Warsaw's REO division had the abandoned property, described by Warsaw's Jerry Tepps as “a mess” following hurricane damage. While admitting that he viewed the auction as a scarier process than a conventional sale, the results made a believer of him. After paying an up-front fee of $36,000 for the due diligence and marketing package, and setting a minimum bid of $1.1 million, Warsaw realized in excess of $1.5 million in the sale. “I was very pleased; the auction proved to be the right choice for this difficult property and I will certainly consider it again.”

As to the perception that auctions are “running brokers out of business”, Fisher Auction Co., Sheldon Good and many auction companies participate and even encourage broker participation. Fisher says that he has brokers involved with every transaction for many reasons; one, having a broker on the team adds credibility; two, “as a national company, I need local brokerage. We offer as much as 50-percent splits to the buy-side broker to encourage participation. We believe that the greater the competition, the higher the yield to the seller.”

As to the perception that auction equals liquidation, the examples provided and many other real stories dispel that thought. The auctioneers say the same thing in two ways. “The right price for your property is the one set by a competitive market. And there is no faster, more direct way to ascertain your property's value than through a (Sheldon Good & Company) real estate auction.” Louis Fisher — “Our concept provides market value and market value is nothing more than what people are willing to pay.”

For more information and related articles, go to

Stephen Taylor is managing director for Horwath Hospitality Investment Advisors' Miami office. He has written on branding, hotel technology, financing and appraisals. Reach him at or 561-575-6590.

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