Lodging is the most management-intensive segment of the commercial real estate industry. And while location and financial structure are critical, operating performance may be the primary driver of value in a hotel investment. So when a property becomes distressed or goes into default or bankruptcy, it’s crucial that competent, experienced and honest management be able to step in quickly to stabilize the situation.

“Our role is to at least maintain the value of the property,” says Bill Hoffman, president and CEO of Trigild, a San Diego-based specialist in distressed-property management and receivership. “Some companies, particularly newcomers to this business, talk about achieving a turnaround, but that’s very rare. It’s not very often we get involved in a hotel that’s been so horribly mismanaged that we get an opportunity to make dramatic improvements.”

Morris Lasky’s Lodging Unlimited succeeded in stanching the losses at the Drawbridge Hotel in northern Kentucky. Since being named receiver for the property last December, the firm has been able to turn $600,000 in projected losses into breakeven-or-better performance.

The management company’s role depends, in part, on the nature of the assignment. “In a receivership or deed in lieu of foreclosure, we tend to be babysitters,” says Kirby Payne, president of Rhode Island-based HVS Hotel Management, “but in a distressed property assignment, our additional goals are to drive revenues and to straighten out any financial management problems.”

Morris Lasky, the so-called hotel doctor, has a bolder viewpoint. For Lasky, who is president of Chicago-based Lodging Unlimited, it’s not worth taking an assignment to be just a caretaker. “If we feel we can’t make an improvement to the property, we don’t want to get involved,” he says. “We always take a proactive approach as though we own the hotel ourselves.”

The first steps
Once a receivership order is signed or an owner or lender hires a distressed specialist, speed is important. The first step, the experts say, is to secure the property’s cash flow and institute strong financial controls. As Payne puts it, “The first thing we do is grab the cash, count it and change the combination to the safe.”

“From there, it’s important to set payment priorities and delay what you can,” says Jim Burr, principal of Illinois-based Burr Co. and a 40-year veteran in consulting, workouts and asset management. “Then, it’s crucial to speed up collections and make sure the hotel is timely in its city ledger and credit card billings. Also, the front desk and sales departments need to follow procedures that maximize cash flows. After these steps, you can focus on wringing excess costs out of the operation.”

Under the terms of receivership, the receiver isn’t obligated to pay any bills incurred before the onset of the receivership. That includes franchise fees, which gives the franchise company the right to terminate the license agreement. “That usually doesn’t happen because the franchisor wants to retain the location,” says Hoffman. “However, it gives the brand company the opportunity to do so if it has wanted to get rid of that property for any reason.”

Another decision a receiver needs to make is what to do about onsite management. Both Burr and Lasky agree it’s usually better to replace the hotel general manager in these situations. “We want somebody we trust,” says Lasky, “and it takes a particular personality with the right levels of experience to operate a hotel in receivership or in any distressed situation.”

And as Hoffman points out, it’s a matter of receivership law that an owner can’t operate the property while it is in receivership. The same goes for a management company owned by or affiliated with the owner. “The owner simply can’t have any involvement with the hotel while it’s in receivership,” he says.

Kirby says one of his company’s first tasks when they assume control of a troubled hotel is to address the property’s financial management strategies and procedures.

“Often, the accounting is messed up,” says Payne. “It’s mind boggling how many small to mid-size operations use QuickBooks for their accounting, which doesn’t work for hotels because the system can’t generate the statistics an operator needs, like the cost to operate a room, and it doesn’t conform to the Uniform System of Accounts.

Building business
Even in a “babysitting” situation, it’s important the receiver or management company is able to find low-cost or no-cost ways to build business for a hotel in trouble. Lasky says it’s important for management of a troubled hotel to reassure customers that the hotel is stable, will improve under the new management and that their scheduled meetings or events can proceed as planned.

“It’s also very important your staff, and particularly those in sales and marketing, believe this is true,” says Lasky. “Even then, it’s sometimes a tough task because some meeting planners find it difficult to tell their bosses they’re holding a meeting in a hotel in receivership.”

Rate strategy is another priority for new management. Payne recalls a distressed hotel in San Antonio his firm was called in to manage. “We quickly found the owners were overly rigid in their rate structure,” he says. “While other hotels in the area were dropping their rates, the owner wouldn’t let the GM do so and the property’s market share dropped dramatically. We implemented a more rationale rate strategy and the market share began to rise immediately.”

Burr, the consultant and workout specialist, likes to “dig for gold” when he reviews the operations of a distressed hotel. “It’s important for a fresh and experienced set of eyes to look for hidden revenue opportunities,” he says.

His inspiration was Conrad Hilton, who when he took ownership of the Waldorf-Astoria found a number of revenue-producing opportunities, including leasing lobby-level shop space to retailers and creating showcases inside hollow lobby columns that the hotel rents to local companies.

“At many properties, you can carve out a chunk of the lobby for a Starbucks counter or kiosk,” explains Burr. “Even something as simple as leasing a courtesy phone to a car rental company can generate extra income.”