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While there are signs that the hotel industry is coming out of its multi-year slump brought on by the terrorist attacks on September 11, 2001 and the subsequent SARS epidemic, many hotel owners still have not experienced sufficient revenue growth to maintain operations without concessions from their employees, suppliers and lenders. In cities such as the San Francisco Bay Area, where the downturn was exacerbated by an ongoing recession in the technology industry, hotel owners, after many years of expanding revenue and profits, were faced with sizeable losses from their operations which led in many cases to foreclosure and loss of their properties. Some owners, however, approached this economic downturn with a proactive stance and initiated negotiations with their lenders to restructure, or in some cases recapitalize, the loans secured by their hotel properties. This article will briefly explore some tips for hotel owners regarding the restructuring of their mortgage loans.
Unless a situation is especially dire, most initial pleas to a lender to renegotiate the terms of the loan are met with stony silence and denial. In response, some hotel owners have taken the risky route of defaulting or making late payments on their loan as a means to get the lender's attention. While it may work in certain circumstances, this approach obviously creates the risk of the lender filing a notice of default and commencing a foreclosure on the property. Not only does this strategy lock the lender into an aggressive legal stance, but it also entails considerable costs which are then added to the amounts on the table for negotiation with the lender. Such costs include default interest, late fees, survey charges, appraisal fees, title and foreclosure fees, and the lender's attorneys' fees. As a result, a more prudent course of action would be to prepare for submission to the lender a business plan which underscores the current economic difficulties faced by the hotel owner and the need for temporary economic relief from the terms of the loan. This may involve a reduction in the interest rate or the principal payment, a capitalization of past due interest, a reduction in reserve payments or similar restructuring options. This proposal is then coupled with a formula that will demonstrate to the lender a path to weather these hopefully temporary economic difficulties and return the property (and the loan) to an operating basis within a fixed period of time. Any agreement with the lender regarding such a restructuring plan must be reduced to writing and structured within the context of the existing loan documentation.
Many hotel owners would be surprised to learn that the voluminous and carefully-drafted loan documentation they entered into with their lender may contain illegal or unenforceable provisions that were not fully understood by the lender and its counsel when the loan was entered into by the parties. For example, I was recently involved in a loan restructuring where the loan documentation, prepared by a large Wall Street law firm, contained default interest provisions which, as applied, were in clear violation of a 30 year-old California case. The case has been decided by the California Supreme Court and has been upheld on several occasions subsequent to its original publication. When the lender attempted to enforce the default interest provisions and file a foreclosure based on those and other defaults, such action gave the hotel owner the initial leverage it needed to force the lender into more substantive loan restructuring negotiations. To determine whether such an unenforceable or illegal provision is contained in your loan documents, it is absolutely essential to have the loan documents reviewed by experienced legal counsel before the loan renegotiations commence. Such a proactive strategy can save the hotel owner a considerable amount of money and provide the necessary leverage for entering into successful negotiations with the lender.
For a hotel owner faced with ongoing losses from operations, a renegotiation of his mortgage obligations can make the critical difference between holding on to the property until the economic climate improves or losing the property in a foreclosure. As indicated above, this is a move which should not be undertaken without careful review of the loan documentation, as well as the development of a sound strategy and business plan for dealing with the lender and the objectives of both parties during the restructuring process.
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