Most
hotel owners are uncertain how to do deal with a hotel loan in
distress. This is understandable—their skill is in buying, building and
operating hotels. The problem is that they think because they are good
at hotel development and management, they will also be good at working
out their loan's problems with their lender. As a result, they often
don’t consult with anyone with real expertise in negotiating troubled
loans with lenders. Here are 10 pointers to consider before picking up
the phone to call your lender:

David Neff

1. Find out all you can about your lender. No one
ever obtains a loan thinking about what might happen in the event of a
default. Borrowers can learn the hard way that the identity of the
lender may make all the difference in working out a defaulted loan. If
the lender is a bank, its status—financially sound, troubled, or so bad
it has been taken over by the Federal Deposit Insurance Corporation—may
determine its approach to your loan. If the lender is a commercial
mortgage-backed securities special servicer, the approach may be
entirely different than that of a bank.

2. Don’t assume the lender doesn’t understand your industry.
Many players in the hotel industry seem to believe that most CMBS
special servicer workout officers are inexperienced and lack any hotel
knowledge or expertise. In fact, many CMBS special servicers have
degrees from hotel schools or have worked through hotel loans in
previous down cycles. Banks, although generally lacking substantial
knowledge of hotels, are more likely to have access to that expertise,
with hotel brokers, consultants and others beating on their doors for
assignments.

3. Prepare thoroughly before making your proposal.
You wouldn’t seek a new loan from a lender without presenting detailed
financial statements and projections, including market analyses, Smith
Travel Research (www.str.com)
reports and a list of needed capital expenditures. Approach a workout
the same way. You need to educate the lender about what is happening
with the hotel and its market. Simply telling your lender that these
are challenging times will not be enough to make your case.

4. Be prepared to “share the pain.”
If you are in monetary default and need relief on your debt service,
many lenders will want you to come up with new money if you want to
retain your ownership. If you are unable or unwilling to do that, most
lenders will seek to take the keys and obtain the entire hotel’s upside
potential for themselves.

5. One size does not fit all. It is
wise to ask other hotel owners what lenders are doing in terms of
working out their loans. However, just because one borrower obtained
certain concessions from a particular lender does not mean you will get
the same concessions. Each workout is judged on its own merits based on
factors such as the hotel's value compared to its debt, how much cash
the hotel needs, deficiencies in the lender's loan documents and the
existence of any personal guarantees.

6. Beware the springing guaranty. A
common feature of most CMBS loans is that there is a guaranty that
springs into effect only upon certain defined events. A well-known
triggering event is the borrower's bankruptcy. However, there are often
a number of other possible triggers, including failing to pay
real-estate taxes, allowing mechanics’ liens to be filed against the
hotel, and, in some instances, even abandoning the hotel back to the
lender. You need to know what that guaranty says before you talk to
your lender.

7. Don't make a lowball first proposal.
There is a school of thought that the first offer should be
sufficiently low so that you can negotiate to an acceptable middle
point. That may make sense in some negotiations, but you run the risk
of this strategy backfiring. Make your first offer meaningful enough
that the lender sees a point to continuing settlement negotiations.

8. Get ready for foreclosure. Many
lenders will negotiate with a borrower, but at the same time pursue
foreclosure of the hotel. This does not necessarily mean that a workout
cannot happen. It does mean that the lender wants to keep the pressure
on the borrower to come up with an acceptable proposal. It also
positions the lender closer to getting the property back if no
consensual resolution occurs.

9. Do damage control. The filing of
a foreclosure complaint against a hotel often makes the press. If it
does, competitors will mention it every chance they get when pitching
group business. Such news will make event planners nervous about
whether the hotel will be open when their events roll around. Arm your
sales staff with the information to address client concerns and
reassure the public that foreclosure does not mean the hotel is closing.

10. Know what you are fighting for.
There have been a few high-profile hotels where the borrower has simply
returned the keys to the lender and walked away. Whether or not this
makes sense for you depends on many factors, such as whether or not you
get cash flow from the hotel through a management fee, whether or not
ownership allows you to avoid recapture of taxes, the amount of money
your hotel needs and the extent to which you believe your hotel will
recover when conditions improve. If you decide to just turn over the
keys, it takes planning and forethought. You need to be aware of any
potential liability to employees if they are terminated, to your
franchisor when your license agreement is terminated, to any equipment
lessors that may have personal guarantees and to taxing authorities for
unpaid sales and withholding taxes. No matter what you do, it will take
careful consideration and cost money to get it done right.

David M. Neff is co-chair of the Hotel & Leisure
Group at Perkins Coie in Chicago, Illinois. He can be reached at
312-324-8689 or dneff@perkinscoie.com.