One
of the most challenging aspects of any crisis is adjusting to the idea
that business as usual is not enough. This downturn—the worst since the
Great Depression—has had a profound effect on every aspect of the hotel
industry. Occupancy rates, just barely better than after the financial
crash in 2008, have remained at all-time lows for a devastating 15
months, and the short-term forecast remains bleak. Inventory planned
before the bottom fell out in October 2008 continues to open, and the
anemic real estate market offers no conversion solutions for 

Robert Habeeb

tired hotels. Lenders that avoided the reality of the situation are
faced with borrowers that are unwilling to pay, regulators hawking
nonperforming loans and assets growing deeper in stubborn debt, such as
unpaid tax liabilities. And with a compound revenue-per-available-room
decline of more than 22 percent, hotels hanging on for better days are
running out of gas.

More than 12 percent of U.S. hotels are currently in
default, and some analysts predict the percentage of defaulting hotels
could go as high as 25 percent by year’s end.

For some, the rise in foreclosed and defaulted hotel
properties actually represents an opportunity, as the current economic
circumstances constitute what is perhaps the best buyer’s market in
decades. For others, successfully executing a smooth ownership and
management transition and overcoming financial and logistical hurdles
is simply making the best of a tough situation. With the market ripe
for takeovers of underperforming assets, now is an ideal time to
consider how best to handle these unique assets. Here are a few tips to
successfully manage, turnaround and sell distressed hotels:

Early intervention. Find out the
details of nonperforming loans early to avoid a snowball effect. What
you don't know will come back to haunt you later. By working with
borrowers, you can cut costs and manage cash flows as quickly as
possible to reverse the problem before it gets worse.

Understand the asset. Even seasoned
real-estate professionals struggle with the complexities of hotel
management. Hotels have several special considerations that need close
attention, such as the 24-hour business cycle, franchise agreements,
liquor licenses, insurance, inventories, personnel and union contracts.

Mind the law. Complex legal issues
can arise when working with distressed properties, especially those in
receivership. Working with lawyers, drafting motions and orders, and
appearing in court for procedural hearings are critical to a smooth
transition. Creating a court order checklist can ease transition and
lays out critical issues like liquor licenses, bonding, insurance,
credit card and bank accounts, inventories, personnel and other
practical implications of a hotel receivership.

Talk to your franchise. Now more
than ever, making the franchise happy, sticking with brand requirements
and standards, and using trusted partners that know that brand will
show a commitment to the franchise and the hotel. Putting time into
building a relationship and keeping the franchise company happy is
invaluable to ensure the franchise does not “pull the flag” during a
transition period.

Go for broker. The hotel community
is very small. A qualified real estate broker experienced in hotel
transactions is the best option for marketing a hotel for sale. The
local commercial real estate generalist will not have the same platform
or connections to be as effective in a hotel transaction, so find
someone that is trusted within the industry and that knows it inside
and out.

Be report-savvy. Whether reporting
to a judge or working with a broker, you will need to devise a complete
and accurate reporting strategy. Growing revenues and developing a
repositioning strategy is a multi-step process that includes not only
daily monitoring and financial assessments, but also collecting
receivables, negotiating with vendors and beginning the process of
maximizing return. Keep a detailed analysis of the asset, forecasts for
revenue and profit and loss statements.

Have a reposition and disposition plan.
Distressed hotel buyers are savvy, and the quality of the disposition
plan will impact the recovery value. Develop a comprehensive strategy
that outlines how to reposition the hotel for maximum recovery value,
and determines how best to position the asset for sale. Tell the story
to potential buyers on why this asset has unexploited potential, and
assure that a buyer is well-capitalized and suitably experienced so
history does not repeat itself.

Remember the brand. One of the most
valuable aspects of any asset is its story. Distressed assets are no
different. A unique brand can paint a picture for potential buyers
about the hotel’s history, its distinctive qualities and defining
characteristics, and its potential for the future.

Distressed hotel management is highly complex and
intricately detailed. Knowledge of managing these assets is
increasingly necessary. At this point in the economic cycle, the
hospitality industry is anticipating difficult conditions for quite
some time, and it is vital to understand the nuances of how to proceed
confidently in the event of a default or foreclosure.

Robert Habeeb is president and COO of Rosemont, Illinois-based First Hospitality Group