By Brad Mead, Lodging Hospitality Contributing Columnist
In a federal penitentiary you get up early, eat a minimal amount of food, work hard all day at menial tasks, get paid very little and can never leave the property. Sound a lot like your hotel these days? If so, it is
time to restructure your debt.
Nearly 25% of the 46,000 hotels in this country are in default of their mortgage covenants. A deep recession and overbuilding of hotel rooms have resulted in a drop of both occupancy and average daily rate.
Mortgage rates have remained constant and many hotel owners find themselves cutting operation costs to the bone, yet are still unable to make the monthly mortgage payment. Even working for free with little staff doesn't assure the bank can be paid.
The recession may have eased, but most economists think it will be a long time before the country returns to 2008 operating levels. Additionally, the excess rooms that were built and are still being built will not go away with the end of the recession.
Hotel owners who drafted business plans based on 2008 occupancy levels and rates will come up short in paying their mortgages. What to do?
First: If your debt is what’s keeping you awake at night, it is time to restructure your mortgage. There is little point in hoping the economy will get better soon. You need to set your debt at a level you can afford. Many banks will let you go to interest-only payments for a while, or even cut your interest rate.
However, if your property has fallen in value to a level from which it will never recover, even with these modifications you’ll be working for many years with nothing to show for it.
Second: The bank’s job is to keep you paying. If you continue to pay from other personal resources, eventually you will just run out of money. That makes no sense. If the debt doesn’t work now, then take it head on.
Third: Decide what level of debt you can afford and that becomes the debt you need the bank to agree to, or you will hand the lender the property back today. There’s no point in working for free, and you’ll be amazed at how reluctant the bank is to take over your property. Most banks are having enough operational troubles; they certainly don't want to become hoteliers.
Fourth: Approach the bank with a plan as to how you want to restructure your debt and make it very clear this is the route you are going because you no longer want to be in Hotel Ownership Prison.
Remember, you already have their money — they’re trying to get it back. They don't get paid unless you write a check. They can threaten to take the property, but rarely do they take that approach.
If you’re running it for free, why would they want to hire a management company and pay them to run it? Also, bank-owned or repossessed properties are subject to large property improvement plans from franchisers who see the bank as having deep financial pockets. If the bank wants the keys — hand them over. You’ll be amazed how quickly the bank hands them back.
Fifth: Don't accept a deal from the bank that doesn’t allow you to pay your own management wages and a mortgage that works in today's operating conditions. Hoping the market will turn is fine, but hope is not a strategy.
Sixth: Don't be afraid of personal guarantees. Most owners have personal guarantees that are worthless today, and even if you have some value it’s often uncollectable for a variety of reasons. The threat is very real, but the actual collection very rare.
Seventh: Look to purchase your own note — especially if you have second or third mortgages. The bank will often sell you or a friend of yours its note and mortgage. Then you can foreclose on the other mortgages to eliminate them. You’ll need financing to do this, but there are banks and private equity groups that will help you out.
Most importantly, take control of the situation. If you let your lender control the negotiation, you’ll
have to continue to react to its initiatives. If you prepare and present a solution that works for you, the
bank will have to listen because it’s responsible for getting the money back that it lent you.
Article originally published in Lodging Hospitality Magazine.
