Creating a fiscal fortress


Amid liquidity issues, open communication with lenders is critical to maintaining financial security


Successfully operating a hotel requires a broad skill set, years of industry experience, and a ton of hard work – and your banker knows it. That’s why most lenders, wanting no part of managing a hotel themselves, have been willing to help hoteliers stay afloat during the pandemic.

If your property was profitable before COVID-19, if you’ve pared expenses, and if you’ve maintained open communication with your lenders, then you’re making the right moves, according to hotel industry experts. Just hang on a little longer, watch the nation’s vaccination campaign accelerate, and wait for the inevitable economic rebound, which could be coming directly.

“For most owners, there is light at the end of the tunnel,” said Dave Mei, executive vice president of finance and acquisitions for Hotel Equities, a hospitality management and development firm based in Alpharetta, GA. “I would say the No. 1 thing to do is communicate with your lenders and special servicers. Now more so than at any time I can remember in the past three cycles, lenders are willing to work with owners as much as they can.”

Shreyas (JR) Patel, an AAHOA Lifetime Member currently serving on AAHOA’s Strategic Planning Committee, echoed those sentiments. Patel, president of Helix Hospitality, a hotel ownership and management company based in Itasca, Ill., said banks are reticent to assume the burden and costs of operating a hotel, so they’d rather stick with the owner.

“Most conventional banks and bridge lenders recognize that pandemic-related losses are not directly related to how the borrower operates a property,” Patel said. “Rather, they are systemic. So long as the borrower keeps an open line of communication with the bank, there tends to be a willingness to work through short-term deferrals of payments, deferrals of reserves, interest-only periods, and other covenant-testing waivers.”

Patel said that in recent months, he’s seen quite a few cases of loans being sold by institutions that need to clean up their balance sheets. Private debt funds or other entities are purchasing hotels’ loans, often at substantial discounts, and essentially becoming their bank.

“They generally want to see you succeed and continue to pay your note, so the willingness to keep you in your property is quite high,” Patel said. “If your loan can be modified to a payment that you can afford, and your loan then becomes current, the value comes back for the owner of the note – a perfect win-win.”

However, there can be danger when a hotelier’s note is sold. When the basis is low and the property is in a prime location or isn’t well capitalized, a private fund or entity that buys a hotel’s note may be eager to foreclose, take over the property, ride the recovery wave, and eventually sell the asset at a premium.

“Unfortunately, you really don’t have control of the note being sold,” Patel said.

Most experienced hoteliers, having lived with the pandemic for more than a year, have taken the steps prescribed in this article, but hospitality experts offer the following checklist to make it through several more lean months.

This means sharing the good news and the bad, according to Jon Peck, principal of Chicago-based Peck Hotel Consulting. When hoteliers are transparent and proactive, lenders can have greater confidence that properties are in good hands.

“Banks and traditional lenders do not want to take back the hotels and become hotel owners,” Peck said. “They are smart people and understand this is not their business, and it creates additional liability for them in the form of future operating losses and all of the complexities that come with owning an asset class with a 24-hour lease.”

In addition to regularly submitting financial statements, hoteliers should provide information on future bookings and any developments that signal a return to normal. These include updated schedules of conventions and local events; restaurants, sports arenas, and other indoor venues being allowed to operate at greater capacity; local universities holding in-person classes and allowing more fans at sporting events; and industry forecasts from reputable entities such as AAHOA, AHLA, and STR.

“All of these things are indicators that business will come back, so it’s important to share that knowledge and research with the lender,” said Patel, a member of the advisory board for DePaul University’s School of Hospitality Leadership.

Lenders may know management companies that can help hoteliers or techniques and resources that other borrowers are using, Patel said. You won’t know unless you ask.

“Remember, you are not the only one out there who is having difficulties paying your mortgage,” Patel said. Every real estate investment trust, private equity firm, and owner in hospitality and commercial real estate “is feeling it,” he said.

“There’s nothing like a good, trusted attorney,” Mei said. “It’s really important to have a good understanding of loan documents. That’s absolutely the first place that I would start – reading your loan documents with a fine-toothed comb. Owners who aren’t comfortable probably should get some expert advice, talk to their friends in the business, and do their own research. There’s so much available online.”

For hoteliers who have poured their sweat into struggling properties, it can be tempting to believe that an industry turnaround will lift all ships. But if your property was underperforming prior to the pandemic, those fundamentals are unlikely to change simply because travel has resumed in earnest.

Furthermore, if a market is seeing a massive amount of new supply and can’t absorb it all, then the least-solvent borrowers will fall first, Patel said. If a borrower is unable to pay, then banks may force a sale, “which is probably the most vulnerable position to be in,” he added.

“This likely means that the borrower or the property itself are not well-positioned or well-capitalized to make it through the pandemic, and it needs to be sold at a discount,” Patel said. “If the basis is favorable, the lender will likely look at market fundamentals to see how long it will take your property to recover before deciding on next steps.”

Mei said the nation’s well-documented lack of affordable housing is leading some property owners to convert hotels into multifamily housing units or micro-apartments. Some owners are converting properties themselves, while others are selling to real estate developers and entrepreneurs, often at a discount. Mei said that in some markets, permanent housing may represent a struggling property’s highest and best use.

“Everyone is anticipating quite a big rebound, but there probably will be a day of reckoning for hotels where it’s not financially viable on a go-forward basis,” Mei said. “Lenders are going to have to make hard decisions about whether to foreclose or not, and owners are going to have to look at alternative uses.

“Multifamily housing and single-family residential are really hot, so there are conversion opportunities.

Some of the older extended-stay properties make for very easy conversion into multifamily or micro-apartment units, so we are seeing more of that, and I would expect more of that to happen.”


Money matters

Develop alternative plans for rescue capital. There are hotel-focused debt and equity funds out there, and while the capital they offer isn’t cheap, it can serve as a bridge until demand returns, so hoteliers should know their options, Peck said.

Make sure your operating costs are in line with the revenue reality. With revenue down sharply, hoteliers had better reduce their labor costs and their fixed costs with vendors, and operators should conduct regular cash-flow reviews to ensure alignment.

Mei said many vendors, like lenders, have been allowing hoteliers to defer payments during the pandemic, recognizing that better days are ahead.

“It’s really been incredible to see all the partners working as best they can in good faith to get through this crisis,” he said. “Almost everybody has been willing to defer, delay, or forbear – and probably more so because there is light at the end of the tunnel.”

Communicate with limited partners. The hotel’s general partner should advise limited partners of the potential for a capital call and outline the property’s potential needs, Peck said. “You want to let them know how you see things – the operating forecast, the cash-flow forecast, and capital needs – and tell them to get ready for their part,” he said.

Take advantage of PPP money and state grants for pandemic-impacted businesses. The federal Payroll Protection Program has been instrumental in helping hoteliers retain their workers and continue to make rent, mortgage, and utility payments.

Work with lenders and franchisors to access FF&E and other reserve funds. A hotel’s furniture, fittings, and equipment reserve – the money set aside to replace these components as they wear out – can be a source of emergency funding.

Ensure your sales and revenue departments are ready for demand to return. Many departments have been cut severely due to the pandemic, so hoteliers should have a plan and enough manpower to manage the first wave of leads that hit sales, Peck said.

Seek expert help. Hoteliers who are unsatisfied with their lenders should reach out to fellow AAHOA Members and industry contacts. They can discuss the aid they’re getting from lenders and recommend a good consultant or lawyer. Mei said it’s understandable for hoteliers who are struggling to want to avoid additional expenses, but if you feel your property is at stake, call for backup.


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