In a U.S. 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.
Almost 25 percent of the 46,000 hotels in this country are in default of their mortgage covenants. A deep recession and over construction 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 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 ease, but most economists think it will be a very 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 is keeping you awake at night then 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 that it will never recover from, then even with these modifications, you will 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 does not 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 them the property back today. There is no point in working for free and you will be amazed at how reluctant the bank is to take over your property. Most banks are having enough operational trouble, 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 are 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 do this. If you are 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 PIPs from franchisors who see the bank as having deep financial pockets. If the bank wants the keys—hand them over. You will be amazed how quickly they hand them back.
Fifth: Don't accept a deal from the bank that does not 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 (PGs). Most owners have PGs that are worthless today and even if you have some value it is 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 and then you can foreclose on the other mortgages to eliminate them. You will need financing to do this but there are banks and private equity groups that will help you out here.
Finally: Take control of the situation. If you let your lenders control the negotiation you will have to continue to react to their initiatives. If you prepare and present a solution that works for you, the bank will have to listen because they are responsible for getting the money back that they lent you.
Brad Mead is the president of Delta Capital Group LLC (www.DeltaNow.com) headquartered in Simsbury, Conn. Delta, an investment banking firm specializing in advisory services to companies under $40 million in revenue, has been restructuring bank and SBA debt for the past 25 years. He can be reached by phone at (860) 677-0000 or by e-mail at: email@example.com.