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Hotel
Lawyer in Dallas Listening to the Special Servicers
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News for the Hospitality Executive |
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Hotel
Lawyer in Dallas Listening to the Special Servicers
|
By
Jim
Butler
of the Global Hospitality
Group®
Author of www.HotelLawBlog.com October 18, 2011 Hotel Lawyer from CMBS Special Servicer heaven with the latest insights from the Dallas Lenders Conference For 11 years now, Steve Van and his team at Prism Hotels have held what is probably the best lender conference in the country. Attendance is by invitation only. The one-day program is attended by industry leaders and about 100 of the Who's Who of the hotel lending world. If you are a special servicer, you want to be at this meeting. The convocation has swelled in size from about 35 at the first meeting, but Steve resists all the temptations to grow too large so that this remains an informal meeting place for serious dialog and candid discussion. Generally, the conference delegates include the top people from the major special servicers, such as Midland Loan Services, C-III Asset Management, CW Capital, Berkadia Commercial Mortgage, ORIX Capital Markets, KeyBank Real Estate Capital, Bank of America and the like - all the people you would like to see but never find at the major investment conferences. The sessions are highly interactive, more akin to think tank sessions and sharing of experiences and concerns than the typical conference lecture format. I was privileged to lead a panel of thought leaders on "Trends in Hotel Loan Sales," and Guy Maisnik (my partner and vice chair of our Global Hospitality Group®) spoke on the panel "Special Servicers Survival Guide for Loan Defaults - CMBS 201: What has changed?" Here are some highlights of the meeting that I thought were noteworthy . . .  Steve Van welcomes his guests to "Fishing for Solutions 2011 -- Prism Hotels' high-powered, by invitation-only lender conference in Dallas, held October 13, 2011. Steve Van's 10 thoughts for the industry Steve Van's warm welcome to long-time industry friends was punctuated with some tough realism: More than 2/3 of the CMBS loans coming due have already been extended and cannot be extended further because of limitations in the PSA (Pooling and Servicing Agreement that governs all the CMBS loans in a particular pool). In addition to the PSA limitations on how many loan extensions can be granted, there is also an express absolute prohibition on any extensions being granted beyond the life of the pool. Many pools are now approaching their end of life. PIP (property improvement program) pressures will force borrowers and lenders to act. By and large, the brands have been lenient on maintaining their brand standards since the meltdown started. But many hotels needed upgrades then, and little has been done for almost 3 years. The brands are near the end of their patience, and will enforce PIPs. They don't care anymore if hotels can't cover operating costs, much less debt service. For FelCor Chairman Thomas J. Corcoran's optimistic keynote address at the conference, see Hotel Lawyer with optimism for the hotel industry from at the Dallas Lenders Conference, Fishing for Solutions 2011. And for Kris Hudson's Wall Street Journal article on the conference, see FelCor Chairman: Decline of Hotel Stocks Ignores Industry's Results Special Servicer panel interchange  Kevin Donahue of
Midland moderating a Special Servicer panel with Michael O'Hanlon of
Berkadia,
Tom Biafore of Kilpatrick Townsend, and Clark Rogers of KeyBank. One of the most interesting panels from my perspective was led by Kevin Donahue of Midland. Michael O'Hanlon of Berkadia, Tom Biafore of Kilpatrick Townsend, and Clark Rogers of KeyBank were also on the panel. Here are some extracts from that panel that I found intriguing. On
the backlog of distressed loans Michael O'Hanlon, Berkadia: We have seen a dramatic reduction in transfers. Our resolutions are outpacing transfers, excluding large floaters. People were able to secure some decent financing in the window up until August. A lot of loans in special servicing were liquidated through full pay offs, and liquidation. But now, we are starting to see contracts fall out mainly due to lack of financing. Hopefully will see that open up next year again. The
floaters are coming Donahue: It is sad when you say a loan does not work at 3% interest! . . . The floaters will be a challenge. They were all on shorter terms. They have a lot of challenges. Even though it might be in the interest of the trust to extend these loans again, there are many that cannot be extended any more. O'Hanlon: There are big floaters. There will all be in default. There is no way to get rid of them other than to take huge losses. Donahue: The documents are not well structured. No one thought about what happens in this case. I would estimate that up to 60 or 65% of the loans coming due now will be floaters. Most of these loans are pegged to LIBOR, without a floor. They have avoided default because it is almost free money. In order of magnitude, there are $50-60 billion in floaters coming due, and hotels probably represent 25-30% of floaters.  Kevin Donahue, head of special servicing at Midland Loan Services, said that people want to be optimistic but keep looking over their shoulder for something bad to happen. In this environment, he said that hotel RevPAR today should stand for "Really exuberant voices Predicting A Recovery." Rogers: The hotels with floaters are the trophy stuff in gateway markets. There is tremendous demand for this product. When
does the outlook brighten and the economy improve? O'Hanlon: I think we will be status quo through 2012 and 2013. It may be 2014 or 2015 before we can hope to see anything different. Donahue: It is all about jobs and consumer confidence. Bloomberg was quoting that less than 90 days ago a large bank in Belgium would not need bailout. Today it took $100 million bail out. It is the same in the hotel sector. We don't see an increase in distress levels, but don't see a decline. Clark: What if Europe
blows up? A large
percentage of NY occupancy is from Europe Donahue: It is all about
the lack of
certainty. Until that is resolved, there will not be improvement in
commercial
real estate. What
is happening to the flow of distressed hotel loans? Watch out for the
"floaters." The special servicers who "kicked the can down the road" or played "extend and pretend have been vindicated. They have increased their stakeholder's returns significantly and now look like "geniuses." Maybe they are, and maybe all the grousing comes from frustrated buyers who were denied all that upside that patience preserved for the lenders who waited. There is something like $80 billion of CMBS loan maturities coming due in the next two three years. Many of those loans cannot be extended any longer. Many of the new maturities are floating rate CMBS loans or "floaters" with interest rates near zero. Special servicers expect to see a significant influx of distressed loans starting in early 2012. The big question is whether this will create buying opportunities the opportunistic investors have been expecting for almost 3 years. Is
greater investment opportunity coming?
Cause
for Optimism? Smith Travel says industry fundamentals remains strong and look good for 2012, but everyone is waiting for "footsteps in the night"  Jeff Higley of STR said, "While fundamentals look good, there is great uncertainty about the economy, and therefore about what will happen to the hospitality industry. It is like everyone is expecting to hear footsteps in the night." Jeff Higley did a nice job of presenting the latest update on industry statistics. Nothing significant has changed since the last report at The Lodging Conference. Hotel Lawyers in Phoenix: "It's not just me. The market has changed in just the last 60 days!" In short, it has been a stronger summer than expected. Demand is there. An all-time record number of roomnights are being sold. Supply growth is now less than 1% and likely to stay there for a while - at least in 2011 and 2012. RevPAR
growth in the luxury and upper end of the industry is poised to hit
double
digits this year and next. Put
another way, people want to be optimistic but keep looking over their
shoulder
for something bad to happen. This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to help investors be successful in bidding for hotel acquisitions, and helping investors and lenders to unlock value from troubled hotel transactions. Who's your hotel lawyer? ________________________ Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,300 properties all over the world. For more information, please contact Jim Butler at [email protected] or +1 (310) 201-3526. Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why. Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. JMBM’s Global Hospitality Group® The hotel lawyers in the Global Hospitality Group® of Jeffer Mangels Butler & Mitchell (JMBM) comprise the premier hospitality practice in a full-service law firm and are the authors of the Hotel Law Blog. We represent hotel owners, developers, investors and lenders and have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties worldwide. For more information about the Global Hospitality Group®, go to www.HotelLawBlog.com. For more information about full range of legal services provided by JMBM, go to www.JMBM.com. |
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