News for the Hospitality Executive |
By
Jim
Butler of the Global Hospitality
Group®
Author of www.HotelLawBlog.com March 14, 2012 Hotel investment through buying hotel notes As the economy and hotel fundamentals continue to improve, hotel note purchase opportunities will be one of the most attractive hotel investments for savvy investors. My partner and Vice Chair of our Global Hospitality Group®, Guy Maisnik, has been working a lot on note purchases lately, and I asked him to share some insights with us, which he graciously consented to do with his article today. BUYING HOTEL
NOTES: 5 THINGS TO REMEMBER by Guy Maisnik |
Hotel Lawyer and Vice Chair Global
Hospitality Group® (1) The hotel sector will continue to improve in 2012, with RevPar increasing anywhere from 4 to 6 percent, depending on which expert you follow. (2) It's going to be a rocky year for hotel loans held by lenders, particularly for those loans made at the peak of the last cycle in 2006 and 2007, and especially for loans that cannot be extended further. Some of these loans are securitized with complicated structures that involve multiple tranches of senior and junior debt sold. Others never got securitized and weigh heavily on lenders' books. Our
prediction: Capital providers and special servicers will sell more
hotel notes
and assets in 2012 Out hotel lawyers at Jeffer Mangels Butler & Mitchell LLP (JMBM) have been involved in the purchase of hundreds of notes secured by real property, and experience tells us that most note buyers (other than institutional participants) are looking to obtain the locked up value in the hotel real estate -- and not really interested in the fixed income of the note. These note buyers want to get at the hotel asset as quickly as possible, and either operate or sell the underlying hotel. This is the case whether it is a portfolio or an individual note that is being purchased. What
buyers of hotel notes need to know 1.
Update your checklist and use it No checklist fits every asset or circumstance, so you must tailor your checklist to your asset. My team starts with a comprehensive checklist that covers virtually every hotel issue we have come up against. Then we brainstorm the particular asset at hand and conform the checklist accordingly. We almost always find concerns in the hotel loan file that need to be addressed. Do not assume because the loan was prepared by a good law firm that the loan documents work. First, good firms can make mistakes. Second, many hotel loans are done by good law firms that simply do not typically handle hotels, so they miss many hotel related issues. Remember, a hotel is made of anywhere from 15-25 percent personal property. Some of that property could have liens or be leased from third parties. The UCC has an entire body of hidden liens many real estate lawyers simply do not know about. The note buyer must run a proper UCC search. In many states, liquor licenses, which provide value to the hotel, cannot be collateralized. Also, the loan may have been previously modified without guarantor approval; there could be important waivers missing in the note or guaranty. Finally, your checklist needs to take into account any new laws that have come into effect. For example, on March 15, 2012, new ADA Standards become mandatory. The loan could have been assigned multiple times but the assignment documents are incomplete. The note buyer may find that it has to prove up the outstanding amount of loan in front of the bankruptcy judge who requires additional proof. (Good luck getting that done without the assistance of the note seller!) And if you are buying from a note flipper...beware. Don't
miss this step. Mundane, yes, but well worth the effort. 2.
Think like a lender: You are buying a loan not the real estate Before buying a loan, know the "dos and don'ts" of lending. If you do not have that expertise, you are strongly advised to engage legal counsel who does. A wrong step can cause you to lose lien priority of all or a part of your loan. Even seemingly innocent acts such as your making decisions on hotel operations or approving or disapproving borrower expenditures can be problematic. In some states, the note buyer can lose its security interest in the hotel altogether. Hotels are operating businesses, and it is rare that a lender will be comfortable leaving the operations of a distressed hotel in the hands of a hotel owner who has lost its equity. The sophisticated note buyer will understand the applicable rules of receiverships and employ a receiver where permitted. In many states, the receiver has authority to cause a transfer of the liquor license, even if not collateral of the hotel, which can be quite valuable. But again, tread carefully, particularly in single action states. Remember,
think like a lender, not a hotel owner. 3.
Due diligence, due diligence, due diligence Understanding hotel operations is important and is discussed below in more detail (see 4 below). A greater scrutiny of the physical improvements is required for a hotel than for ordinary commercial real estate. For example, if the secured property were a retail supermarket, the supermarket tenant is charged with maintaining and insuring the asset. Thus, if the windows leak or the sprinkler systems do not comply with applicable law, the burden and costs of fixing these items often can be passed through to the supermarket tenant. Not so with a hotel. These issues fall squarely on the shoulders of the hotel buyer. To make matters more challenging, note selling lenders actually often give a shorter period of time to note buyers to review the file and asset when compared with sellers of other real estate. Use experienced hotel contractors and engineers to walk through the level of physical due diligence needed. Have a zoning specialist ready to review the hotel entitlements. Confirm all signage and parking are on the real property collateral. Confirm the number of parking places complies with zoning requirements. Confirm the asset complies with all environmental laws and any governmentally issued conditional use permit. Hotel owners often tweak the physical improvements which can cause the hotel to become non-compliant. The key is to have your due diligence team (hotel consultant, construction/engineer consultant, zoning consultant and legal counsel) ready to move before the note hunting begins, so they can hit the ground running. Proper
due diligence cannot be stressed enough. 4.
Understand the hotel business
Remember:
Hotels are more than just real estate. 5.
Review your tax plan with an expert It's
a good time to buy hotel notes There are lenders and special servicers itching to get hotel loans off their books, and note buyers eager to unlock the value that is languishing in distressed hotels across the country. For lenders and buyers alike, 2012 could be a very good year. 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 unlock value from hotels. Who's your hotel lawyer? ________________________ Guy Maisnik is a hotel lawyer with nearly three decades in commercial real estate transactions. He is a partner and Vice Chair of JMBM's Global Hospitality Group®, a member of the JMBM Chinese Investment Group™ and a partner in the JMBM's real estate department. Guy advises clients on hotel transactions, representing lenders, opportunity funds, banks, special servicers, owners, REITs and developers in hotel transactions, including senior and mezzanine financing, workout and debt restructure, strategic portfolio acquisitions, co-lender, participation and securitization arrangements, joint ventures, management agreements, buying, selling and ground leasing of hotels, complex mixed used resort development, fractional and timeshare. For troubled hotels, Guy develops and executes strategies for CMBS and whole loans, and REOs. He also assists investors with recapitalization of distressed borrowers and purchases of troubled assets. Guy has assisted major lenders in revising and structuring their hotel lending programs and documentation, including their hotel construction lending. Guy's practice is both domestic and foreign; he has advised on hotel and real estate matters throughout the United States, Canada, Mexico, South America, Middle East, Caribbean, Western and Eastern Europe, Asia and Scandinavia. For more information, please contact Guy Maisnik at [email protected] or +1 (310) 201-3588. ________________________ 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 1,300 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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