Recapitalizing an “Underwater” Hotel Deal
The number of hotels that are “underwater” financially is substantial and growing. The challenges of today’s economic and capital market conditions has brought even solid, experienced operators to their knees. So when looking at investing in a hotel deal today, should you recapitalize the current owner or acquire the property and start over?
For starters, it’s helpful to analyze the subject hotel in comparison to its competitors. If the property is maintaining its relative pre-down-cycle position with its competitive set, you might conclude that the problem is less likely due to the operator. By interviewing ownership and key employees, reviewing property records such as quality scores and operating statements and physically inspecting the property, an experienced investor can come to a reasonable conclusion about whether or not to consider recapitalizing a current owner.
Assuming that this review indicates that the problems are not operational, the key to putting a deal together may lie in a capital restructuring. In this regard, it’s helpful to understand the motivations of the equity and debt participants in the transaction. Equity investors, after careful analysis of their position may be motivated more by “mitigation of personal guarantee liabilities” or “recovery of principle” than by return on their investment. Lenders and special servicers may be as motivated by timing and overall loan portfolio considerations as they are in getting the loans off their books. An approach that we are getting some traction with includes recapitalizing “underwater deals” as follows:
Sufficient new equity is brought into a deal to enable the loan to be restructured, to position and operate the property, and to provide for capital requirements and reserves. Typically, this new equity receives priority returns over the current owner’s equity. The value of the original equity is negotiated, but generally is discounted.
The existing loan on the property is restructured to a level that works in light of the current market. Generally, this involves a discount on the principle amount of the loan and well as the interest rate, term and amortization. We have seen a willingness on the part of some special servicers to discount an outstanding loan balance by 20-30% with term extensions of 3 to 5 years at attractive interest rates in exchange for new equity contributions that further decrease the loan balance and provide adequate operating capital.
The pool of troubled hotel deals in the hands of quality owner/operators that could be recapitalized is substantial and may be a better investment target than the volumes of properties caught up in the unrealistic bid ask schism and the legalities of lender borrower disputes.
Paul Reitz, CCIM is Senior Vice President of Investment Services at NAI Global and is a hospitality specialist in NAI Global’s Special Asset Solutions and Investment Services groups.
About the author
Scope of Service Experience Paul's real estate expertise includes brokerage, equity & debt financing, development, and investment of office, industrial, retail and hospitality properties. He has serviced his client's real estate needs throughout the United States, Canada, Latin America and the Caribbean. He has been featured speaker & panelist at major real estate conferences including The Global Property Forum- Toronto Canada 2007 & 2008 ; Eiendomsdagene -Kvitfjell, Norway 2009; Queen's University Executive Seminar on Corporate & Investment Real Estate, Toronto, Canada 2009 and The Nordic Business Arena-Stockholm, Sweden 2009. Education BS & MS degrees The Pennsylvania State University Background & Experience Paul has been in the commercial real estate business for 26 years. His transaction volume includes over $1 Billion of leasing, sales, development, financing & investment of commercial real estate. Paul has been a principle in the DFW broker member of New America Network (predecessor to NAI Global), and a founding partner of its first Mexico City broker member in the 1990's. He has been a past Chairman of NAN Investment & Industrial Councils and has served on the network's national advisory board. Paul's development expertise included the development of a 300,000 sf neighborhood shopping center; an award winning re-development of a 16 story historic office building and the construction of two urban parking lots. As the Chairman/Founder of Sinclair Resorts & Hotels, Inc.-an owner of 5 luxury boutique resorts valued at $100 Million, Paul directed the acquisition, financing, deal structuring and operations of the company. Recent accomplishments include the sale of a 5,000 square meter Class A office tower in Rio de Janeiro; advisory services for the proposed Waldorf Astoria Hotel & Residences in Montreal Canada. Paul is coordinating the activities of the Latin American investment team & actively working globally on behalf of his clients.. Additionally, Paul is directing NAI Global's Hospitality group and is a regional director for the companies Strategic Asset Solutions group targeting advisory and disposition services of bank REO properties & portfolio loan sales. Professional Affiliations & Designations CCIM SIOR (inactive) Licensed Real Estate Broker- The State of Texas Significant Transactions LTV Aerospace & Defense Company- several million sf office & industrial leases & acquisition of 300,000 manufacturing facility; Bridgestone Firestone 300,000 sf industrial lease; Homeowners Warranty 60,000 sf office lease; Holiday Inn Sunspree Resort $56M acquisition; Two Bunch Palms Spa Resort $20M sale; L'Auberge de Sedona $14M acquisition; acquisition, redevelopment & sale of 100k sf Sinclair Office Bld, Fort Worth, Tx.; acquisition, completed development & sale of 300k sf Good Homes Plaza Shopping Center, Orlando, Fla. $13M; acquisition, redevelopment & sale of 117 room West Vail Lodge, Vail, Co. $6M; equity & debt financing of Sinclair Resort & Hotel Companies hospitality portfolio $100M; sale of 5,000 square meter Class A office bld. (Shell Oil) in Rio de Janeiro; sale of 440,000 sf Sherwin Williams Distribution Center, Waco, Tx.; acquisition of 106,000 sf Martin Brower Distribution Center, Lewisville, Tx.; advisor to Monit Inc. in negotiations with Hilton Hotels regarding the proposed development of Waldorf Astoria Hotel & Residences, Montreal Canada; advisory services & master planning of proposed major industrial airport, Mexico City.
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