Experts to Borrowers: ‘Help Lenders Help You’

By Natalie Dolce of
Thursday, May 07, 2009

“If a borrower can’t cover operating costs in the near future, instead of defaulting, a borrower needs to be honest with a lender before it is too late.” So said panelists at the Meet the Money, Debt and Equity Financing for Hotels conference held Wednesday at the Sheraton Gateway Los Angeles Hotel.

Patrick O’Neal, of Midland Loan Services Inc. and a panelist in a session titled “The Note is Coming Due: Strategies and Approaches for Value Enhancement… and Other Opportunities” says it is important to “state what your case is, (if you are a borrower) let the lender know, put it in writing, and never lie… Nobody wants your property…that is not our goal.”

The morning session was moderated by Jim Butler, chairman of the global hospitality group at Jeffer, Mangers, Butler & Marmaro LLP, which put on the event. “The current economic crisis is creating unprecedented challenges and opportunities for hoteliers, resulting in the greatest repositioning of wealth since the 1930s,” said conference host Butler.

The 19th annual conference themed “Out of Panic and into Unprecedented Opportunities” looked to lessons from the past, but also focused on the defining differences that create challenges and opportunities this time around.

Other panelists in the session included Jack Westergom of Manhattan Hospitality Advisors; Steve Van, Prism Hotels & Resorts; Jackie Brome of Capmark Inc.; and Troy Miller of Centerline Capital Group. Butler asked the question of how to create value in an asset, where Westergom said that some of the things one can do to tap into the hidden value of an asset include cost containment, revenue enhancement, and adjusting.

“We have seen borrowers ready to throw in the keys,” says Butler. “Through analysis work–we have been able to on the borrower side–to create enough value to give the lender enough incentive to give something to the borrower.”

Incentives are key says Westergom. “The borrower can’t show up to the table with the same plan they came to the table with,” he says. “You can’t expect the lender to know the specifics of the market. You need to help them become familiar with them. You need to help them understand the market drivers.”

Certain Deals Still Get Done

In other hotel finance news, sources in the following panel, “What’s Happening in Capital Markets? Are any Deals Getting Done? Where and How?” said that there are certain deals getting done in this environment. “There is activity,” said moderator Michael Cahill of HREC Investment Advisors, “but on the other side, there have also been deals we have not been able to close.”

Panelists on the session included: David Schachter of Reedland Capital Partners; Marty Collins of Gatehouse Capital; Neil Freeman of Aries Capital LLC; Henry Vickers of AEW Capital Management; Kevin Donahue of Midland Loan Services Inc.; and Abid Gilani of Marriott International Inc.

“We are working on a loan workout involved in the capital markets,” said Schachter. He continues that his company is working with a hotel owner in the Bay Area that have a $25 million loan that is in default and his company is bringing in a private equity source that together with his firm and the borrower, are bringing in a discount. “In doing so, the hotel owner will live to see another day.”

Schachter mentioned another scenario where his company has a new hotel construction loan it is working on. “There are a number of large global banks that are still making construction loans,” he said. “We are working with a handful of lenders around the country that are doing these types of loans.” He added that it is not easy to get construction loans done, but he said that “the good news is if you have a strong enough developer and they are looking for under $20 million, it can get done.”

Donahue explains that there are opportunities, and Midland is considering note sales, but it is “really trying to simply preserve debt of what we have.” He added that “I think everyone is scrambling for answers. We are more willing to listen to borrowers. We encourage creativity and we try to be flexible but they have to be adding something to the solution.”

Marriott is also seeking opportunities, explained Gilani, but mostly conversion opportunities in markets where the company does not yet have a presence.

Collins explained that “the idea of people getting funds to develop from the ground up is so over. It is over perhaps for the next half decade.” He did add that although there are always exceptions to this, “developers need to redefine themselves.”