CHICAGO—The pace of hotel transactions might not be what industry pundits had projected, but there’s still a wealth of opportunities out there for savvy investors, said a group of financial experts during the Midwest Lodging Investors Summit last week at the Sheraton Chicago Hotel & Towers.
One such prospect that has emerged is the purchase of notes. But buyers beware; you can’t just buy the paper to own the bricks and mortar.
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Eric Prezant
partner
Bryan Cave LLP
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“It’s more complicated than that,” said Eric Prezant, partner of Bryan Cave LLP, a law firm with services in bankruptcy, restructuring and creditor’s rights, among others.
To get to the property, you have to work through the existing owners and borrowers, he added during a panel titled “How to Buy Debt.”
Purchasing notes also subjects the buyer to the defaults, liens, outside litigation and other elements relegated to the lender, said Sonny Ginsberg, a partner based in Ginsberg Jacobs’ Chicago office. It requires an extra level of diligence, he said, adding it’s crucial to have some sort of agreement in advance with the borrower. You can’t just execute a hostile takeover.
The buyer often has to put more on the table than the borrower deserves, said Jonathan Benowitz, managing director of RockBridge Capital, which invests in the hotel industry as a borrower and a lender. It’s a matter of the nuisance factor, he said: Show the borrower you can work with them, and they’re more likely to continue a seamless level of service for guests.
Future opportunities
Note purchases weren’t the only opportunity discussed during the discussion. Each panelist was asked what prospects are on the horizon.
Prezant expected more transactions to hit the market during the latter half of 2011.
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Jonathan Benowitz
managing director
RockBridge Capital
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“I still think there’s some pain that lenders and borrowers have to feel before the real deals get done,” he said.
Benowitz predicted a steady flow of transactions for the next 18 months, with values rising in turn with improving economic indicators.
Ginsberg said lenders have to lend, so they’ll soon be forced to work through existing loans to recoup any capital.
“As liquidity improves, you’ll have more asset sales coming through the market,” he said. “It’s going to be slow, but it gets better.”
Neil Freeman, chairman and CEO of Aries Capital, said now is as good of a time to buy as any we’ll see during the next 10 years.
“I don’t think that things are going to trade as low as they did in the (Resolution Trust Corporation) days, but lenders are finally writing it down,” he said. “There’s a lot of capital that can help finance these deals.”
David Rattner, senior VP of JDI Realty, a Chicago-based private real estate investment firm, said once owners and investors get out of the denial phase about what their assets are actually worth, things are going to have to get worse before they get better.
“We’re early,” he said. “Right now, there’s a lot of capital that’s been waiting and there’s been a relatively small supply of note.”
Banking the buy
To take advantage of any future opportunities, “mostly you need cash,” Prezant said.
But there are other requirements as well, the panelists said. You’re going to need a plan, a partner and—in some cases—a prompt pace.
• The plan. Just as the owner of an underwater asset should approach their lender with a proactive solution to restructure, a prospective borrower should come to a lender with a plan. You should always have an actionable plan for the property coupled with realistic expectations for performance, Freeman said.
• The partner. Cash is still king, so even the savviest investor needs some extra money to bring to the table. That’s why borrowers should team up with a “big brother”—a larger partner to front the necessary financial muscle to get the deal done, Ginsberg said. “Doing it on your own is still going to be hard.”
• The pace. Especially when purchasing notes, it all comes down to cash and speed, Rattner said. Most note sales happen very quickly—seven days or faster—so you have to act fast. “If you can position yourself with a speedy and certain solution, you can have a productive discussion,” he said.
