REPORT FROM THE U.S.—Business is booming for hotel receivership companies as the number of distressed properties in the United States continues to rise.
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Steve Van, president and CEO of Prism Hotels & Resorts
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Steve Van, president and CEO of Prism Hotels & Resorts, said he’s waited a couple years, but his phone is ringing off the hook with requests for help.
While hotel performance metrics are expected to be solid for the next five years, the financial structure is pending catastrophe, Van said.
Loans for hotels that were financed and bought between 2005 and 2007 are coming due, and Van expects there will be major defaults during the next few years.
“Everyone borrowed too much money, and they’re having trouble paying it back,” he said.
Borrower issues
Lou Plasencia, chairman and CEO of The Plasencia Group, a hospitality transaction and consulting service, said the volume of business his company is seeing is significantly greater this year than it was a year ago.
“We are getting a lot of requests from lenders, servicers, what I would term ‘forced owners,’ or passive investors that ended up being the owner of the property when their partners backed out or went bankrupt,” he said.
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Jeff Kolessar, senior VP of development for GF Hotels Management
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Borrowers also are experiencing difficulties paying fees to their franchisors, said Jeffrey Kolessar, senior VP of development for GF Hotels Management. Many have not been able to put required property improvement plans or standard brand changes into the property.
“(The property) then goes into default with the franchisor with the possibility of losing a franchise,” he said.
Michael Marshall, president and CEO of Marshall Hotels & Resorts, said brands will more than likely kick franchisees out of the system rather than allowing them to reflag within the company.
“That will bring about liquidated damages for getting out of your contract too soon,” Marshall said. “That’s the way these franchise systems are set up. It’s not always fair, but at the same time, you’ve got to protect the brand.”
If the foreclosure is coming from the bank, the brand might decide to invest money in the property if it makes economic sense to oversee a renovation, he said.
Despite the financial hardships distressed properties experience, Kolessar said the property continues to operate normally as long as there is significant cash flow.
Managing distressed properties
Often times, those involved in distressed situations want to get rid of the property, Marshall said. “It’s easier to sell a hotel when it’s running than when it’s shut down.”
“You’ve got to spend money to make money, but we try our best to spend as little as we can. A lot of it is changing the mindset,” Marshall said of operating a distressed property.
Motivating the staff is key, he said. It is important to let employees know it is not their fault if the owner made a lousy deal.
Much of the management process for a distressed property involves working on guest service issues and developing a comprehensive sales and marketing plan, Marshall said. However, some properties are beyond repair.
“A lot of times, it’s as simple as going in and spraying the place down. We’ve been involved in situations where we’ve gone in and told the bank, ‘You’ve got to shut this place down. It’s a safety hazard,’” he said.
Another big part of Marshall’s business is working to keep hotels that are not yet distressed from getting to that point. “There are a lot of hotels that are in trouble,” he said.
Prism’s Van said although the U.S. hotel industry is paying for its mistakes, there’s still great news for hoteliers to revel in: “Worldwide we’re starting a recovery, and hotels are recovering faster than the economy.”
