LAS VEGAS—Hotel Brokers International members focused on the basics during their recent annual meeting while trying to establish if indeed there is a recovery on the horizon for the hotel industry.

Clearly, the best thing that could happen to brokers would be for banks to start lending so the transactions market would heat up. But at this point, most banks are still figuring out what to do with the many distressed hotels that dominate the landscape.

“If you’re a bank what are you going to do with (a hotel),” said Joel Ross, principal at Citadel Realty Group and a HotelNewsNow.com columnist, during a panel discussion outlining the current economic environment. “You come into something not so good.”

Jeff Kolessar, senior VP of development for distressed-hotel specialist GFI Management in Philadelphia, said his company gives simple advice to lenders who are confronting troubled assets.

“When we talk to them we say ‘work something out with the borrower or sell the loan. The last thing you want to do is own it.’” Kolessar said. “If you don’t have to take it back, don’t take it back.”

‘Alice in Wonderland has to go away’

The consensus on the panel is that foreclosure laws vary greatly by state, and brokers need to be well-versed in any state in which they work. The problems in some states are so severe that no short-term solutions are in sight when it comes to banks selling hotels.

“I’m hearing that the docket is so backed up in Florida that it’s 12 (months) to 18 months before you can get the property in some cases,” Kolessar said.

Ross said the problem has grown so big because potential buyers, sellers and lenders have buried their heads in the sand when considering the severity of the current economy.

“Eventually Alice in Wonderland has to go way,” he said. “The whole country is in make believe delusional mode. We’re not going back to (2007) values for seven to 10 years or so.”

Ross said that things are so bad that revenue per available room is at 1992 levels when using the calculation of taking RevPAR in 1992 and applying only the consumer-price index.

“It takes an awful lot for people to understand that all their money’s gone,” Ross said.

Ross relayed the story of a developer who got 85 percent of a hotel built before running out of money to finish it. An offer to put in US$3 million to finish the project was rejected by the developer because he wanted his original US$5 million investment back. The lender then had to put a plan in place that included taking back the asset.
 
“If he’s seeking a workout with special servicers, they’re looking for some equity to be put into play,” Kolessar said. “Most of these guys don’t have the equity to put back into it, that’s the problem. If you can bring something into play and a strategic plan into play, then they are willing to play.”

“If you don’t bring a check, they will literally throw you out,” Ross said. “They won’t even talk to you.”

Emerging trends

Peter Berk, president of PMZ Hotel Finance Group, said the emerging trend revolves around investors acquiring notes for hotels. His company recently signed a contract with an opportunity fund to buy a note from an investment bank.

Ross said that until the government changes its policy of not forcing banks to take financial write-downs on toxic hotel assets, transactions will remain few and far between.

“That’s not based on economics, it’s based on politics,” Kolessar said. “I personally see more and more bankruptcies with hedge funds coming in.”

The brokers also hear that a broker opinion of value is more important than ever to lenders who are trying to figure out which direction to go when evaluating troubled hotels in their portfolio.

Darin Brock, VP of Brock Hotel Group, said it’s important for owners and lenders to know that a BOV isn’t an appraisal—it is simply a mechanism to establish an opinion of value.

BOV’s generally include a description of the property, a description of the market, valuation, a listing proposal (not always needed) and background info on the broker.

“Keep in mind that many sellers of distressed assets might ask five different brokers for a BOV,” Brock said.

Lee Vache, senior VP for Western Hotel Brokers, said giving a range of capitalization rates to show how a BOV correlates to cap rates is something that’s often appreciated by those who order BOVs.

Bill Lazarus, president of Topher Real Estate Services, said brokers shouldn’t be shy about making people aware of BOV services.

“In many cases, our BOVs are more accurate than appraisals, and they are done much quicker,” Lazarus said. He also advised the brokers in attendance that if they provide a BOV to a lender, they should propose becoming the broker of record should the property be listed for sale.

The panel said other things that a BOV should have include: suggested asking price; anticipated offer range; liquidated price estimate; potential conversion opportunities for the property; and a tax assessment.