In 2020, the hotel industry was performing well, with strong market positions and sufficient budget for renovations. The future looked bright, until the COVID-19 pandemic hit. Now, two years into the pandemic, the leisure business is making a comeback as businesses begin to slowly recover from the coronavirus disruptions. At the same time, many hotels still face issues with completing renovation projects due to a variety of problems, like missing payments and defaulting on loan covenants.
As a result, businesses are now weighing their options in an uncertain environment. Selling may be a possible route, given how relatively low interest rates still are, but that may not be appealing depending upon the business’ market, scale, and readiness to sell. In addition, selling a distressed property may involve selling at a loss or at a level that the business may not be ready, able, or willing to absorb.
If businesses aren’t selling, they’ll have to consider a way to remain in control of their property. To do that, a working relationship with the lender needs to be established or enhanced. This isn’t necessarily an easy process, but there are approaches that can help turn a potential confrontation into a collaboration and increase the odds that the business retains the hotel at the end of the day.
If there is a danger of default or an impending due date, businesses need to work with their lender and determine what they want from the lender. This could range from things such as a covenant waiver, deferred payment, or a modification to a total renegotiation or standstill agreement. Whatever the situation, businesses need to make sure that they are being honest with the lender, and they are providing all the relevant information necessary. This means explaining clearly what is happening, what the business is doing to proactively minimize the damage, and what is needed from the lender.
To ensure that the business is prepared to negotiate with the lender, a team of professionals who can provide insight into the lender’s thinking and credibility should be present at the negotiating table. If the business is not self-managed, the management company can play a key part with its operating executives, marketing professionals, engineers, and architects. This team can also be augmented by a qualified asset manager and workout attorneys, if needed. The business may also require a financial consultant or CPA firm with experience in the industry, experience with lenders in distressed situations, and the resources to provide a variety of support services. Finally, external sources can be called upon if the lender needs a valuation or a projection from an outside party.
Coming to the negotiation table with a game plan and a strong team will significantly increase a business’ chances of successfully maintaining control of the hotel. You can reach out to Larry Cohen at firstname.lastname@example.org or one of our Restaurants & Hospitality Practice professionals to discuss how to help your business get through the lender negotiation process.