Commercial Property Receivership for Hotels

Restrictions on travel and business activity and widespread stay-at-home orders as a result of the coronavirus are having an unprecedented impact on the hotel and hospitality industry. Hoteliers, lenders, and investors are now grappling with numerous difficulties presented by the pandemic, such as plummeting occupancy rates. We'll discuss how the COVID-19 crisis is impacting hotel values, what unique challenges commercial property receivers currently face in the hotel industry, and how our Cleveland property receivers at Dottore Companies can help struggling hoteliers.

How the COVID-19 Crisis is Impacting Hotel Values

According to the American Hotel and Lodging Association, the 'sharp decline in travel demand is nine times worse than September 11 and with lower room occupancy than during the Great Depression'. Although gradual reopening has shown some signs of improvement in the hotel industry, room occupancies have plummeted to less than 40 percent and RevPAR (revenue per available room) is down roughly 65 percent. All-cash transactions, seller financing, and other capital solutions will unaviodably exert a downward pressure on hotel property values.

How the current economic downturn will specifically affect individual hotel values depends on a number of factors, including the characteristics of the property, its market, and its location. Some hotels will be more vulnerable to property value declines, such as full-service hotels that depend on group business and markets that heavily rely on airports and international travel for business. Management companies and franchisors are desperately trying to determine how to financially support their hotels under a consistent business strategy, while lenders and investors are struggling to address fundamental issues regarding risks and property value amidst the uncertainty of the pandemic.

Unique Challenges that Property Receivers Face in the Hotel Industry During a Pandemic

Compliance with strict COVID-19 safety procedures
The CDC guidelines for hotel, lodge, and resort employees include specific instructions for housekeeping staff regarding the cleaning and disinfection of guestrooms and used linens. A property receiver will therefore need to be alert to potential health risks that may arise during business operations and properly adhere to the federal and state guidelines on sanitation for hotels. Since these COVID-19 safety guidelines may differ by state, it's imperative that property receivers remain up-to-date on your state's current standards as the circumstances surrounding this pandemic continue to evolve.

Overcoming funding issues
Limiting expenditures while attempting to revive a struggling hotel business presents property receivers with a broad set of challenges. Loss of revenue will inevitably inflict a significant decrease in EBITDA (earnings before interest, taxes, depreciation, and amortization) and possibly even negative EBITDA. Lenders are reporting lower loan-to-value rations, which will also result in higher interest rates.

Minimizing litigation risks
The most obvious risk exposures for hotels right now are sanitation and virus spread. White it helps to follow the federal and state guidelines previously mentioned, property receivers will also need to ensure that safety guidelines are posted for customers. If an informed customer refuses to wear a face covering or fails to practice social distancing on hotel premises and thereafter contracts COVID-19, they will have a much more difficult time suing your hotel.

Additional litigations that may arise could involve cancelled room reservations, forfeited deposits, inability to honor group contracts, and other customer complaints. Property receivers will need to therefore exercise foresight and proactively address these potential disputes before complaints are made so as to avoid liability later on.

Employee lawsuits can also pose problems as workers compensations claims rise. So property receivers must ensure that all hotel staff members are following safety precautions and implementing risk-reduction measures in their workspaces. It's better to have to let go of employees and offer them severance rather than incur legal costs due to lax enforcement of safety standards.

Difficulty negotiating mortgage loan agreements owned by Wall Street investors
According to a survey by the American Hotel and Lodging Association, "just 20% of hotel owners whose loans had been packaged and sold to investors have been able to adjusts payments in some form during the pandemic, versus 91% of hotel owners who borrowed from banks". Many hotels are collapsing under the weight of mounting debts, "especially those with Commercial Mortgage-Backed Securities (CMBS) loans, as they have been unable to obtain urgently-needed debt relief". About a third of all debt in the U.S. hotel industry is represented by CMBS loans. Over the last few months, there has been an unprecedented spike in delinquencies in the CMBS market. Property receivers thus face the daunting task of trying to renegotiate loan terms with inflexible representatives of bondholders.

Fighting the stigma associated with "closed" hotels
Hotels that are "closed" due to financial downfall carry a stigma that can negatively affect their property value. Under typical circumstances, a hotel closes because of physical defects or problems with management and property ownership. As a result, attacking those underlying issues with the aim to reopen the hotel is viewed as a high risk endeavor, thus putting downward pressure on its property value.

However, adverse situations arising from the pandemic that cause a hotel to cease operations are clearly external. This should not be interpreted as a stigma on that property, since the conditions are out of the hotelier's control. A property receiver will need to combat negative stigmas in the market and emphasize that the hotel has not permanently "closed" but has temporarily suspended its operations until market conditions improve.

How a Dottore Companies Cleveland Property Receiver Can Help Hoteliers Facing Bankruptcy

Taking a long-term view of hotel property value increases the final sales price.
Our commercial real estate receivers will focus on preserving and enhancing the value of your hotel property. Rather than quickly disposing of assets and selling immediately to get what you can now, our property receiver will prioritize the gradual rebuilding of your business whenever possible. Rushing this process is a dangerous, short-sighted approach that will undercut the sales price that your hotel property deserves. With careful planning and execution, we can help your hotel business endure COVID-19 and recover financially.

Expert cost analysis helps narrow the gap between hotel business expenditures and incoming revenue.
With significantly reduced cash flow, some hotels are more inclined to shut down entirely rather than risk poor performance. That's where a property receiver comes in. One of our Cleveland property receivers will perform a thorough analysis of your existing expenditures and available funds and decide how to best curb costs without cutting corners. This may include eliminating redundancies in staffing or consolidating job positions and reducing your hotel property's reliance on third-party deliveries. The ultimate goal for every expense is to boost the value of your business property. Additionally, receivership provides much more flexibility in negotiating existing loans.

Thankfully, many states have enacted legislation that prevents landlords from acting against commercial tenants during the pandemic. A property receiver can use this to your advantage to free up some budgetary breathing room for your business as you embark on the road to recovery.

Our Cleveland property receivers at Dottore Companies possess expertise and experience you can trust. Read our case study to learn how court-appointed receiver Mark Dottore preserved the value of commercial real estate collateral in downtown Cleveland during litigation. Contact us today to learn how our Cleveland property receivers can help you avoid costly foreclosure proceedings and achieve the maximum value of your property.