Mr. Glincher

Hospitality Law

How to Avoid Hotel Bankruptcy

By Andrew Glincher, Office Managing Partner, Nixon Peabody LLP

Today, we have the added factor of the fear of terrorism causing many would-be travelers in the United States and around the world to feel more secure staying closer to home - placing the entire travel and hospitality industry in a precarious position.

Although the stronger properties seem to be managing, and will likely survive to see another upswing, many others - independents, smaller hotels with less defined brands, properties where margins were lower and vacancy rates were higher even during good times - are feeling the economic pressure. This is particularly true of hotels that may have taken on too much debt and are now faced with insufficient cash flow.

How should they deal with these financial woes? The most important advice one can give to a property owner in this situation is first and foremost to be honest with yourself and confront the problem directly, proactively, and as early as possible. Wishing the problem away will not work, expenses are not going to go down, nor will revenues increase on their own, and ignoring your bankers is not going to make them go away.

Following are a few steps hotel owners need to take when they begin to recognize the signs of financial distress:

Take a hard look at operating cash flow and match it up with debt service. It's important to be very comfortable with projections for the foreseeable future and feel secure in your ability to make these payments.

If cash flow is insufficient, initiate discussions with your lenders. Don't wait until you've missed payments and they come to you. In most cases, if you can provide reasonable justification, they may prefer to work with you to restructure the debt rather than to force you into bankruptcy. Maybe the term of the loan can be lengthened, maybe it can be refinanced at a lower interest rate, maybe payments can be made based on cash flow, maybe they'll be willing to defer certain payments for a period of time in return for larger payments of interest or some form of shared appreciation down the road.

Develop a plan for reducing expenses immediately. Lenders will want to know that you are serious about cutting waste if they are going to be flexible. This may involve making tough decisions to lay-off unnecessary employees, cease unprofitable operations or possibly even close portions of the hotel that require ongoing maintenance but produce little current revenue.

Identify ways in which you can squeeze additional revenue out of the existing property. Has your target market changed? Is there retail space in the lobby or other locations within the hotel? Are those tenants paying the maximum rent that the space is worth? Perhaps an analysis by a retail real estate consultant could reveal alternative uses for the space that could produce higher rentals - or identify other spaces that could be more profitably utilized.

Determine whether you are deriving maximum value from your brand. Are there minor renovations that could significantly enhance the property's value? Would an affiliation with a new marketing group produce increased revenue?

Think about the overall marketplace that the property is part of. If, for example, there is a shortage of housing, it might be possible to convert a portion of the hotel into corporate apartments.

There is often a fine line between survival in a difficult financial position and bankruptcy. Dealing with the problem aggressively and not hiding from it is the key. It may be difficult to have conversations with creditors asking them to help you through a crisis, but you have to remember that creditors are business people. They know that if your business fails, they have little chance of recouping their investment. As unpleasant as it may be, to the extent a relationship of trust exists, they would almost always prefer to work with you, knowing that if you turn things around, they may eventually obtain the return they desire. Creditors generally have no desire to be in the hotel business.

Andrew Glincher specializes in the negotiation and resolution of business and real estate disputes. Mr. Glincher has represented developers and owners of retail centers, hotels, movie theatres, office and industrial buildings and parks, utilities, restaurants, subdivisions, apartment complexes, assisted living housing complexes, long-term care facilities and condominium projects. Mr. Glincher is admitted to practice in Massachusetts, the U.S. Court of Appeals, Third Circuit, the U.S. District Court, District of Massachusetts and the U.S. Tax Court. Mr. Glincher can be contacted at 617-345-1222 or aglincher@nixonpeabody.com Extended Bio...

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