Let’s say that you now have a non-performing hotel or resort loan on your hands. In fact you may have a few. And, as you know, these are the things that gray hair is made of. By the way, if you were doing this in the late 80′s and early 90′s like we were you probably already have a few gray hairs to show for it.
But for now, let’s talk gray matter. As you know, there are some fundamental differences between hotel/resort assets and other real estate asset classes. A hospitality asset’s value is generally calculated using a stream of future cash flows and this cash flow stream is driven by an operating business with many moving parts – market dynamics, operational efficiency, plant & equipment, brand/operator viability and encumbrance. Add to that the most problematic of asset types, human assets…lots of them. Let’s add another degree of difficulty to the value equation, leverage. The owner’s return on investment (cash on cash IRR) is half of the Cap Rate equation, the other half of the weighted average cost of capital is the amount and cost of financing. The problem here is the amount, zero to 50% or 60%.
According to Steve Rushmore and HVS, a liquidation sale will result in sale proceeds that may be 40% less than what the proceeds would be given a market sale.
The problem is – nuanced by REMIC considerations, the lender’s balance sheet strategy, special servicer requirements – there isn’t much of a market for hotel/resort assets now and it is likely that the hotel/resort will require funding to continue to operate.
What we do is provide the lender and/or special servicer with an Assessment of Risk/Opinion of Value that leads to a strategic plan. That strategic plan can be a sale of the underlying note/security or it can be to take control of the asset through a variety of means. We established our business platform to provide the initial assessment and collaborate on the strategic plan, and then to execute and/or facilitate the execution of the plan all the way through disposition.
We will continue to explore the various nodes of the decision tree in depth. In the meantime, we would welcome the opportunity to discuss this topic in a theoretical or practical context in a scheduled teleconference. See us at http://www.hardistybaxter.com/index.html
