I. OVERVIEW. With greater frequency hotel owners, their lenders and hotel operators are confronting the issues that arise in connection with the troubled hotel project. The myriad of constituents and operational nature of a hotel distinguish it from other commercial real estate projects. These constituents and operations compound the complexity of restructuring hotel credit facilities and hotel management agreements. Further, because the entire hospitality industry (rather than a few individual projects) is suffering historical losses, hotel owners face the unenviable task of convincing lenders and operators that the owner’s struggles are not exclusively attributable to the down economy, but include unique problems which can be addressed through a workout of the owner’s credit facility and/or management agreement.
As in any commercial real estate workout, the owner should have a clear understanding of the lender’s rights under its credit facility in advance of initiating workout discussions with the lender. The issues the owner can anticipate arising in negotiating the workout with the lender are discussed in Section II below. Of course, it may be unrealistic that the lender and hotel owner will reach a pragmatic workout and, accordingly, the owner may need to consider alternatives. These non-workout alternatives are discussed in Section III below.
Perhaps nowhere else in the realm of commercial real estate projects does a third party have so much control and influence over the owner’s success than in the context of the managed hotel project. Owners who have retained third-party operators may need to confirm the hotel operator’s willingness to cooperate with certain aspects of a lender workout. Owners may also need the hotel operator’s cooperation in modifying the hotel management agreement. A good measure of the operator’s willingness to cooperate in the modification of the management agreement will be substantively impacted by the terms of the operator’s non-disturbance agreement with the lender. The issues which might arise in re-negotiating a hotel management agreement are discussed in Section IV below.