Receivership 101: Navigating what’s next for distress
Receivership 101: Navigating what’s next for distress
25 SEPTEMBER 2020 8:11 AM

Extended forbearance has provided a debt cushion, but as that period comes to an end and borrowers go into distress, many hotels will enter receivership.

REPORT FROM THE U.S.—As many hotel loans hang in the balance between forbearance and distress, the prospect of receivership may not be far off for some.

Speakers at the recent Distressed Hotels Forum outlined the basic processes of hotel receivership and shared their thoughts on where the U.S. hotel industry stands today on the spectrum of hotel loans in forbearance, distress, special servicing and receivership.

The industry hasn’t yet seen a wave of distressed assets hitting special servicers and ultimately, bankruptcy or receivership. But that’s in part due to current and extended forbearance periods.

“Based on what we’re seeing in bankruptcy court, the types of cases going into bankruptcy or receivership are of two types—hotels that were in trouble prior to COVID-19 or cases where the borrower has just given up, handed the keys to the lender and said ‘I’m through and don’t want to be part of the solution,’” said Mary Jo Heston, judge in the U.S. Bankruptcy Court, Western District of Washington. “Once we get past the forbearance phase, we’ll see an increase in receivership and bankruptcy.”

How does receivership begin?
A process that takes place in the court system, receivership typically is initiated by a primary lender on a loan that has gone into default, said Cliff Risman, partner with law firm Foley & Lardner. Typically, the process is pursuant to provisions in CMBS loan documents that allow lenders to exercise the option, and often it’s done with the cooperation of the borrower.

“The selection of a receiver is typically the party suggested by the lender or party having the receivership put into place. Once the court determines the receiver is qualified, the receiver takes an oath and posts a bond,” Risman explained. “The bigger process is post-appointment, when the receiver gets their arms around the asset. Until they are appointed, they normally don’t have access to all the documents, agreements and financials. It’s like a fire hose opens and they have to start drinking.”

The receiver’s role
Dan Lesser, president and CEO of LW Hospitality Advisors, summed up the role of the receiver by explaining that “a receiver is an agent of the court, a fiduciary who steps into the shoes of acting like an owner and being responsible like an owner. The key (role) of a receiver is taking control of an asset and securing it and the value of the asset at a minimum.”

Panel moderator Michael Nanosky, president of Janus Hotels & Resorts, reminded the audience that the servicer and court look to the receiver to take control of the asset and everything affiliated with it, while finding ways to build revenue.

“You’re making sure employees are OK, making sure there are no life/safety issues with the property,” he said. “And most importantly is building revenue. You open all the revenue channels so you can get cash back in so the servicer or lender doesn’t have to fund it moving forward.”

Increasing the value of the asset is key, Lesser agreed.

“You must avoid asset value erosion,” he said, calling the receiver’s role “basically asset management on steroids.”

“You are stabilizing the asset and getting it to a point where an economic decision can be made as to what happens next—will the asset be sold? What’s the lender’s exit strategy?”

Crucial to that, Lesser said, is ensuring the receiver and management company have a good working relationship.

Franchise issues
The relationship between the hotel’s brand franchisor and other stakeholders is equally critical during receivership, and this often is a relationship that can go south quickly, some panelists said.

Aileen Canta, CEO of A F Canta, is working with a client who has a hotel in receivership and said all parties are finding it tough to get feedback from the brand parent company.

“The brand hasn’t been that flexible; it’s been challenging, like pulling teeth,” she said. “The brand doesn’t want to work with us or extend anything. It’s kind of bizarre.”

Brand representatives were not part of the panel discussion to share their side, but Nanosky said in his experience, brands sometimes are more willing to work through issues for properties located in “great markets and locations.”

“If the property is older, the brand instead may have someone ready to build something new there,” he said. “Or if there’s been a history of poor scores from (that property), they may not want to work too closely.”

Add to that the furloughs and layoffs at many franchise companies, and clear, quick communication can be tough, he said.

Risman said “there’s no rhyme or reason” to some actions—or lack of actions—brand companies take when assets reach receivership.

“We’ve experienced everything, from one brand wanting to repaper the franchise agreement, cut off access to third-party management and almost make it as difficult as possible for the receiver to maintain status quo, to brands that don’t call, don’t write and don’t really want to talk to you … if the check shows up.”

Other issues that complicate the brand/receiver relationship include liquor licenses that are tough to transfer between managers, credit card merchant numbers that are difficult to transfer, and issues with warn notices for employees going through layoffs or furloughs. All of those and more can potentially fall through the cracks as properties shift management and potentially cause a breach in a franchise agreement.

However, Risman said brands typically want to continue their revenue streams where possible.

“Everybody seemed to be playing nice in the sandbox for a while, but I think some are tiring of niceties,” he said. “Most brands, like owners, are in trouble. They’ve seen loss in revenue too and laid people off.”

The bankruptcy option
Heston said bankruptcy is another option for borrowers, though lenders typically prefer receivership because it’s less costly, quicker, and they can retain more control.

Under some conditions, however, bankruptcy can be preferable.

“Borrowers like bankruptcy because they can cram down the amount of secured creditors to the value of the collateral on the date they filed bankruptcy,” she said. “There are counter-moves a lender can make, but because we’re in a trough right now for value, because revenue streams are so low, it can be advantageous for a borrower to file bankruptcy.”

Cashflow becomes a key issue in the case of bankruptcy, however.

“It assumes (borrowers) have some ability to cashflow, and that’s driven by their current ability to use cash collateral to pay operating expenses, and I expect many current hotels don’t have that capability,” she said. “If they have new money coming in, maybe they can liquidate some assets, or call on a new lender.”

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