During the financial crisis that started in 2008, many clients needed to invoke workout and reorganization strategies and tactics to save their hotels. As best as they were able, the goal was to not only save the hotel, but to do so with a financial structure that allowed the owner to realize future appreciation for themselves and not the lender. Here we go again!
Presently, due to the pandemic, most hotels are experiencing very low occupancies, rates, RevPAR, and net operating income that may even be negative. The marketplace is full of loans in default and scarce debt financing for refinancing or acquisition. Pre-bankruptcy workouts can provide relief without the cost, hassle, and stigma of filing for relief under the bankruptcy system.
Many people in the hospitality industry have watched as the difficult economy decreased the value of their properties and reduced their cash flow, only to be hit with the demands of lenders to make principal pay downs or bigger monthly mortgage payments.
Attempting to work out a lasting solution can be frustrating and difficult. Owners in the hospitality industry are taking advantage of the framework in the bankruptcy system as a way of providing leverage at the negotiation table between the lender and the borrower. In short, by using the bankruptcy process as a backdrop to settlement negotiations and discussions, the property owners are able to change the bank’s perception of its potential outcome and thereby negotiate from a relatively stronger position.
Generally, people know that there are two types of bankruptcies: (1) Chapter 7 bankruptcies that liquidate assets, pay off creditors and leave the debtor free from further obligations to those debts; and (2) Chapter 11 reorganizational bankruptcies in which the current obligations and debts of the debtor are reorganized to meet the cash flow realities that the debtor is experiencing.
In a Chapter 11 proceeding, secured debt that exceeds the fair market value of the secured assets, at the time of the appraisal in the bankruptcy, will be treated as unsecured debt. So long as unsecured lenders receive more in the Chapter 11 reorganization plan (“Plan”) than they would in a liquidation (often pennies on the dollar), the Court will often approve the Plan with payments over as much as five years. The secured debt moving forward will be the fair market value of the property, not the face value of the Note. (This enables the owner moving forward to realize any future appreciation for their own account, not the lender’s.) The Plan can also readjust interest rates, payment amount and even extend loans that are close to maturity without the lender’s approval.
Guarantees can complicate the process and may require a reorganization process for the borrower, individually. These can take a number of tacks depending on the individual’s holdings.
With bankruptcy filings as an unwanted but real option, borrowers can use the potential outcome of that process as leverage to persuade lenders to workout defaulted loans without the borrower having to actually file a Chapter 11 proceeding. By using the bankruptcy process (Ch. 11) as a back drop to settlement negotiations, hotel owners can enhance the borrower’s negotiating position.
Most people do not want to undergo liquidation because it means starting over and losing all of their assets. Lenders also do not want to undergo liquidation because they too usually will not receive as much as they could. In contrast, the successful reorganization makes sure that all of the creditors receive at least as much as they would receive at liquidation but in a way that is practical to the Debtor. This means that creditors have to view their position in light of what they would receive in liquidation even though the Debtor will not have to undergo liquidation.
Banks often times prefer to create their own deal with a borrower rather than suffering the outcome that the Court will force upon them in bankruptcy. This pre-bankruptcy process therefore helps place the Borrower on equal footing with the lender and leads to successful workouts.
About Miller Law Group, PC, and Contact Information
Mitch Miller, the founder of the Miller Law Group, is nationally known for the firm’s full-service hospitality law firm representing hotel owners and management companies throughout the United States. Allied Memberships: CHLA, CLIA, AAHOA, NABHOOD, LHA, ICSC and AAFD. For further information, contact Mitch Miller at firstname.lastname@example.org or 650.566.2290.
- Purchase and Sale Transactions
- Debt/Equity Financings
- Franchise Agreements—Negotiation and Dispute Resolution
- Loan Workouts and Chapter 11 Reorganizations
- Management Agreements
- Development and Construction Agreements
- Joint Ventures
- ADA Issues
- Entity Formation and Asset Protection
- Restaurant/Banquet Leases
- Liquor Licensing
- Retail Leasing
- IP, Technology, and Internet Issues
- Wage and Compensation Matters
Copyright © Miller Law Group, P.C. 2020. All Rights Reserved.