How to Prevent Your Hotel from becoming a Distressed Property before it’s Too Late
Your hotel is not thriving as you have planned and the property is now in danger of going belly up. This problem could be caused by the general economy, new competition, or over leverage. If you are a hotel owner whose properties are in danger of financial ruin, you have your work cut out for you. There is not just a financial toll, but an emotional toll that effects all those involved. Your hotel is your baby, and you want it to be a success. The good news is that you are not alone and it is possible to save your distressed property. Here are a few suggestions that we find have worked for us and our clients to save their hotels from going belly up.
Work toward a Positive Cash Flow
As the owner of a financially distressed property, your first aim is a fast turnaround, and for that you will need money – lots of it. The prospect is possible provided that you know what to do. You need to do three things: act fast, act decisively, and get all of the interested parties involved. Here are a few ways to climb toward a positive cash flow.
1. Cut Expenses: Eliminating non-essential costs is one of the first steps toward returning to financial security. Take a look at all of the expenses and items on the budget and decide what is essential and what can be put aside for a later point. Do you really need to install a new fountain in the lobby when all the old one needs is an inexpensive paint job to make it look as good as new? If it’s not going to bring in revenue don’t do it.
2. Increase Revenue: Of course, expenses are not the only aspects that might be preventing you from a cash surplus. Your hotel needs occupancy to stay afloat. By eliminating the non-essential costs in the previous paragraph, your budget should now have room for a bold marketing campaign. Kick you’re marketing efforts into high gear by, say, launching a creative and bold sales campaign to attract more guests. Don’t forget to market any new perks, things such as free in-room Wi-Fi. Your goal is to have every room occupied, even at lower prices. A discounted occupied room is better than a non-occupied room asking full price.
3. Outside Counsel: Bring outside counsel to the table to help turn the situation around; they can bring invaluable expertise, private investors, and a fresh pair of eyes with creative solutions to help you turn the property around for everyone’s benefit. If the hotel is over leveraged, you may need to negotiate a mortgage or loan modification with your lenders. This is our area of specialty and you would be amazed at what we can do. In one case, we brought the monthly mortgage payments down by 50% and worked with the second lender to waive the interest for the life of the loan. For several years the ownership of the hotel was contributing their own personal funds every month to keep the hotel afloat, this went on until all three partners did not have a penny left. We got involved and cut their payments in half by negotiating with their lenders. Now they no longer need to drain their personal finances and have the extra cash flow to fix up the hotel to increase revenue.
Be Prepared for the Worst
Your hotel may not be facing foreclosure yet, but it pays to be prepared. Sometimes lenders will agree to negotiations or to modify the existing loan in exchange for a change of terms or you giving up some of your rights. Nonetheless, they could still pursue the foreclosure process. Be careful….
Lenders have their own financial interests in mind. Your job is to use as much leverage as possible, via multiple strategies, to halt their actions of foreclosing on your hotel or get them to give you a favorable modification. Once the relationship between the lender and the borrower has become spoiled, the lender may have only one intention and goal, and that is to liquidate their investment and collecting every penny. This would result in your hotel being taken away from you – leaving you with nothing. As a borrower you have many strategies and options to gain leverage and fight back. Utilizing out-of-the box thinking and tailored solutions to an individual business, owners need to work with lenders to save money to protect their hotel.
H. Jack Miller
October 11, 2014
GFCIB and Advisors, LLC, a nationally recognized advisory firm for commercial real estate owners, developers, builders and mid-sized businesses, GFCIB focuses on providing advisory services to clients, including restructuring, workouts, and financing.