December 2, 2009
By Patrick Mayock
 

CHICAGO — Dealing with your lender in today’s economic climate is like undergoing a personality critique with a particularly blunt self-help guru: You might not like what either tells you, but you’ll be better off because of it.

“(Servicers) do return phone calls, they just say hard things to people who might not want to hear the truth,” said Biff Hawkey, senior VP of development for Hostmark Hospitality Group.

Hawkey was one of three panelists who discussed the state of lending during a session of Perkins Coie’s annual Navigating Troubled Times in the Hotel Industry conference last month at the Fairmont Chicago.

Those “hard things” are particular difficult to hear for owners who wait until they’re too deep in debt, added Hawkey. As such, the panelists advised speaking to lenders before default scenarios arise.

“Speak to your lenders early, preferably before you’re in a distressed position,” said Greg Royer, president of Calgary, Alberta-based Royco Hotels.

That conversation should also take place before an owner puts a single dollar of equity into the hotel, he added.

“The bank gives you no points for funding shortfalls. If you’ve carried that hotels for six months and you go talk to lender at that time, the hundreds of thousands (of dollars) that you’ve put into that hotel to carry it means absolutely nothing to them,” Royer said.

Keeping it real

To successfully renegotiate the terms of a loan, owners must come to the table armed with their checkbook in one hand and a healthy dose of realism in the other.

“The more realistic the plan, the better chance you have of them buying into it and you actually delivering on it,” Royer said.

Hawkey suggest a three-year outlook that incorporates market data and analysis. Doing so shows a lender that the owner has a firm grasp on the current operating environment and the savvy to lead the asset out of it.

It certainly helps if the owner already has invested in the property within the past three years, and if he or she is willing to put more equity into the deal today, the panelists agreed.

That doesn’t mean owners should throw good money after bad. They shouldn’t just cave in to lender demands, said Peter Dumon, president of Chicago-based The Harp Group, a real estate and investment and development company. In some instances, it might make sense to say, “We’re not willing to do this unless we get A, B, C and D, and then be willing to walk away,” he said.

But no matter what they do, owners just need to make sure they negotiate with their lenders. Now’s the best time to do so, Royer said, because banks don’t have a lot of other options.

The return of lending

When the dust settled from the initial economic fallout in late 2008, some industry pundits prognosticated banks would sell off notes to recoup their losses. But that hasn’t gone as planned.

“For the most part, the bigger banks that were originally offering notes for sale got TARP funds and solved their problems,” Dumon said.

And what notes did remain—the ones banks would still happily trade—are for D-flag properties with significant performance drops, Royer added.

“You’re not seeing a lot of real good quality of loans being sold,” he said.

But what about lending in general?

“Isn’t that an oxymoron?” Royer quipped.

Lending in general is broken right now, not just hotel lending, he continued. Many banks don’t have the ability to lend, and the ones that do have such tight restrictions that transactions have all but reached a standstill.

“I think it’s going to be a long, long time before you see anything that resembles the type of lending you saw from ‘04 to ’08,” Royer said.

Hawkey pointed to hurdles of other forms of commercial real estate, which must first be kicked back into gear. Only after “reasonable lending” exists for apartments, office buildings and malls will hotel lending be allowed back into the fray—sometime in late 2011 or 2012.

“Transaction activity will start to pick up next year off a very, very low base,” Royer said.

The first part of the year will prove particularly interesting as borrowers will likely default on a “tremendous amount” of C-caliber assets, Hawkey said. A year later, upscale assets will start to roll in.

So what does that mean for this time next year?

“Next year, unfortunately more of the same,” Dumon said.

Hawkey was slightly more optimistic: “We’ll start to finally be saying to ourselves, ‘We’ve weathered the storm and the best is coming.’”