Conversations about distressed hotel assets are more likely to have better outcomes when owners and operators are on the same page before talking to lenders.

Knowing the fine details lends credibility during negotiation, said Joseph Yi, chief investment officer at third-party management company Real Hospitality Group. Real Hospitality Group also performs hotel acquisitions and development.

“It really becomes how [well] you know your business and how you can communicate that succinctly to get your point across,” he said. “Nobody is going to spend hours trying to talk about segmentation … but having a good grasp of all of that would give credibility when you are contesting a point of view that’s different.”

Vicki Richman, chief operating officer, HVS Asset Management and Hotel Management, said in an email interview the borrower and operator should be aligned on what they need from the lender when conversations are initiated.

“They both would be seeking relief from debt service but there are several possible approaches to that relief — some are temporary and some are long-term and some impact the owner and operator in different ways,” she said. “It’s important to address those differing impacts before the lender is approached, or at least before a deal is struck with the lender, to prevent a conflict and potential damage to the resolution with the lender.”

When a lender performs an appraisal, it could go either up or down depending on the value of the property, Yi said.

Management companies that are owners and operators know the business and where markets trade during normal times, he said. If a management company and borrower disagree with the appraisal, they will need to explain why in writing.

Tanya Little, founder and president of Hart Advisors, which advises on loan modifications and commercial mortgage-backed securities, said in an email interview that borrowers can help management companies by educating them on loan terms that might affect hotel operations.

“For example, many of the loans on hotels today have cash-management provisions that can be triggered when the income levels drop over a period of time. It is important that the manager understands those triggers and the implications on the loan,” she said. “By doing so, [borrowers] can assist owners in managing around some of these provisions that would be more onerous on future operations if triggered.”

Management companies can provide critical assistance by managing costs, employee loads and overall operations “in a distressed operational mode versus normal day to day. Strategy needs to be in place to be proactive for owners not reactive,” she said.

Borrowers need someone to provide honest answers on what is possible when working with commercial mortgage-backed securities servicers and troubled loans. Her company, for example, helps protect borrowers against misinformation and facilitate the best resolution, she said.

She said lenders' views on hospitality and distressed loans are changing daily.

“Hotel borrowers and guarantors need to know that time is not on your side when working with lenders. Costs and conditions can rise exponentially if you are in a default and have not resolved the issue,” Little said.

Richman said the lender can defer payments by adding them on to the end of the loan or extending the loan. The lender could also modify the business terms such as the interest rate, amortization and a number of other components.

She said it’s important to remember that some operators have incentive fees that are tied to the bottom line after payment of debt service.

“Not only do they want to be sure that the hotel is stable and able to pay the mortgage, but they also want to increase the possibility of earning an incentive fee,” she said. “For instance, if deferred payments are added to later dates — perhaps in a year — to get caught up as opposed to added to the end of the loan by extending the term, those have different results for the operator’s compensation.”

Ultimately, the borrower and operator will need to reconcile those differing factors; otherwise, the operator could get in the way of a beneficial resolution with the lender.

Richman said lenders will often want direct contact with the asset's operator to get comfortable with any forecasts presented to justify modifications. The lender also will want assurance that the forecast and timeline are achievable.

“The operator’s support and guidance as to the future success of the hotel is essential to giving the lender that comfort,” she said.

Additionally, brand operators, opposed to third-party operators, typically have a subordination and non-disturbance agreement in the management contract. This provision requires the lender to keep the operator in place even if they foreclose.

“While an operator with an SNDA in place is still very motivated to help the owner [reach] a beneficial resolution with the lender because they don’t want to be associated with a failed hotel, sometimes it is unavoidable and they are generally protected from being removed and would not be willing to take all steps that a desperate owner might request,” she said.

Richman said in some cases the owner doesn’t involve the operator in conversations or in drafting forecasts.

“Those situations have poor results because there is a diversity of expectations and assumptions among the parties,” she said. “Whomever you include in crafting a solution will be bonded to that solution and have more motivation to help it succeed.”

Yi said failing to communicate a realistic picture that is not overly aggressive is detrimental with lenders. Lenders need confidence that what the borrower projects is consistent.

“If you’re continuously not providing enough data that’s realistic, your lender is going to be less willing to trust you,” he said.

He said it can be difficult to maintain constant communication with larger lending institutions, but smaller ones often are more willing to work with borrowers if there’s honest conversation happening.

Richman said because the source of the current dramatic decline in revenue is the result of an identifiable and uncontrollable event, it shouldn’t be a challenge to get the lender honest and useful data as well as supporting information from the owner and operator.

“Of course, some owners and/or their operators might have other extenuating circumstances that will color what they are providing to the lender. All lenders should be careful to do their own research and their own analysis to confirm what the borrower and the operator are saying,” she said. “It’s a prudent thing to do.”