Hotel Value Volatile Issue for Lender, Court Appointed Receiver Sale

Earlier this year I attended a hotel valuation workshop to better understand in part what affect today’s investment and lending market will have on hotel real estate values and subsequent sales by a court appointed receiver in hotel receiverships. Put on by The Appraisal Institute of Northern California, the issues focused on how the valuation process without adequate comparisons in past downturns now must take into consideration the lack of capital and drops in income unprecedented for the last twenty to thirty years since the mid-eighties recession. Waterfront Hotel More importantly, the take away is that the current credit crunch has changed the dynamics for sellers and buyers alike. No longer is there a ready lender with 75% LTD or even 60% if you are well capitalized and credit worthy. The new normal, at least for the last 12 months and going out another year or more, is that most hotel sales will require either an all-cash buyer or a minimum 50% cash down by someone with a strong credit line already in place. Click here for an example of today’s hotel valuations and how hotel buyers are looking at opportunities in this economic environment provided by HVS International… What is noteworthy here is the consideration that a lender must understand when using a state or federal receivership as an alternative remedy to sell the hotel in lieu of a foreclosure. Typically, a lender will elect to put a court appointed receiver in place to sell a hotel within the confines of a receivership so that it can avoid the added costs and potential loan write offs that foreclosures may entail as well as the management headaches and unforeseen costs of operating the hotel asset as an REO. However, while a lender can avoid the costs in foreclosing, it must still be prepared to subsidize the receivership until a sale is made. Also, and in order to obtain the most value for the asset in today’s economic environment, the income must be either on the upswing or it is foreseeable from a potential hotel buyers perspective that the projected incomes will be realized in the short term, often starting in 12-24 months. This means understanding that a receiver may need to be in place potentially longer, then like the customary 90-120 days pre-foreclosure preceeding here in California, in order to obtain the best possible valuation and sale price. Fortunately, given the recent spate of good news about lodging and travel expenditures on the increase in the USA and abroad, which in turn is improving the overall economic fundamentals of hotel investments reported in my previous blogs. It is also becoming easier for a court appointed receiver to wait, while income factors improve that ultimately drives higher valuations, rather then selling a hotel asset quickly as through an auction or discounted loan sale. More to come on this subject…