Limited Hotel Receivership One Solution to Insure Debt Payment Part 1

The use of a limited purpose hotel receivership is sometimes employed where the lodging property owner is diverting funds collected from sale taxes instead of paying the city or county. Another circumstance is when a liquor license may need to be recovered and sold or a certain lump sum for equipment is owed to a secondary creditor when the business is pending closure. However, owners may sometimes get delinquent in the mortgage payments as a result of excessive management fees taken or perks and subsidies it pays itself to operate the business. In this case the lender may determine through independent analysis that the income after reasonable operating expenses is more than adequate to cover its debt service. But, the owner, who is also acting as the operator, continues to be in arrears in its monthly debt obligations due to these and other questionable payment activities. A limited hotel receivership and the appointment of a court appointed receiver might be a necessary and cost effective solution. In this case study scenario, a hotel has 200 rooms and generates approximately $5,000,000 in revenues. Gross operating income before debt service is approximately 35% or $1,750,000. Debt service includes the mortgage, insurance, taxes and manager fees. The interest only mortgage is based on a loan for $16,000,000 with annualized payments of $960,000 and a 2nd interest only mortgage loan payment for $240,000. Annual property insurance and taxes are $125,000 and management fees and salary are $525,000. There are no FF&E reserves and value will be affected due to deferred maintenance. The hotel reports a loss before depreciation and amortization of -$100,000. It is behind in its loan payments. Problem – The owner/operator charges the hotel both a management fee to operate and a hospitality asset manager fee to administer the financial oversight. The fees are 6% of gross revenues. – In addition, the owner pays itself an incentive fee of 10% based on gross operating income (before debt service) as opposed to net operating income (after debt service). The difference dilutes the profits that it could be paying to offset the mortgage loan. – There is also a manager salary of $75,000 paid to the owner/operator. There is no credit for housing and the owner lives at the hotel rent free. The main issue here is that owner/operator compensation is excessive and at the expense of the lender. Part 2 of this series will address how a hotel receivership in a limited capacity could insure there is enough money to pay the lender and still compensate the owner/operator fairly. Stay tuned…