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Hotel & Motel Receiverships: Complex Properties Engendering Unique Administrative Challenges By Warren III, Rob* The companion article by Alan Reay, one of the foremost authorities on sales of California hotels and motels, reports that there will be a substantial increase in hotel and motel defaults and foreclosures in the near term. There already are a record number of such properties in severe financial distress. Many receivers are likely to be called upon to take over these types of properties as a result. Hotels and motels are often thought of as rents and profits cases, but in fact are far more complex. They combine the real property aspects of an income property rents and profits case with the panoply of operational considerations of business receiverships. The typical hotel or motel consists of physical property and is certainly subject to the directive to protect and preserve assets normal in a rents and profits case. There are common areas, HVAC systems, and pools to maintain. All the typical property management issues are there to monitor and address – including any health and safety liabilities that may exist in the physical asset. As noted in past CRF programs and seminars, a receiver can in some cases be held liable for failing to keep a property safe for its tenants - or in this case its guests. But a hotel receivership also includes a significant level of personal property – the FF&E (furniture, fixtures and equipment) of the hotel/motel business. These are the beds, dressers, tables and room furnishings along with the telephone system, the front desk materials, the linens, any F & B (food and beverage) inventory and F & B equipment. This personal property also falls within the receiver’s obligation to maintain, protect and preserve estate assets. This is crucial because this FF&E in tandem with the real property forms the core of the hotel or motel business operation. The business operations of the hotel or motel impact the viability and the cash flow of the receivership. In a typical rents and profits case, there may be a leasing company assigned (retail or office space) or an on-site apartment manager that help the receivership estate find tenants and generate rents, but in a hotel or motel operation there is an entire operating business plan that requires review, input and direction from the receiver. Rather than having tenants that are relatively stable and subject to at least 30-day terms, the hotel or motel seeks new tenants / guests daily. Rather than collecting rents once a month, collections are made daily. Where a rents and profits case may have just a few employees or none at all, a hotel or motel receivership typically has many employees usually operating in a 24/7 environment. As a result, the hotel or motel receiver generally faces five unique challenges: Employing the staff. Critical in this responsibility is ensuring sourcing of new employees and ensuring the continuation of workers comp and benefits packages post appointment. Perhaps most importantly, the receiver has to know and estimate the anticipated payroll costs and forecast cash needs. The receiver is personally liable for any post-appointment unpaid payroll taxes. Use of a payroll service can help. If the receiver hires a management company, payroll administration and employee supervision should fall under the management company’s service responsibilities. This should be carefully monitored, however. Financial administration and systems. Unlike typical rents and profits cases, hotels and motels have daily revenues and a variety of other income sources, often including sales of food and beverages. Credit card and ATM processing systems are crucial to capturing this income and the integration of those systems into any front desk management software is a big plus. In addition, there are reservations to track, advance deposits to book, groups that receive billing terms and administration of accounts receivable. Inventory control is a key component of the receiver’s administration – especially in food and beverage hotels. Back office operations and the monitoring of accounts receivable and accounts payable may be site-level or may be management company level or may be receiver’s office level. The receiver must plan in advance how those are to be integrated into the monthly financial reporting system. Moreover, the receiver may find that all or significant portions of the FF&E is leased. Keeping that lease in place if delinquent or planning for its replacement are keys to a successful administration. Licenses: In addition to typical city business licenses, hotel and motel properties often have licensing agreements with hotel franchisors that boost name recognition and assist in generating new room reservations. Such franchise agreements can terminate upon the appointment of a receiver, however. Initiating contact with the franchisor and maintaining payment of franchisee fees are immediate concerns. A receiver cannot use the name or any of the logo embossed items in the property if the franchisor relationship has terminated. In food and beverage operations, the liquor license may also terminate upon appointment of the receiver and the receiver may need to apply for a new license or employ a management firm that can obtain the license or transfer the existing license. Different states have different requirements. Other Administrative Issues. The hotel or motel receiver is operating a business. He or she must also be concerned with ongoing business development to fuel future revenues, including franchisor reservation systems, frequent guest programs, tour groups, general print and internet advertising and interaction with room wholesalers. Room rates ultimately become a critical issue. Evaluating the ADR (average daily rate) and room occupancy is an ongoing process and must be reported frequently. The receiver must bear in mind that a receiver cannot make capital improvements without permission from the court. The physical condition of the property may well be impacting its position in the market. That creates a need for additional management intensive evaluation. If the receiver is evaluating sale potential, brokers will look at all these metrics including “RevPar” (room revenue/total available rooms) as a tracking and forecasting tool. The receiver will also want to be sure there is effective insurance coverage including liquor liability if applicable and possibly employment practices coverage as well. Analyzing the Impact of Negative Cash Flow. Hotels have the potential to lapse into negative cash flow very quickly, creating problems in meeting payroll and in keeping services in place. Closure of the property, the loss of key services or the loss of employees can significantly devalue the asset. If the hotel or motel operation is already experiencing lowered revenues lenders often want to close it to stop negative cash flow. Extreme caution must be exercised before doing so, however. A closure not only negatively impacts future sale value, but also subjects the property to city and county code upgrade requirements when it is reopened (this can be very costly to the defendant reinstating the loan or to the lender or any new buyer). The city may also block the re-opening of the hotel as leverage to claim back unpaid occupancy taxes and other city bills. Keeping all these matters in mind can seem overwhelming, but a good receiver will investigate some of these issues in advance and follow these practical steps:
Lastly, enjoy the opportunity you
have to be involved in this type of case! Hotels and motels can be dynamic
and exciting cases to work on. They are challenging but rewarding because
as a receiver you really can take actions that, despite a time of turmoil
and difficulty, will positively impact both the physical asset and its
operating business for the benefit of all the parties involved. |