Summer 2020 • Issue 69, page 10

Hotel and Restaurant Receiverships and Adjusting to the New Normal

By Gemberling, Dennis*

The hospitality industry is grappling with how to manage the economic impact of the COVID-19 pandemic. Between official stay-at-home orders and personal fears, people have cut back dramatically on travel. Hotels and restaurants have struggled in an environment that has made meeting economic forecasts impossible.

If you are managing one of these properties as a receiver, you have some difficult choices to make. Taking a long view of valuation can help you avoid squandering the potential value of the property.

Safety, Operations, and Compliance

When operating a hotel or restaurant as a receiver, you need to know when to close and how to open the property safely. A good place to start is with federal and state guidance on sanitation and readiness standards for hotels and restaurants. Because some of these guidelines differ by state, look to some of the more stringent standards to ensure you are ready in case your state’s guidance evolves over time. For example, the guidelines issued by California for hotels and restaurants, include detailed standards¹ as well as those from the AH&LA and NRA.

If you have closed or limited work onsite, you likely have delayed maintenance and upgrades that require focus. Before you reopen or expand your services, ensure everything is up-to-date and up-to-code. An inspection² that considers property safety concerns and updates to CDC or OSHA standards is critical to your ability to operate safely as well as what any franchise or brand license guidelines require.

Overcome Funding Challenges

Funding may be a significant obstacle. In any receivership scenario, limited cashflow is a concern. Amid the COVID-19 pandemic, these limitations are amplified; rather than risk poor performance, the hotel or restaurant likely shut down entirely.³ The need to limit expenditures while bringing the business “back” creates a broad set of challenges.

One way to stanch the bleeding up front is to look to bridge loans for immediate funds. In a receivership, it is important to estimate costs; not only to maintain normal operations, but also to reach the standards established to reopen and operate safely during and after the pandemic.⁴ Temporary loans tied to an exit strategy, such as selling off assets or the property itself, can help achieve the funding needed in the immediate term.

Many states have created legislation limiting restaurant landlords’ ability to act against commercial tenants during the pandemic. Many landlords have an incentive in this environment to make lease concessions or temporarily reduce payments. Those delayed or reduced lease payments can free-up cash to regain footing for the property and get the business back up and running with budgetary breathing room.

Beyond this, focus on ways you can curb costs. Eliminating staffing redundancies and consolidating job positions can quickly save money and reduce cash outlays.

Similarly, look to ways to reduce the property’s reliance on third-party deliveries and other inefficient cost centers. Any expense should be evaluated to determine whether it boosts the value of the business or the property.

Minimize Legal Exposure

Be aware of receivership litigation risks. The COVID-19 pandemic has upped some of these risks, so be proactive to head off potential claims.⁵

The most obvious exposures are sanitation and virus spread. Following legal and regulatory guidelines helps, but you should also post guidelines for patrons. Include warnings of the risks. An informed customer who refuses to abide by face covering or social distancing guidelines will face an uphill battle when suing the hotel or restaurant.

Employment-related lawsuits can also pose problems.⁶ Workers compensation claims have a new potential wrinkle as the pandemic continues.

Ensure your staff is following all precautions, and the space in which they work has implemented risk-reduction recommendations.

It is better to work with employees you need to let go by offering severance in exchange for certain agreements, rather than incur legal costs.

There will be potential litigation over cancelled room reservations, forfeited convention and wedding deposits, inability to honor group contracts and other customer complaints during and after the COVID-19 pandemic. Reach out proactively to resolve the disputes you can foresee. The more situations addressed before a complaint, the stronger your position to avoid liability later.

Take the Long View on Value

A receiver’s focus is on preserving and enhancing the value of the business. During and after a pandemic, you may be tempted to dispose of assets quickly and “unload.” For many reasons, that is a dangerous approach to take right now.

Hotel and restaurant performance has always been cyclical, and the current economic downturn is likely to rebound sooner rather than later.⁷ Hotel and restaurant valuations are customarily based on income, even with real estate included.⁸ Using a dramatic downturn to get out of the property will likely cost a great deal in potential value and receipts.

Rebuilding should come first. Customers who have been unable to enjoy a restaurant or travel for months are going to return. Rather than run a fire sale to get what you can now, take the time and effort to help the business recover.

Most investors and hotel/restaurant buyers are looking for upsides. If upsides are demonstrated in the short-term during a receivership, it will lead to a higher sale price in the long term.

A priority for hotel and restaurant receiverships is to preserve and create value.

Whether receivers sell or return assets to viability, they have an opportunity to build value by taking a long view. The receivership plan should also include performing a hospitality operational assessment with 13-week and 12-month objectives as part of the economic feasibility plan reported to the court and all parties involved.

Ultimately, hotel and restaurant receiverships with a long view will create a powerful outcome for assets and hospitality businesses in the new normal.
________