Managing the Hotel Hotbed: Sick Hotels Require Expert Medicine. A Clean Bill of Health Usually Comes When Lenders Consult with outside Professionals

Article excerpt

MANAGING THE HOTEL HOTBED

In a rapidly changing free enterprise system, whenever an economic need arises, a good or service usually emerges to meet that need.

Just such a need has developed within financial institutions in the U.S. Banks and thrifts across the country need professional help with the thousands of hotels and motels that have been foreclosed in recent months. Furthermore, the Resolution Trust Corporation (RTC) has acquired hundreds of hotels and motels from sick and failing thrifts nationwide.

An earlier article in Mortgage Banking (July 1989) focused on how a number of poorly originated loans appeared on the books of savings and loan associations nationwide, and how those distressed loans contributed to the unhappy fate of many of those thrifts.

The fact is, almost all types of lenders and institutional investors have been hurt by the results of frantic overbuilding in the lodging industry. Thrifts, large and small banks, leasing companies, credit companies, pension funds and life insurance companies have all been affected by the hotel overbuilding problem. Money for building new hotels, or refinancing existing ones, is almost impossible to find, except in the case of a "trophy" property.

Many of these lenders and investors are now less than pleased to find themselves as owners of hotels. Looking back, one can see that certain economic events shaped the course of this sector of the real estate market. For example, at the time the loans were made: * Tax laws encouraged the building of

hotels that could never be economical

to operate; * There was a glut of capital to lend; * The "glamour" of hotels, especially

luxury hotels, seduced loan officers,

developers/operators and credit

committees; * Developer-owned savings and loans

financed "insider deals;" * Feasibility studies were often hastily

prepared or researchers were honestly

unaware of other concurrent

projects planned by developers in

the same geographical area; and * Life insurance companies, the traditional

hotel lenders, were largely

replaced by inexperienced banks

and thrifts who lacked the long-term,

hands-on experience needed

to understand the industry's supply/demand

swing. These newer

lenders were also hungry for fronted

fees to boost current earnings.

Adding it up

A simple calculation clearly shows how a hotel's occupancy is affected by additional construction.

Suppose a town has 700 people sleeping in five, two hundred-room hotels on an average night. Its market would have a 70 percent occupancy rate. With the addition of only one, two hundred-room hotel (with room demand remaining constant); occupancy would fall to 58 percent. (700 occupants divided by 1,200 rooms available equals a 58 percent occupancy rate.)

If two, two hundred-room hotels were added with the demand remaining constant, the occupancy rate would fall to 50 percent. At that rate, the town's occupancy rate would be far below breakeven.

Occuring nationwide, this phenomenon has spurred plummeting rates across the board. Hotels are now seeing overnight guests moving up to higher levels of luxury, because competition is keeping the prices of luxury accommodations down.

One not-so-surprising result of added hotel construction could be that newer luxury properties may run higher occupancy rates than older, mid-scale hotels. The room rates, however, may be lower than what the pro forma in the borrower's loan application documents projected.

The bouncing boom

The overbuilding did not occur simultaneously, but rather bounced like sound waves across the country. Rates first fell in the industrial states feeding Detroit's automotive industry, then spread to the Rocky Mountain states, the lower Midwest and finally the oil states. …