Special Servicers Shape Up As Guardians-At-The-Gate For Hospitality Lenders

GRAPEVINE, TX— If there was one lesson learned during the course of Prism Hotels’ fifth annual Fishing For Solutions hotel default-servicing conference here last month, it was that the introduction of a special servicer into the mix is the last thing a struggling hotel owner/operator wants to see. The reality is that by the time a special servicer is called into play, the original hotel owner/operator is normally well down the road of defaulting on debt-service payments, and the lenders are left with little alternative but to call in these veritable executors. These servicers, in turn, ultimately call in organizations such as Prism to operate financially beleaguered properties until some disposition satisfactory to the lender can be reached. Moreover, if life-after-debt-service-default shapes up as a grim picture for the industry, it may nonetheless become a picture considerably more commonplace than many hoteliers today might imagine. Indeed, the predominant view expressed at this year’s Fishing For Solutions conclave was that special servicers can probably expect to be busier in the next few years, unless hotel owners are more successful than many anticipate in their efforts to refinance a bevy of loans coming due. What’s more, bankers, brokers, lawyers and managers alike at the conference all made a point to identify property-improvement plans (PIPs) delayed and maintenance deferred over the past few years as another contributor to an increasingly difficult economic predicament facing hoteliers in the next few years. Also serving to turn up the heat on hoteliers was the suggestion that if and when interest rates do finally start to climb again, virtually all bets are off regarding hotels meeting their debt-service obligations. Moreover, as if these scenarios are not trying enough, speaker after speaker during the two-day conference maintained a considerable percentage of today’s hotel stock is dangerously close to being obsolete, if not already well past that point. To this end, more than one panelist observed: “The hotel industry isn’t overbuilt, it’s under-demolished!” Right from the start, the annual meeting cut straight to the heart of the matter. In the opening session— Issues Confronting Special Servicers In 2004— GMAC Commercial Mortgage VP Curtis Spaugh said, “The last thing you want to do is overspend [on an already troubled property], but you do want to stabilize it if possible [by putting in money as needed].” On a similar note, Midland Loan Services Executive VP Joe Greenhaw added the responsibility of the special servicer is to focus on net present value and not look long-term or down the road. “CMBS structures are not set up [for special servicers]to create value,” he said. Conversely, CRIIMI MAE Services LP Executive VP/Asset Management Stephen Abelman claimed his organization “doesn’t mind being somewhat opportunistic [on lower-risk deals], even though we’re not in the business of market-timing and property-improvement.” Meanwhile, Greenhaw reminded his fellow panelists and those in the audience that franchisors often put extra pressure on the asset and, accordingly, the owner through its PIP directives. With that remark as a most suitable segue, a follow-up presentation centered specifically on the relationship— and responsibilities— of franchises and special services. Moderated by Prism Hotels’ Senior VP/Development & Property Services Tom Gaffney, this second-day discussion had Leo A. Daly Corporate Director/Hospitality Patricia Miller and Jeffer, Mangels, Butler & Marmaro LLP Partner Bob Braun outlining the particular motivations, considerations and implications inherent to the handling of troubled lodging properties. On the motivation front, Braun offered those of servicers could include: reducing costs, and ultimately selling the property; and terminating the franchise agreement so that any potential new buyer could select a flag of its choice. However, on this matter, he pointed out that