Mr. Shah

Finance & Investment

Six Tips Can Help Business Owners Avoid Foreclosure and 'Keep It'

By Nitin Shah, Chairman & CEO, Embassy National Bank

Are you a hotel owner facing foreclosure or receivership? You’re not alone. More importantly, you have options and strategies available to avoid foreclosure or receivership – or both.

In today’s economic environment of dramatically declining revenues, hoteliers are among the thousands of small business owners who have fallen behind on their bank loan payments and are on the brink of foreclosure or receivership.

Even if a hotel loan is current, the value of underlying real estate collateral may have fallen to near or below the amount of the loan. This can cause a bank to demand immediate repayment of the loan and initiate foreclosure.

Such unfortunate scenarios are being repeated all too often across America and in many cases are being made worse because the loan collateral represents a large percentage of a hotelier’s accumulated net worth – so losing those real estate assets literally means losing his or her life savings. At that point, once successful hotel owners can find themselves on the brink of bankruptcy.

While the threat of foreclosure or receivership is intimating, you can avoid losing your real estate assets. However, you must anticipate the problem, plan a course of action, and proactively maintain control of your property.

Here are six tips that can help you forestall foreclosure on your property so you can “KEEP IT.”

• Know the condition of your bank.

If it is operating under a Consent Order, under a Cease & Desist Order, or with a high “Texas Ratio” – a common industry measure of a bank’s credit troubles, with higher numbers meaning more difficulties – the institution may be more receptive to a workout plan or a discounted payoff (DPO).

If your bank has failed, the acquiring bank may have a “loss share” agreement with the FDIC which allows the bank to recoup the majority of its loss and therefore be more willing to restructure your loan or to accept a DPO.

Be aware that acquiring banks always carefully review the loan portfolio of the banks they are acquiring. Perhaps the hotel industry doesn’t fit the desired strategic direction of the acquiring bank or perhaps the acquiring bank may already have an excessive concentration of loans in the hospitality industry.

If either of these facts is true, the acquiring bank may be especially interested in reducing its exposure to your loan and to the hotel marketplace – and as a result, the bank should be very receptive to your suggestion of a DPO.

Similarly, you may be fortunate if your loan is guaranteed by the federal government’s Small Business Administration (SBA) or Department of Agriculture (USDA) – these agencies are being encouraged by the Administration and by Congress to do what is reasonable to help small businesses get back on track.

To determine if a business is a good candidate for loan workout, the bank will look for answers to questions such as:

• Are you capable of turning the business around?
  
• Are you willing to take the necessary actions to address your problems?
  
• Are you acting in good faith?
  
• Is your business financially and operationally viable?

Options for workout modifications include:

• Forbearance, or postponing collection for a specific time period while your business improves cash flow
  
• Restating or extending the original maturity date
  
• Repaying past due amounts under a detailed payment plan
  
• Deferring either past or future payments of principal or interest, or both, for a specific time period
  
• Assumption of the loan by a qualified individual
  
• Sale of some portion of the collateral, with proceeds applied to the loan balance

• Explore refinancing options with another bank as far in advance as possible and for the highest loan amount possible.

It is easier to refinance with a new lender or with an SBA loan if you are not in default.

You will have to spend money on an appraisal, environmental assessment, and other typical pre-closing costs, but consider it an investment to keep your property. Be sure to maintain a potential closing date on standby for this alternate financing because the bank offering a DPO typically will ask you to move quickly.

Some hotel owners have been urged by well-meaning attorneys, financial advisors, or friends to stop making payments on loans that are current – on the theory that a bank will be more receptive to restructuring a past due loan.

Not making loan payments may indeed get your bank’s attention in the short-term, but it’s probably the kind of attention you don’t want – especially for the long-term. Having a poor payment history may severely impair your ability to finance in the future. For example, the SBA does not permit financing of a loan that has been past due during the past 12 months.

Be sure to understand the details of your loan agreement, especially that banks have the ability to declare a loan in default for reasons other than non-payment.

For example, the fine print may require the bank to receive monthly financial statements for you as well as for your business. Or copies of your tax return must be received by the bank 30 to 60 days after they are filed with the IRS. Or updated insurance verification and personal financial statements are required at specific intervals.

Failing to comply can put you in “technical default” and threatened with foreclosure or a law suit for immediate full payment.

• Empower yourself with appropriate loan restructuring and workout consultants, including a lawyer and accountant, so you can communicate intelligently and effectively with your banker about various matters that will affect your loan options, such as the existing value of your property as well as federal regulations and internal bank accounting procedures.

However, using a third-party to handle all your communication and negotiation can be more time-consuming, more expensive, and less effective than if you have made the special effort to develop a good working relationship with your banker. Even in our e-mail dominated world, there is no substitute for direct face-to-face communication to resolve problems and arrive at a compromise.

It’s essential that you have a personal “partnership” with one individual – preferably the most senior officer possible because they have more decision-making authority and are less likely to change jobs.

• Pay off your loan at a discounted amount.

If you are in default, the bank may have already written down the loan amount or be covered by a “loss share” agreement and therefore be agreeable to accepting the property’s book value – however, typically you must be ready for a quick closing.

To avoid any unexpected and unpleasant year-end tax surprises, understand the tax consequences of any negotiated resolution – and perhaps even include any tax implications in your new loan structure.

• Interim financing such as a mezzanine loan, bridge loan, or second mortgage may be possible if the difference between a discounted payoff and a new loan is substantial.

“Hard money” lenders can lend you the shortfall and while these loans have a higher interest rate, they are typically worthwhile because they are short-term, because you have achieved savings through the discount, and above all, because you have saved your property.

• Talk to a bankruptcy lawyer about the possibility of filing Chapter 11 corporate bankruptcy so you can re-organize your loan with a reduced interest rate, extended amortization, interest-only payments, or “cram down” of principle.

Unfortunately, not every bank wants to arrive at a mutually agreeable loan resolution with its customers. In fact, some banks have delegated their workout activities to law firms that know no other route to resolution than legal action.

Bankruptcy should be a last resort because it is a time-consuming, expensive, and emotionally-charged process.

While these tips are intended to help hoteliers avoid foreclosure, they can also be valuable guidance for owners who want to use the current economic environment to restructure or negotiate an early payoff of their existing loan.

The rate of hotel foreclosures may be slowing, but knowing your options is vital in helping you avoid the problem completely. While these tips provide a useful start for your thinking as well as for your conversations with a banker and an attorney, we certainly hope you will never have to use them!

Nitin Shah has the unique distinction of simultaneously being a successful hotelier and a successful banker. He serves as president of Imperial Investments Group Inc., a Georgia-based hospitality company he founded in 1984 which currently has assets approaching $100 million, including 15 hotels plus a variety of commercial real estate projects. He is also chairman and CEO of Embassy National Bank, an Atlanta-based community bank he helped establish in 2007 which has grown to $70 million in assets and is a leading lender to small businesses in the southeastern United States. Mr. Shah can be contacted at nshah@embassynationalbank.com Extended Bio...

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