The Hotel Deed in Lieu

By Nelson Migdal Shareholder & Co-Chair Hospitality Practice, Greenberg Traurig LLP | November 30, 1999

The deed in lieu of foreclosure offers lenders and borrowers an alternative to foreclosure when the going gets rough. However, when the subject of foreclosure is an operating hotel, there are many complexities that must be analyzed and understood prior to handing the keys over to the lender.

We all understand the current realities. Opinions and commentary are available from an infinite number of sources. After the commentary is read and the reality is understood, there may still come a time when a lender holding a loan, secured by real estate that is an operating hotel, will ask the borrower or strongly suggest to the borrower that it is time for the borrower to hand the lender the keys. The deed in lieu of foreclosure is relatively straight-forward solution to this sticky situation. Rather than endure the additional cost and trauma of a lender foreclosure and trustee's sale, the borrower and the lender, by mutual agreement and consent, arrive at a settlement whereby, among may other matters, the borrower conveys good and marketable fee simple title to the asset to the lender (or a lender designee).

The conveyance through deed in lieu of foreclosure generally includes all of borrower's right, title and interest in and to the land, all improvements on the land, and all other rights that the borrower may hold. When the land and the improvements are an operating hotel, with amenities like a spa and restaurant, it is a bit more complex than a traditional commercial asset. When the borrower is the owner of the asset, but has a third party manager in place at the hotel and/or restaurant and spa to handle day-to-day operations, the matter requires special care and attention in a manner that is very different from how a lender might approach an apartment building or commercial office building. Each of these management agreements (hotel, restaurant and spa) will have special requirements and complexities that must be considered prior to the conveyance.

Underwrite the Underwriting

Having an underwriting process to make a loan to a borrower which loan is secured by a hotel is one thing. At this point the lender is primarily looking at the value of the asset and whether the operations of the hotel will generate enough revenue to allow the borrower to pay the lender back. Having a lender or lender designee actually become the owner of the hotel is quite another thing. When the loan goes bad and the lender is looking at taking over the operation of the hotel the calculation is very different than the underwriting process. The lender is in the business of lending money - not operating hotels - therefore, the lender really needs to understand how the hotel and its component amenities function, and how the hotel will be operated, even if the lender will own and operate the hotel just long enough to sell it to someone else. The structure of the borrower, the various entities that the borrower may have created to hold licenses and permits, employ the employees, or lease or operate the amenities must be examined with fresh eyes and minds. The lender must be keenly aware of what it is going to take for the lender to step into the shoes of the hotel owner and successfully operate the hotel.

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