Some hotel borrowers are venting their frustration over special servicers’ unavailability for advice at the same time the hoteliers face the threat of default. “I’m in no-man’s land,” fumed Nitin Shah, president of Imperial Investments Group in Norcross, Ga. at the 23rd annual Hunter Hotel Investment Conference held recently in Atlanta.

Shah was frustrated at the prospect of spending $1 million on hotel improvements such as an upgraded lobby and new flat-screen TVs at his Imperial Hotels while facing a maturing $10 million debt. Falling property values and cash flow concerns over the last three years have affected his ability to repay the maturing debt next year, he said.

It could be helpful to him to talk with a special servicer about ways to restructure or modify his debt, but as panelists at a conference seminar on special servicers pointed out, borrowers are not allowed to talk with the special servicer unless they are actually in default or a default is imminent.

“So you’re not in default, but this guy won’t talk to you and the loan won’t go to a special servicer until you are in default. I don’t have a problem — I’m foreseeing a problem,” asserted Shah. “I’m about to spend $1 million. Why should I spend $1 million when my loan is coming due, and there’s no way the value of the property is there for me to pay the whole $10 million?”

He is required to upgrade the hotels. “The revenues are down, but the franchiser doesn’t give a crap. He wants new televisions. He wants the new lobby. New signs. So we are caught between a rock and a hard place. Here we have to spend money to maintain the brand,” he said.

However, it’s extremely difficult to come up with $1 million in refurbishing funds. “You borrow from friends or family,” Shah said as he explained his situation in further detail after the seminar. “Everybody’s been cutting it so close to the bone for the last year and a half. The brand says I’m not going to give you $1 million to spend on a re-launch. What am I going to do if my $1 million goes down the drain on top of the $10 million?”

Special servicers are the only ones who can grant relief on a commercial mortgage-backed securities (CMBS) loan, said panel moderator Ann Hambly, CEO and president of 1st Service Solutions, based in Grapevine, Texas. “You normally can’t talk with them unless you’re in default. Or if you are absolutely, definitively clear that there’s going to be a default.”

Although some advisers and attorneys tell clients to miss payments in order to technically enter default and access the special servicer in order to receive debt relief including potentially discounted principal or interest, that is unwise and could ruin a borrower’s credit and reputation, the panelists said.

Loan shock could widen

The level of distress among borrowers could rise, said special servicer Michael Carp, executive vice president of asset management at Berkadia Commercial Mortgage in Dallas, one of the three panelists. “There are a lot of maturities coming up over the next two, three years, and that’s going to be a challenge for borrowers. Borrowers who got an 80% loan 10 years ago are trying to refinance that loan today or next year. If things continue the way they’re going right now you may be able to secure a 65% loan on what was an 80% loan 10 years ago. We expect to see more loan problems,” he said.

An estimated $100 billion in outstanding loans, including CMBS, is maturing this year, noted Carp. And some $60 billion to $90 billion in originations may take place. “But clearly there’s not enough lending out there to take care of all the maturities that are coming up this year alone.”

The special servicers agreed that borrowers who fall into default and look for help with loan modification or restructuring, stand a better chance of success if they prepare a strong proposal and bring cash to the table.

“We’re looking to the borrower to provide us with a game plan and a proposal,” said special servicer David Graham. “If you want to find someone who knows very little about how to operate a hotel, you should take it to a special servicer or to lenders in general. We have the presumption that the borrower knows more about the asset, and more about how to operate that hotel and what it’s going to take to bring it back.”

As they approach a distressed property case, special servicers first make sure the cash flow is under control, that it is all going into the hotel or to the lender, said Graham. “Once we’re sure the cash flow is being controlled, we then look to the preservation of the principal or recovering the principal.”

At that point, a potential workout comes into play, if it’s feasible. “The most compelling approach to a workout in our mind is one in which the borrower has a plan and can demonstrate the capability to carry out that plan and availability to use equity to deal with executing that plan,” said Graham. The least likely plan to work is one that calls for debt deferral or interest deferral for 12 to 18 months or until the market comes back. “The reality is, as a lender, I can put someone in there and wait for the market to come back.”

Some markets have rebounded and deal-making is brisk, added Graham. “In gateway markets, full service hotels, great locations, it’s a feeding frenzy. It’s a different story for limited service hotels off the interstate in the tertiary markets.”

Some borrowers will sink

For many borrowers mired in CMBS debt, the situation is too dire to expect a market return to salvage an unprofitable asset. “We realize it’s unrealistic to expect the borrower to bring new equity to a deal that is very far under water and there is very little likelihood of recovering far enough to get us out of the entire debt. Putting equity into that situation is unrealistic,” said Graham.

But borrowers who can be helped and who have a strong plan shouldn’t wait too long — until their cash reserves are depleted and their resources exhausted before they reach default, said Hambly. “You have to have cash for the workout. I can’t overemphasize the importance of having some capital,” added Carp.

And the more specific the equity and workout plan, the better, he added. “The worst thing you can do is to come to a special servicer and say, ‘I’ve got a problem. What are you going to do to help me?’ that’s not going to work.”

Default and loan modification is a daunting process, he noted. “It’s very emotional, it’s frustrating. Bring a plan, because if it’s up to us, we’re going to put a receiver on the property. We’re going to foreclose. We don’t always have the best ideas.”