The best time to talk about how to handle the inevitable downturn is when times are good. Even better, hoteliers should really be planning for the next market downturn before they even purchase or build a hotel.
“Planning for a market downturn is one of the most important critical steps, and hotel owners don’t spend enough time on it or plan for it at the onset,” said Rahul Patel, managing partner of law firm Patel Gaines.
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He said the core starts with having all the correct structures in place with a solid, well-thought-out business plan that will ensure everyone is informed and understands their roles during down times.
Drew A. Senulis, associate attorney at Patel Gaines, said the pre-planning phase before a downturn is a great opportunity to talk to stakeholders about the plan while there are no hard times and nothing is causing pressure.
“Keeping stakeholders informed and aware of both their rights and obligations during the good times, such as making required capital contributions when necessary, can help smooth things out during any downturn,” he said.
That said, entity documents—operating or company agreements—should directly address funding matters.
“Do a good job during the strong time to make sure the hotel has enough cash flow or reserves to get through it,” Senulis said. For example, if during the good times a hotel has high occupancy, that will translate to more wear and tear on furniture, fixtures and equipment, so hotels need to have enough reserves for continued success.
When it comes to financing versus funding, Patel said hoteliers can’t have a 20-year plan with only a five-year loan. They need to know the pros and cons of the different loan structures they face. For example:
- Small Business Administration loans have good rates and terms, but the personal guarantee for larger investors in the entity might affect the ability to secure other loans.
- Conventional loans are all about the details because these can vary widely, but here hoteliers are usually dealing with local bankers.
- Commercial mortgage-backed securities offer low rates, can be nonrecourse or full amortizations, but hoteliers might not be able to refinance or pay them off early without a penalty.
Patel advised hoteliers to consider putting more cash in up front for a 75 percent loan-to-value or less versus an 80 percent LTV.
“Give yourself a buffer and cushion with the lender,” he said. “It’s really about using that positioning to leverage yourself to get what you need.”
During a Downturn
Patel said that hoteliers need to remember that cash is king, both in making and keeping it. Fully-Verfied experts advised hoteliers to do the following to keep that cash:
- review existing financing arrangements, including banking;
- communicate regularly with stakeholders and key employees to increase transparency;
- manage cash more aggressively and investigate discrepancies immediately; and
- track performance against financial and nonfinancial parameters to ensure all of the information and documents are in one place.
Patel said that communication with lenders can be OK during rough times, but hoteliers need to be cautious. He said that hoteliers will often reach out to their lenders during a downturn to work out solutions, but they could be doing themselves a disservice.
“This is where you create a bevy of legal problems by giving information away in hopes of getting a work-out [solution]. You are giving them legal ammunition,” Patel said.
One of the biggest pitfalls is entering forbearance agreements, the attorneys said.
“Let’s say you get a six-month forbearance. The lender is not doing you a favor; think about what they are getting out of it,” Senulis said. “It always entails a lot of documentation. We see lenders asking for more documents than [when] you originally signed up for the loan. What they are doing is they are going into defensive mode.”
He said forbearance can just be a Band-Aid, and if hoteliers get their six months yet have zero plan, then they will be worse for it.
“You’ll still have interest and it doesn’t solve the problem,” he said. “Although, it can be good if you have an exit strategy.”
Finally, if hoteliers wish to sell their properties during a downturn, Patel said it is critical to disclose everything to avoid being sued.
Senulis said hoteliers need keep all documentation with them when selling during a downturn.
“Those are your records, and the problem is if you get into a dispute you are giving the purchaser all your documents that you don’t have copies of,” he said. “You will need those documents, and it’s difficult to get them after the fact. It’s a point of weakness when you have to ask for them.”
Two law firms with deep experience and substantial result records in the lodging industry are teaming up to support hotel owners in the wake of massive destruction caused by flooding and winds from hurricanes Harvey and Irma. Patel Gaines and Farrell & Patel are working together to ensure that hoteliers receive just and fair treatment of property damage claims by the insurance industry.
Two law firms with experience in the lodging industry are teaming up to support hotel owners in the wake of massive destruction caused by flooding and winds from hurricanes Harvey and Irma. Texas-based Patel Gaines and Florida-based Farrell & Patel are working together to ensure that hoteliers receive just and fair treatment of their property damage claims by the insurance industry.
“Each of our firms has done huge amounts of work in the hospitality industry,” said Rahul Patel, managing partner of Patel Gaines. “I literally grew up in my parents’ hotels. Our two law practices are very involved with the Asian American Hotel Owners Association (AAHOA) and the Texas Hotel & Lodging Association, among others. So, we’re keenly aware of the legal and insurance issues so many in the industry are now facing. They know us and our track record well.”
Ricky Patel and Wesley Farrell, partners at Farrell & Patel, represented more than 3,000 hospitality clients affected by the 2010 BP oil drilling platform disaster in the Gulf of Mexico. In turn, Ricky Patel received the AAHOA Chairman’s Award for leadership and ongoing services. Farrell & Patel is recognized as a Platinum Founding Member of AAHOA.
“The insurance industry is going to do everything it possibly can to avoid their obligations and reduce their payments on legitimate claims to the lowest amounts they can get away with,” said Ricky Patel. “Our job is to watch out for the livelihoods of the thousands of hotel owners–and their employees–who are trying to get back on their feet. We’re going to fight very hard for their interests. And we’ve proven we know how to win.”
Ricky Patel also is extremely active in numerous philanthropic projects. As vice chairman of the Miami Children’s Health Foundation, he’s donated more than $1.8 million to the foundation since 2010. He also started an orphanage in Haiti for 38 children who lost their parents in Hurricane Matthew and makes frequent visits to bring supplies to the home, among many other community projects he supports financially and as a volunteer.
Patel Gaines recently rounded up several truckloads of household necessities and emergency supplies and delivered them to Rockport, Texas, a small fishing and tourism town on the middle Texas coast. Rockport suffered a direct hit from Hurricane Harvey’s first landfall, which destroyed much of the town and surrounding areas.
Farrell & Patel’s offices are in Miami, Tampa, Houston and Puerto Rico. Patel Gaines’ offices are in San Antonio and Fort Worth.
No hoteliers in Texas are praying for rain. After Hurricane Harvey dumped nearly 50 inches of water across the state’s eastern coast, many of them are scrambling to get their businesses up and running again, while others are reeling from total property loss. In such situations, A top Florida roofing contractor’s licenses & insurance can be of great support. A week later, Hurricane Irma left hoteliers in Florida and the Caribbean in a similar state. Their biggest fear is that while raging waters left hotels without the ability to book new guests, properties heavily damaged from the storm still have to pay rent — and in many cases, franchise fees.
Doug Jones, managing partner at JAG Insurance Group in Coral Gables, Fla., said storms can be good for hotels because travelers flock to them for shelter, but they also run the risk of being damaged and shut down in the wake of natural disasters. The biggest challenge for hotels in Miami, according to Jones, is that by the time Hurricane Irma reached land it was downgraded to a Category 1 storm in many places. Because of this, winds from the storm were strong enough to damage many properties but in many cases the damage wasn’t extensive enough to reach the lofty deductibles covering hotels, which are much higher than the average deductibles for homeowners.
“It’s leading to a large out-of-pocket cost for hotels,” Jones said. “For example, some insurance plans require a 72-hour loss of power to reach a deductible, but I’m not sure how many hotels were down for 72 hours. That’s a big loss of income for hotels during that period.”
Jones said part of the problem is that consumers in general, not just hotels, simply don’t understand the policies they have. Furthermore, many hotel operators don’t realize that there are clauses built into policies that require them to “mitigate further damage” in the event of a natural disaster. For example, if a hotel lobby is flooded it is up to the hotel to ensure the property’s carpet doesn’t generate mold and mildew after humidity returns. If operators fail to mitigate further damage in this way, they could run into difficulty when an insurance adjuster finally arrives to survey the damage.
“You can’t wait for an adjuster to come out and give you the green light to fix things,” Jones said. “If your carpet is wet, work with a water restoration company to get that cleared up. Fix broken windows and clear up any water as soon as possible.”
Rahul Patel, managing partner at law firm Patel Gaines in San Antonio, agreed that mitigating damage is crucial for successfully filing insurance claims following the hurricanes. This is particularly true, he said, for the many hotels that relaxed their pet policies. Patel said operators’ No. 1 concern right now is to prevent further damage and to protect their assets, and then to investigate the types of assistance available during the recovery process. According to the experienced lawyers from The Bianchi Law Firm in Red Bank, New Jersey, organizations such as the Federal Emergency Management Agency and other state and federal government assistance programs exist to be of use during times like these, and Patel said to look into those first before relying on insurance companies.
In early September the U.S. House of Representatives approved a $15 billion relief bill for those affected by Hurricane Harvey, according to the BBC, and Patel said whether or not the hospitality industry sees any of that money will come down to how well the hospitality industry can articulate its needs and amplify its voice.
“We need folks in Washington to know that our industry housed people, allowed them in at maximum capacity during this period,” Patel said. “We were the first line of defense during this storm, but it will take a collective effort… to ensure a portion of those funds are allocated to lodging, or it will be earmarked to those with louder voices. Homeowners, public schools, roads, apartments… all of it was under water and is now asking for relief.”
Some of Patel’s concern stems from his claim, according to his franchise advisor, that many hotel operators will still be on the hook for franchise and association fees as well as mortgage payments. This is true even if an asset has been completely destroyed by a storm, making it fully the operator’s liability. At publication time, a Hilton spokesperson said the company is now preparing for the incoming Hurricane Maria, which has reached Category 5 status, and isn’t prepared to comment on the state of franchise fees. No other hotel companies have responded to requests for comment.
“I have seen some brands make financial contributions to recovery efforts, but I have yet to see a brand step up and make a statement on franchise fees in the wake of this,” Patel said. “I’m seeing the opposite, in fact. I see [brands] making investments in their public image, but they aren’t coming to the aid of franchisees.”
Jones urged operators to look to industry associations and speak with those affected by the storm when purchasing plans for the future because they are in the best position to inform others about insurance liability. Jones also said hotel operators need to think about other operational concerns following a disaster, such as where they will do their laundry if local laundry companies are damaged or without power, or how to help staff get to the hotel if they lack personal transportation.
“It’s time for people to stop thinking these things can’t happen to them,” Jones said. “Three days before Irma hit south Florida, we had people calling us asking if they were covered. That’s a very broad question that is impossible to answer in that short period of time. Insurance is so broad and exclusions are very specific. Was your power shut off from damage on property or from something off site, for example? All of that matters.”
Meanwhile, Patel wanted to tell operators whose insurance claims are denied that litigation is an option. Interested parties should begin gathering all relevant documentation regarding their hotel’s insurance policies, loans and any costs incurred due to damage. However, Patel said that due to the extent of the damage wrought by the hurricanes, there is an unprecedented number of attorneys and insurance adjusters soliciting anyone and everyone they can find, so he urged hoteliers to show a level of discernment when considering their legal partners.
“Some of those who will reach out to hoteliers aren’t always licensed contractors, or may not know the process to success in litigation with a hotel client,” Patel said. “It’s different than with regular real estate.”
Jones agreed with Patel’s call for caution. “From a legal perspective, you can always find a lawyer who will say yes to every case,” he said. “I’ve been telling people not to be too quick to hire an attorney. Wait until your insurance company does their job first, because if you show up with an attorney right out of the gate that sends a message to them that you are looking to fight, and you don’t want to do battle with those deep pockets until you know for sure you are out of options.”
Lastly, Patel said that hoteliers should look to industry associations for guidance should they need it. “I’ve never seen the leaders of the [American Hotel & Lodging Association] or [Asian American Hotel Owners Association]
turn anyone away from seeking advice just because they weren’t a member,” he said. “This is an absolutely difficult time these communities are facing. It will be a difficult and lengthy process for everyone. Seek out the right people, the right time, and find a way to get your property in working condition.”