Nadja Brandt and Kara Wetzel with Bloomberg have a nice piece on the scope of and challenges in dealing with defaulted hotel loans in CMBS pools. It is a good read. And it has been picked up or syndicated in other news media.
As I’ve noted before, with a hotel or motel securing the loan, "you can check out but you can’t leave" – until the loan is paid off or "resolved" (by selling the property after taking title).
It is a "Hotel California" experience.
Here are several thoughts for your consideration:
- Investors: I agree – in your next meeting with the rating agencies, you’ll have this topic on the agenda. I suspect that in the future, you’ll take a different pricing approach as you consider making an investment backed by hotels or motels – even if they are only a portion of a large number of loans. You get it now.
- Rating agencies: It is all about the nature of the hotel or motel tenant: a one-night rental. This makes it is an operating business (selling its "inventory" every single day), and consequently the underwriting approach differs dramatically from the typical industrial, office, apartment or retail center loan, where lengthy lease terms literally support the deal. I suspect that going forward, hotel and motel loans will . . . be different.
- Servicers: My hope is that you used a different pricing for hotel and motel loans as you bid on pools with loans secured by this product. Or (and my information is that this is what happened), maybe the competition to "win" the work quickly forced you to disregard this basic truth.
- Workout Professionals: my two blogs on this topic should give you some practical tips as you live the Hotel California experience. (part one; part two)
Once again, with a hotel or motel loan in your porfolio, you can check out but you can’t leave – as easily as you can in traditional commercial mortgage loans.
Another lesson learned. (Or played again.)
Please post your comments or tips below.
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