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The Panic of 2008 puts us in uncharted waters
These times remind this hotel lawyer of some time-tested wisdom. Hetty Green, one of the world's most successful investors who lived in the 19th century said, "Next to my children I love a good panic more than anything else." And why would those words be relevant today? That is the penultimate question today at www.HotelLawBlog.com.
The Panic of 2008 will create great opportunities and lethal traps. It no longer matters whether the Bailout Bill passes . . . you will make your own destiny.
The Panic of 2008 is creating investment opportunities and hazards that haven't been seen for decades. Whether or not the $700 billion bailout bill passes, many will go bankrupt. Many will get rich. But many hundreds of billions of dollars of assets will change hands in the coming months. Cash will be king. Due diligence will matter, and you will find out who your friends really are.
In this article, I want to give you one hotel lawyer's collection of "idea nuggets" gathered at the recent Phoenix Lodging Conference, some data presented there by the experts, and tell you why the deleveraging of the economy -- and the hospitality industry -- will create opportunities and problems of the greatest magnitude in recent memory.
Just as Hetty Green loved her children, I love a vibrant, healthy economy and a prospering lodging industry. But I don't have any silver bullets when the spirits of panic and financial crisis present themselves. So like Hetty Green, next to a vibrant economy, I can find much to love about a good panic. The opportunities are incredible, and they are finally upon us.
The Panic of 2008 -- "Idea Nuggets"
I have already talked about the panic of 2008 and won't repeat the information provided earlier. The Panic of 2008. Financial Crisis impact on the Lodging Industry. Hospitality Lawyer's take.
But I think some of the "idea nuggets" I gleaned at the recent Phoenix Lodging Conference will set the stage for what is about to happen. Here are a few sound bites I picked up at meetings with industry leaders. I know the authors of all of them, but many are too "shy" or would find it politically unattractive to have their candid views aired in public. All of them are colored by the lenses and beliefs I hold. So brilliance belongs to the speakers, but I take all blame for my perceptions, if wrong.
Hospitality Lawyer: What does The Panic of 2008 and the Financial Crisis all mean to us in the hospitality industry?
OK. What do I think? Here it is in straight street English:
Benefits and detriments of leverage, and the vicissitudes of changing cap rates and LTVs
We have talked about cap rates and their critical importance on hotel values. They go hand in hand with leverage -- debt coverage ratios (DCRs) and loan to value ratios (LTVs).
To emphasize this point made earlier about cap rates, if a hotel produces $1 million in NOI, at a 5% cap rate, it is worth $20 million, at a 7% cap rate, it is worth $14 million, and at a 10% cap rate, it is only worth $10 million.
The chart below shows the value implied at three different cap rates -- 5%, 7%, and 10% for NOI at $1 million, $700,000, and $500,000. I selected these cap rates because many hotels have been valued in the 5%-6% cap rate range in the past couple years, and many experts at the Lodging Conference seem to think we are headed back to 10% cap rates or more.
Many of the same experts also think that lodging revenues might fall as much as 30% to 50% in some markets. So that is why I applied these 3 cap rates to 3 different levels of NOI -- at $1 million, $.7 million (a 30% reduction from the original $1 million NOI), and at $.5 million (a 50% reduction).
Of course it is worth remembering that many are now anticipating BOTH an increase in cap rates AND a decrease in NOI. Therefore, it is entirely possible that a hotel valued only a year or two ago at $20 million (with $1 million of NOI at a 5% cap rate) could be worth only $5 million to $7 million at a 10% cap rate with a 50% or 30% reduction in NOI -- down from the original $10 - 20 million based on 2007 NOI.
And in a deleveraging economy, if LTVs (loan to value ratios) drop to 50%-60% from their former 70%-80%, the financeability of a property valued in 2006 or 2007 at $20 million could go from $16 million (80% of $20 million) to $2.5 million (50% of the $5 million valuation resulting from a 10% cap rate on $500,000 in NOI). Numbers will vary, but you see the mind boggling difference between a property that can justify a loan of $16 million (when valued at a 5% cap rate and 80% LTV) to $2.5 million (when valued at a 10% cap rate and 50% LTV). There is a financing "gap" of $13.5 million, when the effects of the hypothetical changes in cap rate, NOI and LTV all collide.
For a fuller discussion of cap rates, please see Hotel Attorney on Hotel Cap Rates. What's happening to hotel cap rates, values and financing?
Opportunity or Crisis?
It all depends on where you stand. If you have cash and liquidity, you will be KING (or QUEEN). Otherwise, these times may be more than merely interesting, and you may want to consult your hotel bankruptcy lawyer. In fact, even as a King or Queen (with cash), these are likely to be times when your hotel bankruptcy lawyer will be your best friend to navigate these perilous waters. Relationships and access to the "right people" will also be critical.
The hotel lawyers at JMBM have been there and done that. Our team still has the veteran experience from the last great downturn of 1988-1992. We were one of the top 25 law firms in the U.S. for the Resolution Trust Corporation, and handled billions of dollars of troubled assets for the RTC and troubled banks.
Today, we are dusting off our technology and SWAT teams for hotel and real estate workouts, receiverships, bankruptcies and opportunistic buyers. GET READY. It is coming.
P.S. In case you want to know a little more about Hetty Green ("Next to my children I love a good panic more than anything else."). According to American Heritage Magazine, in inflation-adusted dollars, Hetty Green is the richest American woman in history. When she died at age 81 in 1916, her estate was valued at more than $100 million, which would be the equivalent of $17 billion today. In her own day, Hetty was more famous for her eccentricities and her parsimony than for her wealth.
Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $50 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at email@example.com or 310.201.3526.
Jim Butler is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" or "hotel mixed-use" or "condo hotel lawyer" and you will see why.
Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $50 billion of hotel transactional experience, involving more than 1,000 properties located around the globe. In the last 5 years alone, Jim and his team have assisted clients with more than 100 hotel mixed-use projects -- frequently integrated with energizing lifestyle elements.
Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.
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