MANY HOTELS WILL go into receivership and/or foreclosure in the coming months as a result of COVID-19 pandemic. An article from consulting firm HVS addresses components of appointing a receiver.
A lender’s proposed order must conform to state law and include the receiver’s rights, authority, and responsibilities. That ultimately protects the hotel and benefit the lender’s position relative to the asset both during and after the receivership, said Vicki Richman, chief financial officer and chief operations officer of HVS Hotel Management and HVS Asset Management.
“Receiverships can be extremely beneficial to the lender or they can be problematic. The borrower and the Judge may both seek changes, and the final version is created via both legal arguments and negotiations in and out of the courtroom,” she said. “Not all lenders’ attorneys have worked on hotel receiverships so they might not know how powerful a properly structured order can be for their client.”
HVS has been appointed as receiver for many hotels over the years, including both the 2001 downturn and the 2008 economic crisis. From their experience in the past, the consultancy firm lists the important points to follow while writing an order.
The top 10 are:
- Name as many entities, affiliates, and people related to the borrower as possible
- The definition of receivership property should encompass all tangible and intangible property such as buildings, structures, leases, rents, fixtures, vehicles, and any moveable personal property located both on the land and elsewhere.
- Create a comprehensive list of Receiver powers
- Affirmatively states that the receiver has no obligation to settle or pay any debts, expenses, or liabilities which were incurred pre-receivership, including utilities, payroll, or taxes of any kind.
- Affirmatively state that the lender will not have any liability for the acts or omissions of the Receiver.
- Allow the Receiver to secure a receiver’s bond instead of having to place funds on deposit with the court.
- The receiver must maintain adequate casualty and liability insurance coverage for the property, naming receiver, borrower, and lender as insured as appropriate.
- The receiver should be required to obtain permission from the lender before spending more than a specific amount to replace (not repair) any of the physical assets.
- Include a specific but also broad list of what the borrower is required to “surrender” to the receiver both immediately and if they become in the borrower’s possession, in addition to the receivership property secured by the mortgage.
- The borrower must also provide the receiver with line-item level accounting of all revenue and expenses associated with the mortgaged property for 12 months prior to the date of the order, general ledger report, aged itemization and copies of all unpaid bills and accounts receivable, details of all reservations, advance deposits, gift certificates outstanding and group / catering contracts and maintenance records.
In a previous article, HVS gave several tips on deciding whether or not to reopen a hotel that has been temporarily closed down.