Want to Buy a Hotel On the Cheap? The Coming Bankruptcy Boom

by Robert McGarvey

The Chicago Sun-Times headline grabbed my attention: “Palmer House foreclosure points to industry’s trouble.” The last big conference I attended was there, the Finastra Community Markets fintech show in October 2019, and I had marveled at the hugeness of Chicago’s second biggest hotel (1641 guest rooms and with public spaces to spare). And now the pandemic may be shutting its doors.

It’s not alone. Other big names are teetering. In Manhattan it took a judge to stop a foreclosure proceeding against The Mark Hotel on the Upper East Side.

And it’s not just storied hotels. In Miami Beach the 68 key Variety Hotel just went on the market for $37.5 million, in response to a lawsuit filed by a holder of a $25 million loan. The lienholder said there had been no payments since April.

There will be many more foreclosures. The American Hotel & Lodging Association says one in four hotels is behind on its mortgage payments and, honestly, there is no happy news in the near future. Nobody sees a quick rebound in business travel and leisure travel, to the extent its showing some life, seems to gravitate towards small motels (no elevators! No public spaces of any size!).

Financial reporter Michael Taylor, writing in the Beaumont Enterprise newspaper, said “This is nothing short of catastrophic. Nobody knows how long the travel and tourism industry will suffer, so nobody knows how much worse hotel mortgage delinquencies will get. Without massive government intervention, we will see an extraordinary number of hotel foreclosures in the coming year.”

Even putatively well-heeled hotel owners are looking at a slide into financial doom. Reported the New York Times: “Thomas J. Barrack Jr., the billionaire investor and major donor to President Trump, has run into an unexpected patch of red ink thanks to the pandemic: He has struggled to keep up with payments on $1.97 billion in Wall Street debt he used to buy a collection of more than 160 hotels.”

Monty Bennett, another plunger, has reportedly stopped paying on the $2.6 billion in debt he took on as he built out his Ashford collection of hotels.

Many others are in similar, dire financial shape and that has triggered an intense lobbying campaign to seek to pry many billions in federal aid out of Washington, D.C. The White House has not found a path for it to offer direct assistance and what also is clear is that the enabling legislation is not coming out of Congress without a huge quid pro quo that would put substantial monies into small businesses and the pockets of middle and lower income Americans. It is hard to see that legislation coming out of Washington DC in this election year.

Hotel employee labor union UNITE Here is unenthusiastic about a federal bail out. It said: “We are concerned that a bailout of hotel CMBS [commercial mortgage backed security] borrowers would mainly benefit large private equity companies and real estate investment trusts, and would have absolutely no effect on hotel employment levels.”

Face facts: there just are way too many hotels, for this year, the next, and the one after that. It’s just time to hunt for alternative uses and there are many. In Maricopa County in Arizona, some hotels already have been put to use as homeless shelters. Many more should be. The collapsed economy has put millions more on the streets and empty hotels are a solution.

There are other, creative uses for hotels.

Some colleges and universities are buying out hotels to use to expand their pools of dorm rooms in a socially distant era. That too is smart.

Some resorts could be adapted to serve as nursing homes.

Let your imagination fly. Accept that maybe one in four hotels are superfluous and should be put to alternative uses by owners who cannot make a go of it as hoteliers. The structures don’t have to be – shouldn’t be – torn down. But it is a waste of money to put federal funds to use propping up enterprises that are zombies, that is, hotels and resorts that are unlikely to become going concerns in any foreseeable future.

That is the proverbial good money after bad. Let’s shut them as hotels – and give them new life where they are needed.