Hotel Bankruptcies

Abstract

The precipitous concurrent drop in real estate values and hotel revenues has raised the specter of bankruptcy for owners and lenders alike. Changes in the bankruptcy code (enacted after the last wave of hotel bankruptcies) have remodeled the landscape for those who are considering bankruptcy protection, particularly under Chapter 11 of the U.S. code. This article presents considerations for both lenders and owners, beginning with the realization that declaring bankruptcy under this chapter ironically requires considerable financial resources and will require substantial assistance from counsel. Owners may benefit from the fact that most hotels are complex enough that they do not qualify as single asset real estate. To the lenders' benefit, owner-debtors may not spend room revenues collected after a bankruptcy filing (without permission), since they are considered to be cash collateral. Perhaps of greatest interest to debtor-owners, their lenders, and management companies, the code permits debtor-owners to terminate an unfavorable management contract, with approval of the court, often without paying termination fees.