Crosshost

Situation analysis:

Represented private investment group, Crosshost, Inc under the auspices of their special servicer on their CMBS loan, Lennar Partners. Portfolio included six geographically disparate hotels in the Midwest and Florida and included four Super 8’s and two Sleep Inns. All Super 8 Motels were 63 units and located in Rock Falls, IL, Somerset, KY, Sikeston, MO, and Poplar Bluff, MO, respectively. The Sleep Inns were located in Destin, FL (77 rooms) and Tallahassee, FL (78 rooms).

The situation was particularly difficult given the fact that there was animosity between the lender and borrower, and while the borrower was technically our client, the lender was calling the shots. This required us to serve, and codify, two masters.

The Midwest based Super 8s had all been experiencing increases in room supply in their local trading areas along with declining product quality and declining operating results. Property improvement plan (PIP) requirements were determined to be significantly higher than expected only after pricing had been set and the properties brought to market.

The Florida based Sleep Inns were relatively good performers but both were in danger of being forced out of the Sleep Inn system by Choice, and both faced very high PIPs. Further, the Tallahassee property was in a sub par location.

We were selected, unconventionally, in a collaborative process between the borrower and the servicer, who jointly felt the marketing plan advanced by HREC IA was the most effective, along with our depth of analysis being the most complete. We had advanced the highest values of any of our competitors, which was important to both parties because the portfolio was in default and the only opportunity for the borrower to realize any cash was if we were able to achieve our stated values.

Action Plan:

A mass marketing plan was initiated, attempting to reach out to as many potential buyers as possible in an attempt to create an auction like environment. Further, negotiations were initiated with the brands in an attempt to ease the transition upon license transfer of the PIP requirements along with the brands desire to upgrade their presence in each market. Additionally, we pre-screened lenders on the hotels, and were able to introduce them directly to qualified buyers at the appropriate time. This was especially important because to streamline the process, we were not going to be amenable to any financing contingencies.

Rick George, Principal in charge of our Chicago office would manage the disposition of the Midwestern properties while M. Scott Stephens, the Principal in Charge of our Tampa office would manage the Florida dispositions.

Key Issues:

Significant market performance and individual hotel performance declines in four of the six markets. Property improvement plans well in excess of what anyone expected or had underwritten. Whether the majority of these locations would be able to keep their respective franchises was in doubt.

Further, borrower had no real motivation to be cooperative with broker or lender given the fact that this loan was non-recourse. Their only interest was that they MIGHT realize a small net positive gain after the note was paid off, but as the process progressed, and the issued continued to arise, even this looked unlikely.

Outcome:

Several offers were generated for every property; in fact, over one hundred fifty written offers across all the hotels were managed by the firm. We were able to get the franchisors to agree to extend the licenses in all instances for an additional ten years. We worked through all the PIP issues while still achieving the strike prices agreeable to the clients in light of serious market softness and declining revenues at the properties exacerbated by seriously declining product quality. All the Midwestern locales were tertiary at best and the physical plants were original Super 8 prototypes, so regardless of internal condition, would require completely new exterior packages, including landscaping and parking lots.

Finally, we were able to toe a very fine line between our two clients who were at times, at odds, because their objectives were not aligned. Essentially, this was a non-recourse loan and the borrower had no real incentive to cooperate. This, we believe, is the greatest accomplishment of this transaction. That of keeping all parties focused, and motivated, despite differing objectives and levels of interest.