A Tale of Two Hoteliers

As Charles Dickens once wrote, “It was the best of times, it was the worst of times.” In a career that exceeds 27 years, this transaction rates as the most difficult, psychologically exhausting, intellectually stimulating, messy, and dare I say stinky assignment that I have ever accepted. And the best part is that it closed. I hope you might find a small nugget of wisdom here that might assist you with surviving your professional worst of times.

Pain in the Asset    

In November 2007, I conditionally accepted a referral from our Southern California office to sell a nationally branded hotel in Northern California. The owner and I met at a restaurant on a Sunday morning to discuss his expectations and the asset’s pluses and minuses. The fundamental pluses of the hotel were interior corridors, conference rooms, ample parking, and the fact that it was debt servicing. On the minus side, it had no after-debt cash flow and it was on a land lease that the owner said he would deliver with the improvement, making the asset a fee-simple interest. The owner was a practicing real estate attorney, which gave me confidence in the land promise.

The owner went on to say the hotel also sat on top of a rock quarry turned city dump that was emitting methane gas -- I told you it was a stinky deal. Understanding that it would be difficult -- but not impossible -- to close, I accepted the assignment and proceeded with the task of selling the investment for $9.57 million.

Misadventures in Marketing

When I inspected the property, two things caught my attention. First, there was a huge hole in the parking lot. The manager remarked that just a week before, an RV had to be towed out of the hole. It happened all the time, he said. Second, I thought it was odd that the “smoking-allowed” guest suites were located next to the methane extraction system. I thought the two activities were incompatible.

Several weeks passed and the prospectus and other materials were completed. After reviewing the marketing package, the owner said I should disclose the three lawsuits he recently had filed against the city, the underlying landowners, and the contractor who had competed a second wing to the hotel three years earlier. OK, I thought -- full disclosure! At least the owner was the plaintiff and not the defendant. And I finally understood why the city attorney had hung up on me when I introduced myself as representing the owner and this property.

Buyer? Beware.

Within a week of our marketing program, we entered a purchase agreement with an extremely qualified and informed buyer who didn’t mind the disclosure items. In February -- when the due diligence period passed and the buyer’s financing contingency period was nearly over -- we were told that the funding was in place. But the lender and buyer wanted to know the land transfer status. Keep in mind that hotel financing had effectively dried up in the market. It was the buyer’s strength -- not the asset -- that triggered the lender’s conditional approval.

To accommodate the land transfer, a double escrow was opened. The hotel owner was represented by local counsel (separate from the counsel representing him on the lawsuits), and he informed me that the land transfer was moving along. Aware that there were four brokers and four attorneys working on this transaction, I thought it was safe to take a well-deserved vacation with my wife.

You can imagine the expletives that ran through my mind when, after arriving at our destination and retrieving my e-mail, I read the following message from the hotel owner’s attorney: “Well the wheels have completely fallen off. I tried to keep it together, but the buyer doesn’t believe that the land can ever be delivered by hotel owner, so the buyer left for the Philippines.”

Less than 24 hours after we left for our vacation, the hotel owner and the landowner’s attorney had locked horns and began an exchange that would have made a sailor blush. The award for the most creative salvo would have to go to my client, who concluded the exchange with the following: “I suggest that you calm down, drink a cool glass of water, gaze out the window at pretty trees and green grasses, and try to get a hold of yourself.” You can’t make this stuff up.

Preparing for the Worst

While I was on vacation, the deal found its own wheels and began to move in strange directions. For example, the lender had left the table, and the four attorneys got busy doing what attorneys do -- preparing lawsuits. The buyer’s counsel was preparing to file suit against the hotel owner for fraud over I don’t know what, and the hotel owner’s counsel was preparing a suit against the landowners for “interference with contract” since they had inappropriately contacted the buyer directly. To top it off, our company’s counsel was considering a suit against the hotel owner for “breach of listing contract” in addition to suit against the buyer’s brokers, who had inappropriately contacted our client to discuss more commissions. It was indeed the worst of times.

Besting the Worst

With the vacation over, I intended to grab the bull by the horns. I picked up an old CCIM course binder and thumbed through the course’s 12-step presentation strategy. (By this time I was ready for a 12-step strategy of a different kind.) I recall reading the words “professional focus, objective, personal needs, and describing the benefit.” Then, like an epiphany the solution became apparent. I recognized that my client just wanted to end the hotel nightmare so he could continue to enjoy his golden years. Thus, I suggested that he play the bank and carry a secured second mortgage with the buyer placing 20 percent down -- less than the 35 percent the previous lender was going to require -- and interest for only four years.

The buyer jumped at this offer and immediately returned from the Philippines. The loan had been secured only by the improvement under the land lease -- not a fee-simple interest -- so the bank was happy to accommodate a new borrower and get the added security for its assumed loan. And the franchisor was pleased to have an experienced operator who planned to improve the property beyond its requirements.

Finally, the attorneys received their stand-down orders, and the deal closed June 1, 2008. Everyone involved was pleased, but no one more so than yours truly. It was indeed the best of times!