The Banks Are in Hotel Hell

By Bernard Baumohl

Time was when the hotel industry mixed glamour and high finance in an intoxicating cocktail that attracted the most flamboyant entrepreneurs of the past century -- Conrad Hilton, Richard D'Oyly Carte, Cesar Ritz. But check in today at thousands of U.S. hostelries, including Hiltons, Sheratons and Marriotts, and your innkeeper will belong to a far more somber group: Citicorp, Wells Fargo Bank, Travelers insurance and others.

The jokes are inevitable -- it takes a month to get your reservation approved; no room service after 3 p.m. -- but the banks and insurance companies aren't amused. They are in the hotel business because in the past decade they helped finance a building frenzy that dumped thousands of new rooms on an already glutted market, with disastrous results. Six of every ten hotels in the U.S. aren't able to make a penny in profit, says Bjorn Hanson, an industry expert with the Coopers & Lybrand accounting firm. As losses mount, so do loan defaults, which have forced lenders to foreclose on a record number of ailing properties. More than 3,000 have reverted to lenders in the past three years, and experts expect an additional 7,000 to be repossessed in the next 24 months.

What does a lender do with a foreclosed hotel? With luck he sells it fast and gets his money back; banks and S&Ls have no desire to run these properties. But buyers are hard to find nowadays. "The market to purchase hotels is dead," says Morris Lasky, chief executive of Lodging Unlimited, a firm based in West Chester, Pa., that specializes in turning around problem hotels. "Banks are not going to lend to new buyers, and there isn't anybody with cash to buy these things." Among the many anxious sellers is the government's Resolution Trust Corporation, which has 160 hotels in its portfolio of failed S&Ls.

Some of the repossessed properties are landmarks. Bally has effectively agreed to hand over the keys to its Las Vegas and Reno resorts to a group of creditors. The Westin Canal Place in New Orleans was repossessed by Travelers. The Four Seasons hotel in Austin has been foreclosed by Manufacturers Hanover. The Los Angeles Airport Hilton is in the hands of Security Pacific National Bank. "It is unprecedented what has been going on with hotel foreclosures," says David Renton, who heads a hotel investment firm in Stamford, Conn. "This is the worst crisis for the industry since the Great Depression."

Most bank executives realize that hotel management is a job for a professional, and they usually hire new managers to try to revive an ailing property. Says Lasky, who has resuscitated 200 hotels during his 35-year career: "Three years ago, we were getting four or five calls a month from lenders of problem hotels. We're now averaging that many a day." While professional managers can keep operations on track, every hotel faces decisions that only the owner can make. Does a small roadside hotel really need a Nautilus room? Is it practical to have nightly bed turndowns or a 24- hour doorman?

Bankers aren't equipped to decide, and many are tormented over what to do next. Some refuse to throw more money into a losing business, but experts warn that such a policy can cost more than it saves. "A hotel operation can go quickly into a graveyard spiral if some action isn't taken," says Laurence Geller, who runs a hotel advisory firm in Chicago.

The lenders don't feel any better knowing they have mainly themselves to blame for this fix. Through much of the '80s they were tripping over one another to offer generous terms for even the unlikeliest projects. "In the madness of that decade, many hotels were overfinanced and overleveraged," says Bruce Batlin, a partner with the consulting firm Pannell Kerr Forster. "A lot of hotels are in trouble because of that."

By the time many of the properties were built, corporations were cutting back on business trips to protect profits. The current recession has made things worse. Of the 3.1 million rooms available in the U.S., almost half are vacant every night. Since an average hotel needs 65% occupancy to break even, that translates into an estimated industry loss of $1.7 billion last year, a record, and this year looks worse. Says Randy Smith, who publishes the authoritative newsletter Lodging Outlook: "I've been doing research on the hotel industry for 20 years, and this first quarter beats anything I have ever seen."

Most lenders are resigned to holding their hotel properties until the market improves, but they'd better be patient. "It is going to be anywhere from five to seven years before the hotel industry gets back to reality," says Lasky. Between now and then demand will increase, but probably not nearly enough to catch up with the huge oversupply of rooms. That means the number of rooms will have to come down. Some hotels will simply be demolished. Others may be converted into condominiums, although there's hardly a shortage of those. Some, depending on design and location, could even be converted into prisons. Don't laugh. At least it's a growth industry.

With reporting by Dan Cray/Los Angeles and William McWhirter/Chicago