Despite an explosion of hotel-related defaults, transfers of properties to special servicing, and recent foreclosure activity, potential acquirers have difficulty finding properties to buy, according to a new report from Jones Lang LaSalle Hotels (JLL) There continues to be an imbalance between the limited supply of available properties and the vast amount of available equity capital on the sidelines. This has created a very unique window of opportunity whereby the market has synthetically transformed itself into a seller’s market. That said, hotel transactions in the United States have totaled just $1.1 billion YTD 2010.
JLL says that while they have yet to see a wave a traditional distressed asset sales, they are beginning to see an increased activity in structured equity recapitalizations fueled primarily by the inertia of balance sheet lenders’, special servicers’, and mezzanine lenders’ call to action on problem assets. The most interesting development reflects the recent activity of mezzanine lenders’ willingness and ability to invoke the UCC (Uniform Commercial Code) foreclosure process to foreclose out the equity interests pledged by hotel owners, allowing the mezzanine lenders to step into the equity position and take control of problem hotel assets. Unlike a real estate foreclosure, which can be a cumbersome and sometimes litigious process, the UCC foreclosure process allows the mezzanine lender to quickly and efficiently take control of such hotel properties within four to six weeks.
"As fundamentals continue to improve and the value curve begins its upward climb, we are likely to see more and more mezzanine lenders take action against troubled borrowers and step into a controlling position in order to control their own investment destiny," according to a JLL press release. This will also likely increase the value of such mezzanine positions leading to a more vibrant market for mezzanine position trades.
