Don’t Pay…then Negotiate
I was speaking to a potential client over a year ago who owned a lodge at a local ski area. She has been holding onto her lodge by a thread for quite some time now. She would earn all her revenue in 4-5 months during the winter and spend the rest of the year depleting her retained earnings on debt payments while earning very little revenue. Each year that she was short on cash, she took emergency lines of credit just to pay down other debt in the offseason. It wasn’t a good business model.
The hotel had two mortgages on it, one conventional mortgage and the 2nd lien was an SBA CDC Loan. She tried to negotiate the terms of the loans to get some relief while business was slow, but of course they refused to reduce her payments. She carried on like this for quite some time until she could no longer hang on. I advised her to stop making payments on her 2nd mortgage and this greatly helped her monthly cash flow. At first the SBA would call her and put pressure on her that they would begin foreclosure and take legal actions against her and she was very scared. I tried to keep her calm and I managed to get her to realize that these were just empty threats and she became confident in the research that we conducted. The 2nd lien was underwater, so we were not worried that they would forclose on her. The first lien holder had a subordination agreement with the SBA, meaning no payments could be made on the 2nd lien if the 1st mortgage was going unpaid. Basically if she paid her first mortgage, she would be relatively safe (there are some small risks to this strategy). Suddenly as the months passed, a representative would call from the SBA and offer payment reductions. They could extend relief by lowering her interest rate, reducing payments for a set period of time and allowing her to get her business back in order. This is not a good permanent solution, as she required debt forgiveness, not a payment modification, but it sure did kick the can far down the road.
Although this is a huge victory for this hotel owner it was not a fix all solution. She has kept her hotel, improved her cash flow, but the debt remains in place. She is waiting for revenue to return to 2006 levels when she will be able to start paying the full payment again. Hotel occupancy rates have greatly improved since the 2008 financial meltdown, but they are still not back to pre-recession levels and likely will not be for some time longer. If she can hang on with just a modification until things improve, I’ll be very happy. However, if revenue drops further she will need a full fledged workout and debt forgiveness, a result we can deliver.
