Troubled Condo Hotel Workouts – the Time Has Arrived
Troubled Condo Hotel Workouts – the Time Has Arrived
By Irvin W. Sandman, and Russell C. Savrann
July 25, 2008
The recent collapse of the residential real estate boom has put significant stress on the hotel industry’s fledgling condo hotel segment. Despite earlier warnings, some condo hotel developers pursued and completed borderline projects that lacked sufficient prospects for meeting the reasonable expectations of all stakeholders. These projects now face serious claims and potential litigation.
This article notes how we arrived at this time of difficulty, outlines the issues, and provides guidance on how the best results can be achieved for all stakeholders.
How We Got Here
From 2004 to 2007, the hotel industry reinvented and vigorously pursued a new segment—the “condo hotel.” At a time when the hotel industry was seeing slow but steady recovery, the condo hotel concept took advantage of the booming residential real estate market. Unlike a traditional hotel development, the condo hotel developer sold the hotel rooms as individual condominium units, with the expectation that the unit owners would then place the rooms back into the hotel’s rooms inventory through a rental program. By accessing the market for residential condominiums, the developer sought and often achieved earlier and higher returns than was possible through traditional hotel development structures. And in well-conceived projects, the buyers of the units enjoyed benefits that compared favorably to traditional vacation or second-home condominium units. See “What is a Condo Hotel, Why Does it Work, and Why is it Challenging?”
By February 2006, warning flags were raised. We and others in the industry noted the hazards of condo hotel development and cautioned that borderline and even ill-advised condo hotel projects were being pursued. Developers were advised to recognize that, if a development is inevitably going to produce angry unit owners, then the short-term profit might be eaten up quickly by later litigation. We suggested that the best way to avoid a condo hotel litigation “implosion” was to pursue well-conceived projects that have strong prospects of meeting the reasonable expectations of all stakeholders, including unit owners. See “Condo Hotels: How Developers and Owner’s Associations Can Avert a Hotel Implosion.”
By May 2007, “condo mania” had clearly subsided. In the declining residential real estate market, it was essential for the developer to make sure to begin development of a condo hotel project only if it worked both as a hotel (i.e., it created enough operating profit to satisfy a traditional hotel developer’s expectations) and as a condo hotel (i.e., it met the potentially lower profit expectations of a typical unit owner). See “Condo Hotels: Three Years Into the Concept.”
The residential real estate bubble has now burst. The condo hotel segment’s promise of high, early returns fueled by the real estate bubble proved too attractive—many condo hotels that lacked sufficient prospects for meeting the reasonable expectations of all stakeholders did get built. Now, the unit owners, who expected positive or at least neutral cash flows, are seeing significant, negative cash flows and declining room values. And developers, who often remain on the premises as the hotel manager and the owner of the “hotel unit,” are faced daily with unhappy owners, increasing expenditures in time and money to deal with the owners, and even lawsuits.
But these troubled condo hotels can be reworked to achieve better stability and balance for all stakeholders if reasonable steps are taken. The stakeholders and their perspectives need to be understood. Experienced advisors must be selected. Proactive, early settlements can be achieved. The lack of organization of the unit owners often needs to be addressed. The hotel business must be evaluated to identify problems and opportunities. Claims and defenses must be objectively evaluated. The reasonable objectives for the workout can then be established and pursued to a good result.
Steps for a Successful Condo Hotel Workout
1. Understand the Stakeholders and Their Perspectives
In a normal hotel, ownership is usually held by a single entity. Other interested parties typically include a lender and either a branded hotel manager or a non-branded hotel manager (often combined with a franchise from a national brand).
In a condo hotel, as in a normal hotel, these same other interested parties usually are involved. However, the hotel ownership structure in a condo hotel is not so simple—the hotel ownership equity is divided into many pieces held separately by numerous, unrelated parties. Some or all of the hotel’s rooms are owned by separate unit owners. Typically, the commercial areas of the hotel (often referred to collectively as the “Hotel Unit”) continue to be owned and operated by the developer or its affiliate. The hotel is then run by the Hotel Unit owner, who rents the rooms under an agreement usually called a “Rental Program Agreement.” See “What is a Condo Hotel, Why Does it Work, and Why is it Challenging?
In this structure, the most substantial equity interests in the hotel are held by the individual owners of the room units (“Room Units”)—they are the ones who have, collectively, the most equity invested in the hotel. These owners are typically, if not always, unorganized. This lack of organization often is the result of a conscious decision by the condo hotel developer, who may have sought in the condo hotel structuring documents to limit the ability of the Room Unit owners to join together and exert influence or pressure on the Hotel Unit owner and thereby reduce the likelihood of conflict.
In a troubled condo hotel, the stakeholders need to understand each other’s perspectives:
- The Developer. The developer may have sold out the Room Units and achieved a good return. By retaining ownership of the Hotel Unit, the developer may have sought continuing fee income and a business model that could help support additional growth and development. But the developer might not have been able to control the sales process sufficiently to eliminate representations about investment returns and other seeds of securities claims. As the real estate market weakened, the developer may have also encouraged Room Unit sales by providing a rental program that was initially attractive to Room Unit owners but was ultimately unsustainable. Now, the Room Unit owners are unhappy with their returns and their views are also colored by the general decline in the real estate market. If the developer instituted an initial rental program that was not sustainable, the developer may now need to rework the program so that operating losses will be avoided—doing so, however, would intensify Room Unit owners’ concerns. The developer may increasingly feel under siege by unhappy Room Unit owners. Faced by these circumstances, the developer will want to protect any returns already achieved and reduce the time and expense needed to deal with disgruntled Room Unit owners. Typically, the developer will also want to place the hotel’s operation on sound footing and reach resolution with the Room Unit owners, or, alternatively, extricate itself from involvement in the condo hotel.
- The Room Unit Owners. The Room Unit owners often believe they were promised an investment that would produce reasonable returns. Instead of these returns, they find themselves under pressure from unexpected, negative cash flows. With residential real estate values in decline, a quick, break-even sale is often impossible. Because, as noted above, condo hotel structures often do not provide a way for the Room Unit owners to organize and work together to address their situation, they often feel isolated and unable to take cost-effective action to address and resolve their situation. Often, they also lack the information on the hotel’s operation that would allow them to understand why returns are so poor. A Room Unit owner will want to determine whether there is a quick way out. If there is not, then the Room Unit owners will want to establish a way to organize, share costs, and collectively work with or motivate the developer so that they can obtain information on the operation, improve returns, and reach resolution on any claims they have.
- The Branded Hotel Manager. Many condo hotels do not have branded managers. If a branded hotel company is involved, usually the branded manager has entered into a management contract with the Hotel Unit owner. If the management contract was well-drafted and negotiated, then the manager should have sufficient contractual protections to allow the manager to assert a default, terminate the agreement, and pursue any damages. If, however, the manager remains supportive of the project, then the manager would want to use its position to rework the relationship between the developer and the Room Unit owners so that the operation can be placed on an even keel. The manager might be in a unique position to advise the developer on what steps should be taken and propose a roadmap that can lead to a better destination than devolution into litigation.
- Lenders. A condo hotel can involve several lenders, including a condominium construction lender, a lender providing construction or long term financing for the Hotel Unit, and one or more residential lenders who make purchase money loans to the Room Unit owners. In each case, of course, the lender wants a performing loan or repayment. If that is not forthcoming, then the lender has the usual foreclosure and collection remedies. Before foreclosure, a lender, like a branded hotel manager, can be in a position to encourage the developer and the Room Unit owners to take appropriate steps to conclude a beneficial workout. After foreclosure, the lender steps into the shoes of the borrower, and the lender will thereby take on the needs and motivations reflected by the interest obtained by the lender in the foreclosure.
2. Select Experienced Advisors
Condo hotels are complex. Well-conceived ones require skilled counselors and advisors to create and structure. Similarly, in a troubled condo hotel context, each of the stakeholders needs to obtain experienced counsel and advisors if there is to be any hope of putting the condo hotel on a constructive path.
Whether the stakeholder is the developer or its successor, a Room Unit owner, a branded manager, a lender, or another interested party (such as a spa or restaurant operator), the stakeholder needs counsel that has solid experience in the development of condo hotels as well as experience in asserting and defending claims arising out of them. This experience is needed to identify the issues, envision a reasonable reorganization or outcome, and reach those objectives in a direct and cost-effective way. Counsel should, in particular, have hotel industry knowledge and involvement so that competent, well-regarded advisors and consultants can be identified to help address any positioning issues and solve any hotel operational problems.
It is not particularly valuable for counsel to be located in the city or state where the condo hotel is located. The pool of law firms with experienced hospitality teams is small and spread throughout the country. Condo hotel experience and industry involvement is more important for good results than location of counsel’s offices. Often, the firms with hospitality teams and condo hotel experience have lawyers who are members of the state bar where the project is located—this might be of some use, but is not necessary. If a local lawyer is needed for local procedural or other matters, one can always be associated without significant duplication of expenses.
3. Consider any Mutually-Beneficial, One-Off Deals; Answer the Wake-Up Call
Sometimes a Room Unit owner may recognize the trouble early. If the developer’s marketing efforts created exposure to securities and other claims, a well-attuned Room Unit owner and the developer can reach an early, separate peace. To achieve this result, the Room Unit owner will normally need to obtain a competent evaluation of the claims and present them to the developer. See Section 6, below. The developer then can consider whether an early settlement with the Room Unit owner may help the developer manage risks of wide-spread discontent.
If the developer is not already proactively involved in reworking the condo hotel, the developer should view the early approach by a well-attuned Room Unit owner as a wake-up call. The developer should immediately attempt to get ahead of the curve. It should follow the steps outlined in this article quickly and objectively. It should recognize that the problem will likely not go away by itself. If the developer can establish a cooperative relationship with the Room Unit owners and create a reasonable workout proposal that is better for the Room Unit owners than litigation, then a vast amount of time, expense and liability can be avoided.
4. Address the Room Unit Owners’ Organization
As indicated in the previous Section, a smart Room Unit owner might see problems coming and get out early. Similarly, a developer can answer the wake-up call and proactively devise a solution that is acceptable by most or all of the Room Unit owners. If this does not occur, wide-spread anger, controversy, or polarization may result. Then, the stakeholders usually must address the organization of the Room Unit owners.
As indicated in Section 1, the Room Unit owners, collectively, have the most equity invested in the hotel, but they usually do not have a readily-available way to organize and work together systematically to have their needs met. For example, one might think that the condominium owners association (“COA”) would provide a platform to pursue the Room Unit owners’ interests. However, the COA typically has no power to organize the Room Unit owners, engage counsel or other representatives, or spread the costs of any workout among the Room Unit owners. As indicated above, this lack of power is often intentional.
Once controversy is wide-spread, the developer usually is not well-served by settling with an individual Room Unit Owner. Then, from the Room Unit owner’s perspective, it will be difficult to justify the costs to engage, on his/her own, the skilled attorneys and consultants needed to exert sufficient pressure to obtain a reasonable solution. Organizing the Room Unit owners is essential to proceed at this juncture.
In this context, the organization of the Room Unit owners may also benefit the developer, the Hotel Unit owner, or other stakeholders. Once controversy is wide-spread, it is difficult for the developer to obtain resolution if the developer must separately deal with 100 or more individual and sometimes irrational owners. The developer may initially react with alarm to the Room Unit owners’ efforts to organize. But the developer should work with its hotel counsel and advisors to penetrate beyond this understandable, initial reaction. Certainly, if the organization is being created by known, plaintiffs’ class-action lawyers, the situation might be on a win/lose path to adversarial and expensive litigation, and efforts should be exerted to redirect the momentum. If, however, the organizational efforts present the prospect of a unified, practical approach by experienced, constructively-oriented hotel counsel, then the developer might explore whether supporting and even initiating the organization will improve the prospects and help avoid a death spiral.
How can the Room Unit owners organize, given that the COA and the condo documents usually do not provide any organizational vehicles? Usually, a separate organization or structure must be created. To bring this task to the forefront, one or two motivated and intelligent Room Unit owners must “take the bull by the horns” and engage condo hotel counsel. Counsel can then create a contractual arrangement, a joint venture agreement, or a similar vehicle for organization. This arrangement will normally involve a steering committee that is given Room Unit owners’ authority to engage counsel and other professionals, to collect prorata costs (including the costs of creating the organization), and pursue restructuring and settlement. Experienced counsel will have appropriate documentation to effect this arrangement.
5. Evaluate the Hotel Business; Identify Problems and Opportunities.
Despite the complexity of condo hotel structures, a condo hotel is still a hotel and operates as one. It is marketed to potential guests. It has a hotel manager who tries to maximize yield and market share. It has a brand, either its own individual brand or a licensed hotel brand. And, just like any hotel, its success is measured by occupancy, ADR, RevPAR, operating expenses, debt carry, and return on investment.
So an essential step in a condo hotel workout is to ignore the complex ownership and relationships of the condo hotel and to evaluate the business as an ordinary hotel.
Initially, there are the usual questions about the adequacy of the hotel’s gross revenue. What is the hotel’s competitive set? How is the hotel measuring up under the usual metrics—occupancy, ADR, RevPAR? If the hotel isn’t measuring up, why not? Is the hotel misbranded? Would another brand deliver more value? Can the hotel’s management be improved through, e.g., modified marketing approaches and better yield management? Is the management company getting appropriate supervision from the owners and stakeholders? Or is there something wrong with the physical aspects of the hotel?
Next, there are questions about the hotel’s expenses. Some questions are obvious, such as whether the day-to-day operational expenses are within industry standards.
When evaluating expenses, however, a unique area of concern is likely to be fees or disguised fees. As mentioned earlier, in a typical condo hotel the Hotel Unit is owned by the developer or its affiliate. The Hotel Unit owner often has engaged a hotel management company to manage the hotel. The owners of the hotel rooms typically enter into a Rental Program Agreement (“RPA”) with the Hotel Unit owner, thereby allowing the Hotel Unit owner to manage all aspects of the hotel and the rental of the rooms. In this structure, an issue arises: what should be considered “management fees” in trying to determine whether those fees are reasonable?
In a normal hotel, one expects to pay the hotel manager a fee, the amount of which depends on the hotel’s size and other factors. The fee typically has a base element (usually between 1% and 5% of gross revenues), as well as an incentive element (often between 3% and 15% of gross operating profit, with a hurdle to allow the owner to pay debt service or receive a return on equity before the incentive fee kicks in). Normally, after payment of the hotel’s expenses and fees, the rest of the revenue is available to the owner for payment of debt service and for return on equity.
In a condo hotel, by comparison, the fee situation may be less straightforward and possibly skewed. Not infrequently, for example, the rental program agreement may call for the revenues to be applied as follows: first to pay the hotel manager (often a developer affiliate) 10% gross revenues; then to pay the hotel’s operating expenses; then the remainder to be split 50/50 between the room owner and the Hotel Unit Owner.
Here the threshold question is, should we consider the Hotel Unit owner as simply the equivalent of the hotel manager? In the usual condo hotel configuration, the Hotel Unit owner does, in fact, operate the hotel like an ordinary hotel manager. But the Hotel Unit owner also owns the commercial areas. Does that ownership interest give the Hotel Unit owner a legitimate ownership stake that warrants a separate return on investment?
As we’ve pointed out in other articles, the Hotel Unit structure is often driven by necessity. This is particularly the case if the condo hotel is operated by a branded manager. A branded manager will typically require the developer to create the Hotel Unit so that the branded manager does not have to contract directly with a condominium owners association (COA). Often, though, developers have structured condo hotels this way even though no national brand is involved. See “Condo Hotels: How Developers and Owner’s Associations Can Avert a Hotel Implosion, at p. 8.
Either way, the question is whether the Hotel Unit owner’s stake is a real ownership stake. Did the Hotel Unit owner have to pay real money for the ownership? Or did the developer really already get full value for the hotel when it sold out the Room Units to the owners? Does the developer really have a legitimate cost basis in the Hotel Unit?
If the Hotel Unit Owner has significant, real capital invested in the Hotel Unit, then, to that extent, some portion of the revenue retained under the fee structure might be considered a reasonable return on investment. This should be taken into account in evaluating the reasonableness of the fee structure.
If, on the other hand, the developer has already received full value for the hotel when it sold the Room Units, then arguably the ownership stake in the Hotel Unit does not have much substance. If so, then the Hotel Unit owner should be considered more like pure hotel manager, and the amount of hotel revenues that end up in the Hotel Unit owner’s column should be considered management fees. This analysis may lead to a significant issue. In the example above, the fees retained by the Hotel Unit owner could be well above industry standards for normal operations. For a large hotel, a fee of 10% of gross revenues is twice the normal fee suggested by hotel industry practices. If the 50/50 split results in more fees for the Hotel Unit owner, then the issue is more prominent.
The evaluation of the condo hotel as a business will lead to some answers. These will include a determination whether the operation of the hotel should be changed to improve revenue, and whether excessive fees are resulting in bleeding that should be stemmed. The analysis will also naturally lead to an estimation of the value of the hotel, from which a value per room can be determined—a figure that is useful for all stakeholders in determining their reasonable expectations going forward. From these answers, a vision for reorganization should begin to take shape.
6. Analyze the Legal Claims and Defenses
In addressing a troubled condo hotel, all stakeholders need to evaluate the claims that exist so that they can read their cards realistically and set reasonable goals.
There are several bases on which claims may exist, including those described below.
a. State and Federal Securities Claims and Similar Statutory Claims
As we have written in other articles, condo hotel unit sales must be carefully structured and conducted to minimize the unit buyer’s argument that the sale constituted a sale of a “security” under the securities law. Even if a developer does its best to avoid the securities minefield, the risk cannot be avoided entirely. There is always pressure on the sales people to make sales. Buyers typically do, in fact, want to hear about projections. But securities laws direct that projections cannot be given without registration (a costly and ultimately unworkable process for most, if not all condo hotel developments). Shopping services show that, to make a sale, sales people often do cross the line and make oral statements and forecasts that can result in securities violations.
If, in the sales process, the developer and its agents did not closely follow the SEC guidelines set forth in “No Action” letters, then Room Unit owners may be able to assert securities claims. And even if the developer and its agents followed the guidelines, claims may still exist because the guidelines only set forth what the SEC believes to be the line between selling a security and selling real estate—the courts may interpret the line differently.
As a “broad brush” inquiry, stakeholders should ask, to whom were the units marketed and sold? Were they marketed and sold to people who wanted personal use from the units and an easy way to deal with the units when they weren’t staying there? Or were the units marketed to people who bought primarily for investment purposes, speculation, and projected income from the rental program? If the former, then it is likely that there will be fewer well-grounded securities claims. If the latter, then it would stand to reason that the sales people must have said things that a pure investor would want to hear, and the likelihood of exposure would increase. A more in-depth inquiry, in which the applicable law and the SEC’s guidelines are applied to the facts, is then required to establish the strengths and weaknesses of the securities claims.
In addition to claims under federal securities laws, concurrent claims may also arise under state securities laws and consumer protection acts. As with the federal laws, state law often provides a cause of action for failure to register securities, for fraud or misrepresentation (or omissions) in the sale of securities, and for unfair or deceptive acts. See, e.g., Florida’s securities laws, FSA § 517.07; 517.301; see also Florida’s Deceptive and Unfair Practices Act (similar to Consumer Protection Act). FSA § 501.211.
In many states, the state Attorney General has jurisdiction to investigate and bring an action to enforce the consumer protection statutes. From the developer’s perspective, the risk of widening litigation and involvement by the Attorney General should be considered. From the Room Unit owners’ perspective, the Attorney General’s office may be considered as a resource or ally, but the Room Unit owners should weigh the benefits of Attorney General involvement against the potential of losing control over the settlement.
One issue of considerable importance in evaluating these claims is the application of relevant statutes of limitations. Although the most common claims for federal securities violations arise under section 10b-5 of the 1934 Securities and Exchange Act (including claims for failure to register), that Act does not contain an explicit statute of limitations. However, Courts have determined that the one year statute of limitations period found in the 1933 Securities Act applies to 10b-5 claims under the 1934 Act. 15 U.S.C. § 77m; Lampf v. Gilbertson, 501 U.S. 350 (1991). The one-year period runs from the date of discovery, but in no event more than three years.
State securities laws have separate statutes of limitations. For example, the statute of limitations for securities claims under Florida’s securities laws is typically two years from the date of discovery. FSA § 95.11(4)(e). And if there is a consumer protection act violation, the applicable Florida statute of limitations period is normally four years. See FSA § 95.11(3)(f).
Each stakeholder must carefully apply these laws to the facts in order to establish the extent to which securities and similar claims, if they exist, may still be viable. The issue is of considerable importance, to developers and Room Unit owners alike, in determining strategy and the course of the workout.
b. Claims for Violation of Condominium Laws
The state laws applicable to the creation of a condominium and the sale of condominium units are entirely separate from securities laws and can be a source of exposure to liability.
One area of concern typically is found in the condominium cost allocations. In structuring a condo hotel, the developer must set forth in the condominium documents the allocation of costs. For example, if the developer’s structure creates a separate Hotel Unit, then the condominium documents will indicate how much of the cost of the hotel operation is allocated to the Hotel Unit and how much is allocated to the Room Units. State statutes often provide that these allocations cannot be discriminatory and must be reasonable. See, e.g., Uniform Condominium Act (1980) §2-107(a) (providing that “allocations may not discriminate in favor of units owned by the declarant”).
In trying to protect the Hotel Unit from financial exposure, the developer may have decided to allocate all of the Hotel Unit’s costs to the Room Unit. This approach may help limit the developer’s exposure to operating losses but it can also produce litigation exposure.
Condominium laws regulate many other aspects of the structure and sale process. The application of these statutes should be evaluated by the stakeholders.
As is the case with consumer protection laws, state regulatory agencies may have the jurisdiction and motivation to become involved. For example, in Florida the State’s Department of Business Affairs regulates and enforces the condominium statutes. If the condominium includes a residential component, this agency may investigate and enforce compliance.
c. Other Claims
Because every condo hotel, by its nature, is complex and unique, other possible claims should be evaluated. For example, specific contractual commitments or representations may have been made, such as an obligation to install certain improvements in a condo hotel conversion. The facts and applicable law must be evaluated to allow a stakeholder to understand the circumstances and the litigation alternatives to a negotiated restructuring or settlement.
7. Establish the Objectives For the Workout
The evaluation of the hotel business, as suggested under Section 3, will identify problems and naturally lead to solutions, such as the following:
- If total revenue is less than what the competitive set statistics would suggest, then consider the need for different management, for asset management loyal to unit owners, brand repositioning, different or better marketing strategies, or improvements.
- If total management fees (taking into account splits under the RPAs and offsetting any amounts reasonably attributable to a legitimate ownership interest in the Hotel Unit) are out of line with industry standards for a normal hotel, then flag the conclusion that the fees need to be brought in line.
- If other expenses are out of line with the competitive set, then flag what needs to be brought in line and consider, again, the need for different management or for asset management loyal to unit owners.
- If, after considering how net operating income may be improved by the steps identified above, the hotel’s value per room is still completely out of line with the selling prices paid by the Rooms Unit owners, then ask why and whether an adjustment might be reasonable under the circumstances.
The answers in the above analysis will provide an indication of where the condo hotel should end up, if the hotel is to meet the stakeholders’ reasonable expectations going forward. Of course, getting there—changing the status quo—may benefit one stakeholder but very much hurt another. For those stakeholders who must “give up something” or, as they say in the workout business, “take a haircut,” the question might become, why would they want to do this?
To answer this question, the analysis of the legal claims and defenses, as suggested in Section 4, above, becomes important. The analysis will allow the stakeholder to assess the risks in litigation. The stakeholder should remember to figure into the equation the cost of litigation, both in terms of legal fees and in loss of time. These risks and potential costs can then be compared to possible settlement and workout alternatives. If, in one or more feasible workout alternatives, a stakeholder must give up things of value, but this loss in value is less than the risks and costs in litigation, then a win/win becomes possible.
The possible permutations in a workout have few limits. Creativity is needed in devising possible solutions. Consider the following areas of inquiry:
- Fix the hotel business, paying attention to the operational opportunities described in the above bullet list.
- Restructure the rental program and the RPAs.
- Restructure the condominium regime. For example, if the Hotel Unit is owned by a developer affiliate, evaluate whether the Hotel Unit might be turned over to the COA, allowing the developer to exit the project altogether.
- Consider how a workout can result in a complete resolution and waiver of all claims. If this is not possible because there is no organization of Room Unit owners, consider the suggestions in Section 4, above.
In the evaluation of these areas of inquiry, the stakeholders should pay somewhat less attention to topics that are zero-sum games (i.e., topics where one side’s gain comes only from the other side’s equivalent loss). More attention should be given to topics that are win/win (i.e., one side’s gain provides more value than the other side must give up). For example, making the hotel business run better as an operation can benefit all stakeholders. Focusing on these opportunities allows the stakeholders to see added benefits to a negotiated settlement, because these opportunities are not available in litigation.
8. What If There is Deadlock?
If there are legitimate claims and significant litigation risks, coupled with a vision for a result where the stakeholders are in a more equitable position, then a workout or negotiated settlement is almost always achievable. This is because, in a negotiated settlement, the litigation costs, both in fees and loss of time, can all be saved, and measurable risks of losing can be avoided. If a stakeholder won’t budge, then it is logical to conclude that one or more of the stakeholders are not reading their cards accurately. That is where good counsel is essential.
If good counsel is not present, or some other forces are preventing the stakeholders from accurately reading their cards, a mediator can help. The stakeholders should consider employing a neutral, who is well-respected in the industry and knowledgeable in the structuring of condo hotels, to assist the parties in getting to a reasonable solution.
If no progress can be made, then often there is only one way to motivate the unrealistic stakeholder, whoever it may be: litigation. If a negotiated workout or settlement still isn’t achieved, then, ultimately, the litigation process can produce a result—usually an expensive one.
The rewards of condo hotels in the residential real estate boom were hard to resist. As a result, projects that were unsupportable or borderline went forward. Nevertheless, a reasonable result in a negotiated condo hotel workout and settlement can be achieved, if the stakeholders engage the right people, properly evaluate the hotel business, correctly analyze the claims and risks, and creatively establish and pursue reasonable objectives