It is well known that the Covid-19 pandemic has crippled the business travel industry. While travel in the United States is increasing and tourism is on the uptick for the first time, many hotel properties may be facing immediate foreclosure or have already faced foreclosure proceedings. Even the luxury NoMad Hotel in downtown Manhattan was not resilient enough to withstand the pandemic and is now facing foreclosure. Despite returning to normal, many hotels may see the grim reality of being unable to service their mortgage debts.
Thankfully, foreclosure is not the only option for distressed properties in the hospitality industry. For years, real estate attorneys in New York have used a number of proven lawyer tactics to delay foreclosure for their clients. These foreclosure delay tactics are not disingenuous or illegal; rather, they are mechanisms provided to property owners under the law that often result in a better result for both the lender and property owner.
If you are facing a hotel foreclosure, you are not at the mercy of your lender. In fact, there are a number of methods to help delay foreclosure so that you can get up to date on your mortgage payments. If you are seeking to delay a foreclosure sale, contact one of the local foreclosure attorneys today.
When Foreclosure Happens
It is estimated that nearly one quarter of hotels were at risk of foreclosure during the Covid-19 Pandemic. Unlike a traditional residential mortgage loan, hotel developers often take out loans for millions of dollars. Rather than making the payments on these loans from other income, such as W-2 wages, these monthly payments are paid, or “serviced”, through the cash flow from the hotel itself. When the cash flow is insufficient to cover the loan payment and the owner falls behind, the loan servicer will likely begin the foreclosure process. When loans are in the millions, loan servers may quickly push for foreclosure to cut their losses.
In New York, all foreclosures must be judicial, rather than non-judicial. This means that the foreclosing lender must file a complaint for foreclosure in court. The parties will then litigate the foreclosure by going through the formalities of a typical court case. Non-judicial foreclosure, on the other hand, allows the foreclosing party to foreclose on a property without going through the court system. Non-judicial foreclosure is not allowed in New York, but is quite common in other states.
Ways to Delay Hotel Foreclosure
There are a number of ways to delay hotel foreclosure, allowing the hotel owner to get up to date on any missed payments. Choosing which method is best for you and your situation is a case by case analysis and may require a discussion with a qualified attorney. A qualified foreclosure attorney will commonly utilize a number of proven lawyer tactics to avoid foreclosure in his or her practice. He or she will assess your situation and help determine which method is best for you. There a different mortgage foreclosure defense strategies, but below are the most common ones:
Apply for Loss Mitigation
Loss mitigation is a general term that can refer to a number of processes. There are a number of federal and state loss mitigation programs that may be available to lenders. However, not all of these may be available for commercial real estate borrowers. Loss mitigation may also refer to a number of other tactics that help alleviate the harm of foreclosure. These may include loan modification, mortgage refinancing, forbearance agreements, or utilizing a special servicer that specializes in assisting financially distressed commercial borrowers.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is when the borrower provides the lender with the deed to the property in lieu of going through the foreclosure process. This results in the mortgage borrower owning the property and the borrower being relieved from the debt. A deed in lieu of foreclosure does not delay the foreclosure process, it avoids it entirely. There are a number of benefits to this method. Namely, a commercial borrower may be able to significantly reduce the costs of a commercial foreclosure. The borrower will also avoid the stigma of having a public foreclosure of its property, which may hurt its future investment pool. A deed in lieu of foreclosure prevents a foreclosure from being recorded in the country records.
Filing for Bankruptcy
Filing for bankruptcy automatically halts any pending foreclosure proceedings and prevents new proceedings from being initiated. This is one of the most effective lawyer tactics to avoid foreclosure available. The two types of bankruptcies available to businesses in the hotel industry are Chapter 11 and Chapter 7, both of which will result in a stay of foreclosure proceedings.
While many attorneys are qualified to handle residential foreclosures, only a few are well versed in commercial foreclosures, which are complicated by numerous laws governing commercial mortgage backed securities. Professionals have spent years assisting its commercial clients through the foreclosure process. If you own a hotel property and are facing foreclosure, contact your local attorney for a free consultation.
Which Bankruptcy Chapter Works for Hotels Better
Neither type of bankruptcy is better suited to delay a foreclosure sale. Rather, they both have a place in the arsenal of a foreclosure attorney. Chapter 7 bankruptcy is best utilized when a property owner is seeking to end the business. In Chapter 7 bankruptcy, the court will seek to quickly dispose of all of the debtor’s assets by sale. The proceeds will then be divided amongst the creditors and any excess debts will be extinguished. This is the “traditional” type of bankruptcy that people think of when using the term.
Chapter 11 bankruptcy, on the other hand, is best utilized when the debor wishes to continue operating the business after the bankruptcy proceeding. In Chapter 11, the court helps the debtor restructor, consolidate, and pay off its debts through the sale of assets and by utilizing future cash flows. Chapter 11 bankruptcy is typically a multi-year process, and if the debtor successfully completes the program, excess debts are extinguished.
Unfortunately, the Covid-19 pandemic has forced the hotel industry to get creative in order to survive. Unfortunately, not all hotels have fared as well as others. If you are struggling to keep your business above water, bankruptcy may be a viable solution. This is a serious decision, however, that should not be taken lightly.
Author’s Bio:
Raised and educated in New York City, Yuriy Moshes is a New Yorker at heart. Yuriy has built his career and firm litigating complex real estate transactions for New York business owners. Today, he and the attorneys at his firm offer comprehensive legal services for New York business owners. From advising clients on multi-million dollar real estate transactions to fighting for their rights in the courtroom, the Law Firm of Yury Moshes has handled it all. Contact us today for a free consultation.