by Jonathan T. Howe, Esq. | November 30, 2009

While the economy is sending many signs of recovery, analysts still say the peak in hotel foreclosures won't come for another year or two. Properties in California (where, as of October, foreclosures and defaults were up fivefold this year, according to the L.A. Times), Florida and Hawaii already have been particularly hard-hit.

What Got Us Here According to Bloomberg Reports, properties built between 2004 and 2007 are the most susceptible to bank foreclosure. Securing financing was so easy in those years, banks could bundle loans into commercial-mortgage-backed securities. That practice led to a great deal of the meltdown we all experienced at the end of 2008.

Real Point, a credit-rating agency, reports that some $83.4 billion in hotel-backed securities were issued during that period. Resort properties were being bought and sold for as high as $800,000 per key (guest room). This year, according to Smith Travel Research, occupancy in the top 25 U.S. travel markets fell to 61 percent in the first eight months, from 69 percent a year earlier. This means the hotels and resorts that were financed a few years ago cannot generate enough revenue to cover their expenses and pay back their enormous loans.

Where to Now? So, the question becomes, what does a hotel foreclosure really mean to the meeting professional? Foreclosure generally relates to a "taking back" of a property that was used as security to obtain major financing loans. In the case of hotels, when times were good, many new foundations were dug, but the resulting edifices now represent a deep financial hole.

For the meeting planner, it might not be all bad. When a foreclosure occurs, it is in the best interests of the receiver to keep the property running to preserve the asset. Those who are foreclosing on hotels generally are advised not to shut down or otherwise minimize the services provided. Rather, they are told to recognize that an empty hotel would be a wasting asset. Therefore, even though a property might go into foreclosure, the bank or the financial institution has taken control of the operation and business should continue as usual.

In a foreclosure, even though the property might have changed hands, the management contract doesn't necessarily change, and the process does not release the hotel's obligations, unless your contract provides otherwise. If the agreement allows a cancellation without liability if there is a change in the ownership or if there is a reorganization for the benefit of creditors, you might be able to get out of the agreement without penalty. But once again, as in all cases, the language of your contract will control the situation.

Also important: The con­tract should require the property to maintain its same level of service and quality if the hotel goes into foreclosure. If it was a four-star hotel when you signed, it should be a four-star hotel in all respects when your event occurs. Thus, it is critical in these times to include a clause that stipulates quality ratings and service level be maintained or you reserve the right to cancel.

While foreclosure might be the a result of a bankruptcy, it isn't necessarily the end of the road. But in some instances, the financial institution will decide the hotel is a lost cause and will close it down. At that point, you are at the mercy of the courts as to who will be responsible for performance during your event.

Clearly, foreclosure is not good news, but smart contract language will help you weather the storm.