Lodging asset owners and lenders have options when the sale of a distressed asset is required due to market dynamics like those in today’s economic environment.
This article, written by Lou Plasencia and Robert Wiemer, was published on December 10, 2020 on the LODGING magazine website.
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Lodging asset owners and lenders have options when the sale of a distressed asset is required due to market dynamics like those in today’s economic environment. An owner looking to exit an asset swiftly or a lender forced to take control of a hotel and needing to limit operating losses may consider liquidating a challenged property through an open-bid auction or a sealed-bid sale. Disposition processes like these are most suitable when an asset is particularly distressed and difficult to value but will likely appeal to an array of investors.
Given the increasing need to exit distressed properties in a timely manner, sellers may soon make greater use of accelerated sales than ever before. Below are some of the features and potential benefits of such methods.
Features & Benefits
Length of Process
An auction is generally the most expedient option to determine a distressed-condition value and complete a hotel disposition. However, optional, sequential rounds of bidding may extend the disposition timeline.
Directly marketed and negotiated sealed-bid sales can have a specified call for offers, thus providing certainty of closure. Simultaneous bidding makes for an expedited process, though the seller may opt to state at the outset that there will be a best and final round of bids.
A key merit of a sealed-bid sale is that it allows for a buyer and seller to spend more time discussing the transaction and ironing out possible hurdles before the buyer submits a final bid. In other words, an educated investor makes for an excellent offeror.
Pricing
The precipitous nature of the auction process often leaves buyers with limited time to inspect a property and complete diligence. As a result, buyers at auctions tend to be more risk-averse and value-oriented, and less apt to push pricing.
Sealed-bid sales create the opportunity for the seller to accept a preemptive offer, especially if it exceeds a reserve price and deal terms. The seller also retains the ability to bargain with a buyer pre-bid, potentially resulting in a higher sale price.
Number of Bidders
There is a chance that an open auction may generate few interested bidders, thereby negatively impacting the auction process and the value of the asset, thus earning the property a “shop-worn” stigma.
The sealed-bid sale offers no guarantee of a certain number of bidders either. One appeal of a sealed-bid process, however, is that the actual number of bidders is not disclosed. An investment advisor can offer guidance on qualified, active investors, thereby allowing the seller to make an educated buyer selection.
Competition Among Bidders
Since auction bidders’ names are typically disclosed, should a larger institutional investor participate, it may scare away bidders from smaller firms who perceive that they may not have the financial wherewithal or staying power to aggressively compete.
During a sealed-bid sale, bidders are not allowed to compare bids. The confidential nature of a sealed-bid sale motivates offerors to submit higher prices earlier in the process. Similarly, this method provides greater privacy for both the seller and offerors.
Negotiation
An auction does not provide for the opportunity to negotiate, which may result in better terms and conditions for the seller. Additionally, a non-refundable deposit is usually required by auctioneers. However, auctions could potentially forfeit a seller’s negotiating power, possibly including the ability to withdraw the property from sale.
A sealed-bid sale does allow for negotiation between the seller and one or more offerors, aimed at refining certain offer terms in advance of bid submission. Negotiated items may include higher pricing, a shorter closing period, a higher non-refundable deposit, and other nonmonetary remuneration.
Process
Websites specialized for commercial real estate auctions are often employed to manage auctions. These sites allow bidders to access investment information, execute confidentiality agreements, and submit bids.
The format for the sealed-bid sale is ultimately up to the seller. Whether the seller requests for bids to be physically and discreetly submitted or sent to a designated agent, the seller typically would not open any bids until the specified bid date in order to maintain the integrity of the process. For this reason, sellers often rely on an intermediary such as an investment advisor to orchestrate the process by collecting, compiling, and delivering private bids to the seller on the stated date. At that time, it is up to the seller whether to announce the winning bid publicly.
Summary
When owners and lenders consider the marketing processes available for the accelerated disposition of a distressed asset, an open-bid auction or sealed-bid sale may be viable options. A seasoned investment advisor can provide guidance on a seller’s specific asset and approaches for selling it, whether immediately or well into the lodging market’s recovery over the coming years.
