Hotel specialists are responding to the trend toward debtopportunities tied to distressed properties by expanding theirservices to handle distressed assets. Besides working with lendersand other financial institutions in evaluating assets, they areworking with investors who are interested in acquiring loans onhotels that may be on the brink of foreclosure.

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"As the market has shifted over the past 12 months, a lot of theinvestors we deal with are interested less in hard assets and morein hotel notes and mortgages," Geoff Davis, president of HRECInvestment Advisors in New York City, tells GlobeSt.com. Thoseinvestors seek stronger yields and safety from the capital stack ofperforming assets, while also looking at loan-to-own prospects fromthose properties facing default, he says.

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HREC Investment Advisors, part of Denver-based Hospitality RealEstate Counselors, last month hired William Lee as SVP at its NewYork office to focus on note sales and equity and debtrecapitalizations. Lee has more than $8 billion of commercial realestate transactions to his credit, having previously worked withAnglo Irish Bank, the Carlton Group and HVS.

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"We are out there in the marketplace capitalizing on ourlong-standing relationships with investment banks, regional banksand hedge funds that are looking to get out of their positions,"Lee says. He adds that HREC expects its transaction volume of notesand mortgage loans in the hotel sector to increase dramatically inthe coming year.

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While plenty of other commercial real estate brokerages arestarting their own distressed-asset divisions, Davis says they tendto be generalists while HREC deals specifically with buyers andsellers specifically interested in hospitality paper. The firm wasfounded in 1994 and has eight offices across the country.

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"A lot of what we do in that arena is not broad-based marketing,but more targeted," Davis says. For example, HREC would target 10to 15 prospective buyers for a hotel note brought to it by alender, he says.

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Industry peers that have expanded services in response to thedeclining market include the Tampa-based Plasencia Group, which hasreceived a rush of requests by clients for guidance in dealing withdistressed hospitality assets. The company assists lenders andfinancial institutions in working through highly complex aspects ofhotel operations.

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"Hotels need to be treated as operating businesses, rather thanpure real estate," says Lou Plasencia, the firm's chairman and CEO."People tend to forget that hotel rent rolls are typically onenight in length."

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Plasencia also notes that economic constraints have impairedhotel values by as much as 30% in many cases. "Both borrowers andlenders need to realize that this could mean there is no longer anyequity in a particular asset," he says.

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Davis says the overheated market for hotels caused the sector'soperating performance to decline at such a traumatic level that hasforced many seemingly healthy assets into distress. He points toHREC's experience with debtor-in-possession sales, workouts andvalue preservation as giving it an advantage over other hotelconsultants, adding that its principals have handled 65 REO hotelsales.

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"We've seen some mistakes made by people buying notes basedsolely on yield parameters without really understanding how thatparticular asset is operated," Davis says. "It all comes down tothe underlying fundamentals of what is a unique operating business,as opposed to other forms of commercial real estate."

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