Last June, the owner of San Diego’s W Hotel, Sunstone Hotel Investors, handed over the keys to its lenders and walked away from the property after defaulting on its mortgage payment. Also that month, the developers of the new Fontainebleau hotel in Las Vegas filed for Chapter 11 bankruptcy protection—and that was before the project was even finished.

These are just two of the hundreds of hotels around the country that are struggling to survive in the down economy, and the trend has serious implications for meetings and meeting contracts.

In California alone, 47 hotels have gone into foreclosure this year, while 260 are in default on their payments, according to Atlas Hospitality Group, Irvine, Calif.

“Hotel fundamentals clearly have not bottomed. We’re still in the declining phase of the cycle, and it’s been a longer decline than any other period since the Depression,” says David Loeb, senior research analyst at R.W. Baird, a Milwaukee-based investment company. “In terms of the downturn in demand and the downturn in occupancy and rates, there’s nothing post-Depression that compares.”

Loeb expects declining revenues well into 2010. While he doesn’t anticipate as steep a decline as that of 2009, he predicts more bankruptcies, re-flaggings, and even some closings,

Sunstone Hotel Investors alone has forfeited on two hotels this year and could turn over as many as 11 more if it can’t renegotiate the terms of its loans. Nationwide, 224 hotels with loans backed by commercial mortgage-backed securities are in default, foreclosure, or chapter 11, according to Bloomberg—and that number doesn’t include the many hotels backed by bank loans.

Loeb says hotel closings as a result of the downturn have been rare, but are not unheard of. “We’ve seen a few luxury hotels close, in the Caribbean for example, but not many. I think we could see a few more.”

Defining the Problems
To define the terms of a distressed hotel market, a property in default typically has fallen behind on mortgage payments. If the owner misses enough mortgage payments, the hotel goes into foreclosure, with the lender taking ownership. Often, foreclosed properties go into receivership, meaning the lender appoints a court-approved third party to run the hotel, or the property is sold and may be re-flagged under another management company. Despite being foreclosed upon, the W San Diego is still operating “as usual,” according to hotel spokeswoman Elaine Drebot, even though the hotel technically is now owned by the bank.

Bankruptcy protection, or chapter 11, is where owners seek to reorganize in order to pay off their debts. In November, the Amelia Island Plantation Resort in Florida filed for bankruptcy but already has an agreement with an investor group to help pay its debt and continue operations. The half-built Fontainebleau Las Vegas is likely to be sold; in fact, an auction is planned for January.

Normally, a hotel in distress would borrow from other lenders, renegotiate loans, or come up with some other creative financing, explains Tom Costello, president, Groups International, Houston. But since the market crash of 2008, banks have tightened the purse strings considerably. “Occupancy is down and ADR [average daily rate] is down, and that’s been a killer because it’s been sustained for almost two years. But I think what’s pushing some hoteliers over the edge is their inability to refinance and restructure deals with their lenders,” Costello says.

The Effect on Meetings
What does this mean for meeting planners? Alan Reay, president, Atlas Hospitality Group, cautions planners to carefully research their hotel partners. “Do some due diligence on the financial strength of the hotel owner and what the debt is and if the loan is in default,” he says.

A property in distress is more likely to be in cost-cutting mode, and full-service hotels may be most vulnerable since they have the highest levels of staffing and services. Labor is often the first thing cut since it is the largest expense, says Robert Mandelbaum, research director at PKF Consulting, Atlanta. “Stay in constant contact with hotels to check up on what services and amenities have been cut,” adds Mandelbaum.

Some hotels are also reducing room-service hours, closing or reducing the hours of restaurants, or closing off entire floors. Whether the changes are consequential “depends on the group and what’s important to them,” says James Goldberg, an association attorney at Goldberg & Associates, Washington, D.C. If, for example, 24-hour room service is important, try to get it in the contract, he says. “Take a look at your contracts that have already been signed at least through the end of 2010 and see if they make sense in light of the current economy. If they don’t, it will behoove you to renegotiate rather than wait to the last minute.”

Bankruptcy does not allow a group to terminate its contract with a hotel, says Goldberg. However, planners can protect their organizations by including language in the contract that allows them to terminate if ownership or management changes. He advises planners to list the owner on the contract, not just the management company, so they know whom they are dealing with—and if ownership has changed.

Planners should be especially concerned with management changes that result in the hotel being re-flagged. If a hotel goes from a Westin to a Radisson, for example, the group will get a different bill of goods than it signed for. “There are a lot of management companies, the big ones, positioning themselves to pick up distressed properties and make brand changes over next year and a half,” says Goldberg.

The bottom line, Costello notes, is for planners to seek out legal counsel to make sure a meeting contract’s terms and conditions will protect the organization. But, he adds, there is a light at the end of the tunnel: Smith Travel Research anticipates a turnaround for 2011 with all three hotel metrics—occupancy, average daily rate, and RevPAR—moving upward.