Red Roof Inn defaults on loans for odd reasons. Sunday, 28th June 2009 Source : Andrew Calvo ~ Passions Of A Zealot

It was reported that Red Roof Inns defaulted on $367 million of mortgage debt which covered a little over 130 company-owned Red Roof Inn properties.

Although this won’t mean the end of Red Roof Inns, and it doesn’t seem as though any of the hotels will be sold off or changing names to another brand.

It’s interesting to note that the properties that are involved in the default are “company-owned” yet are completely separate legal entities from the Red Roof Inn franchise company, so franchised hotels are not in anyway affected by this news, except just the public’s perception of Red Roof Inns.

News like this has the tendency to cause unease to the travelling public – now all Red Roof Inn’s will get the moniker of “bankruptcy” or “mortgage default” even though bankruptcy is not even on the table and 2/3rds of the Red Roof Inn properties that are in operation are not even involved in this loan default.

Besides the usual culprits – the slowing economy, declining room occupancy (50% vs 60% a year ago), one of the reasons Red Roof claims they defaulted was the

“$20 million cost of Red Roof’s new reservation system, installed in April”

Is it me or is that one of the most ridiculous reasons to claim is a reason for a mortgage default?

Normally companies would have budgets and reserves for debt service, they know how much the service will cost and they plan for it. Now if room revenues don’t cover the expected costs, that’s one thing – but a mandate from the franchise owner (essentially, itself) should never be a reason for default because the franchise owner will never do anything that will so severely hurt their brand, or the individual owner/operators.

It would be crazy for Red Roof Franchising to mandate a new reservations system throughout their properties if their company owned properties can’t even manage the cost of installing the new system! If the company owned properties cant even cover the costs – the franchised properties probably couldn’t either which would encourage them to leave the Red Roof system. A lose-lose for all.

I think Red Roof Inn’s intention is to make this situation look worse than it is so that they can get better refinancing rates from their lenders. I wouldn’t be surprised to see if Red Roof Inns purposely planned to default for that reason.

andrew@alconic-inc.com

Andrew Calvo is a Commercial Real Estate Advisor in New Jersey. I live in Tinton Falls, NJ. This blog is about my passions - primarily hotels, commercial real estate, and development, etc.

Since I have been in High School I乫ve had numerous jobs, but the field which has always interested me is Real Estate, Hotel Development and Construction. I consider myself a zealot in that area - I try to absorb as much as I possibly can, take the experiences that I learn, or read about and use them in my life. 

www.passionsofazealot.com