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Hotel and Hospitality Property in Bankruptcy: Trustee and DIP Guide

Hotels in bankruptcy present the most complex operational real estate scenario in the estate administration playbook. The property is also a business. Revenue continues during the bankruptcy. Employees must be paid. Franchise agreements may or may not survive the filing. Management contracts may need to be assumed or rejected. And the buyer is not purchasing real estate alone — they are purchasing a going concern that must transition smoothly to avoid revenue disruption. OLH coordinates the hospitality-specific complexities of hotel bankruptcy sales.

Operating Business Complications in Hotel Bankruptcy

Unlike a residential property that can be listed and sold while the debtor vacates, a hotel must continue operating during the bankruptcy and sale process. The DIP (or Chapter 11 trustee) must: (1) Continue paying employees, vendors, and franchise fees during administration. (2) Maintain brand standards required by the franchise agreement or risk flag termination that reduces asset value. (3) Ensure the transition to a new owner does not disrupt operations, reservations, or employee relationships. OLH coordinates with the DIP’s attorney and hotel management to ensure the marketing and sale timeline respects operational realities.

Brand Flag Agreements and Franchise Termination

Hotel franchise agreements (Marriott, Hilton, IHG, etc.) typically contain provisions that may trigger termination or assignment restrictions upon bankruptcy. (1) Assumption under §365: the DIP may be able to assume the franchise agreement and assign it to the buyer if the franchisor consents. A flagged hotel with a major brand commands significantly higher market value. (2) Termination: if the franchisor terminates the agreement upon bankruptcy, the hotel operates as an independent — typically at lower rates and occupancy. (3) Buyer negotiations: some buyers negotiate a new franchise agreement with the brand concurrently with the purchase. OLH coordinates the marketing timeline with franchise status developments.

Hotel Valuation: RevPAR and NOI

Hotel properties are valued on income metrics specific to the hospitality industry: (1) RevPAR (Revenue per Available Room): total room revenue divided by total available rooms. The primary performance metric for hotel operators. (2) NOI (Net Operating Income): total hotel revenue minus all operating expenses. The foundation of the income capitalization approach. (3) Brand premium: a flagged hotel under a major brand commands 20–40% premium over an equivalent independent hotel. OLH coordinates hospitality-specific appraisals through licensed hotel valuation specialists for all hotel bankruptcy engagements.

Immediate: Hub — Appoint a Broker — Out-of-State Property — Broker Checklist — Emergency Appointment
Process: Ch.7 Trustee — §327 Application — §363 Sale — Attorney Guide — Rule 2014 — BPO & Appraisal
By Chapter: Chapter 11 — Stalking Horse — Chapter 13 — Trustee Roster
Situations: Debtor Guide — Co-Owned — Vacant Property — Maximize Proceeds — Buyer Guide — Abandonment — License FAQ
Property Types: Commercial — Multi-Family — Rental Property — Vacant Land — Luxury — Hotel/Hospitality — All 50 States

Frequently Asked Questions

What happens to a hotel's franchise agreement when the hotel files bankruptcy?

The franchise agreement may be assumed and assigned to a buyer under §365 if the franchisor consents, or it may terminate at bankruptcy. A flagged hotel retains its brand premium if the agreement is assumed. If terminated, the hotel operates as an independent at lower rates and occupancy. OLH coordinates with the DIP’s attorney on franchise status as part of every hotel engagement.

How is a hotel valued in a bankruptcy sale?

By RevPAR (Revenue per Available Room), NOI (Net Operating Income), and the income capitalization approach. Brand flag status adds a 20–40% premium over independent hotels. OLH coordinates hospitality-specialist appraisals for all hotel bankruptcy engagements.

Are hotel bankruptcies typically Chapter 7 or Chapter 11?

Almost always Chapter 11. Hotels are operating businesses; Chapter 7 liquidation would require immediate cessation of operations and lose the going-concern value. Chapter 11 allows the DIP to continue operating while pursuing a §363 sale or Plan of Reorganization sale as a going concern.