He adds that there is an onslaught of equity being raised for the sole purpose of going after these notes and assets. "So there is an abundance of investment interest, but there is a reluctance by sellers to sell. Nonetheless it will happen."

Over the past 60 days, Michael Cahill, CEO and founder of Hospitality Real Estate Counselors in Denver, says that his firm has done more than 130 broker's opinion of value assignments on distressed hotel loans. And more may be coming. In a recent survey HREC and Cushman & Wakefield Sonnenblick Goldman did on behalf of the International Lodging Finance Council, 85% of hotel lenders responded that they did not believe they had sufficiently marked down their hotel debt exposure. That attitude has led to the "extend and pretend" phenomenon prevalent today. "If they keep the loan active, they don't have to recognize" the loss, Cahill explains.

To be sure, there is a staggering amount of potentially troubled hotel debt. Real Capital Analytics pegs the current volume of distressed lodging properties in the US at 1,169 properties valued at more than $29 billion.

Likewise, a recent study by Robert W. Baird & Co. Inc. found that 1l.2% of outstanding lodging CMBS has a trailing 12 month (TTM) debt service coverage of less than l.0x. On top of that, another 19.3% has a TTM debt service coverage between 1.0x and l.5x. Further, nearly $30 billion of hotel CMBS debt is on track to mature through 2012, with another $35 billion set to mature between 2015 and 2017. Of those amounts, $7.7 billion carries a TTM debt service coverage under 1.0x, raising the potential of a surge of defaults.

But while those numbers portend potential distress, they may not necessarily herald a wave of troubled hotel properties hitting the market at bargain-basement prices. Cahill points out that lenders and special servicers will control what properties are put on the market over the next 18 months, necessarily herald a wave of troubled hotel properties hitting the market at bargain-basement prices. Cahill points out that lenders and special servicers will control what properties are put on the market over the next 18 months, at what prices and how much debt a buyer can obtain. Moreover, a holder of a hotel needs a compelling reason to sell today, meaning it's an REO, a foreclosed loan, a non-performing note or the owner has simply turned the keys back to the lender. "If a hotel has enough cash flow to make debt you would never put it on the market now," Cahill says.

"You're going to hold on to it for as long as you can."

Despite the huge amount of distress in the hotel sector, Cahill predicts that a majority of those situations will be worked out between the borrower and lender. According to the ILFC survey, 62% said they plan to restructure and hold on to their debt, 35% said they would foreclosure but sell after the market recovers, 18% said they aim to sell the paper at current prices for all cash, and 18% said they would sell their paper with seller financing. Only 15% said they intended to foreclose and sell as an REO at current market prices.

All that makes for a much different lending environment than in the early '90s when the RTC took control and sold commercial property at discounts. This time around lenders are more likely to work out problem loans with borrowers. "Lenders either want to restructure the loans, or if they must foreclose, they are planning on holding onto the property and waiting until a market recovery and pricing gets better," Cahill states.

Not waiting for pricing to recover is a slew of investment funds formed to snag hotel assets at bargain prices. Concord Hospitality Enterprises is in the initial stage of raising a $300-million discretionary private equity fund to acquire distressed hotels and debt. "There are tremendous buying opportunities," says Mark G. Laport, president and CEO of Raleigh, NC-based Concord Hospitality Enterprises. "But the deals have to fit into our sweet spot of upscale select-service properties in major cities." He has noticed different strategies among lenders. "Some want to get it out the door, while others will work with borrowers and wait for a better day"

Yet buyers who want to snap up properties at deep discounts may come away disappointed. Linehan observes that the pool of distressed assets that could potentially be put up for sale is larger than the funds being raised to buy them. The gap is about $125 billion, by his estimation.

"There is ample supply, but less of demand," he says. "However, it's not going to be at the bargain-basement pricing of 20 cents on the dollar as some might think. At the end of the day, you are acquiring a business that is backed by real estate. Therefore, true market valuations need to take place. The question is, what are you basing those market valuations on?"

He adds, "A market valuation looks at the existing value within current market conditions as well as the opportunity inherent in that asset and business. How does it affect the pricing? It is the money that is needed for recapitalization. At the same token, there are a lot of assets to be looked at before the money actually gets deployed."

The fourth quarter will be pivotal in signaling whether there is a surge of hotel properties put for sale early next year. "This last quarter of '09 is significant because everybody is looking for occupancy, average room rates and RevPARs to start to flatten when you go back on a comparison basis to the same time last year," Pastorino says. "If that doesn't happen, then it will create more uncertainty in the market as to when that floor is going to be reached. If it does, it's a marker for everybody to now move forward. These next three months will be fairly telling for our industry."

What needs to happen, Pastorino says, is for a few bad assets to trade to establish the cycle's bottom. "When there is no action, that's not good on the investment side, because it's just prolonging" the downward trajectory. Cahill foresees less sales volume than some may be anticipating. "It's going to be a trickle throughout 2010 and not a tsunami," he says. "Throughout 2010 more product is going to be entering the market. But it's not going to be this huge wave, it's going to be a gradually rising floodwater. It's going to start in the first quarter and then be a level yet gradually increasing slope through the remainder of the year."

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