Every business would like a mortgage payable only when it has the money. But the Annapolis Ramada Inn was able to persuade its banker to make such a loan.
It's called a "cash flow mortgage" and, under terms of the loan made by Second National Federal Savings Bank, the Ramada can pass up payments when business is bad without being in default.
"We'll make payments in accordance with our ability to pay," says R. Michael Floyd, the hotel's asset manager.
Terms of the new loan become effective next month.
To be sure, Second National isn't enamored of the concept of the cash flow mortgage. But the loan, part of a plan of reorganization that is allowing the beleaguered hotel to emerge from protection under Chapter 11 of the federal bankruptcy code, is seen by the bank as the best alternative.
"In the current environment, the banks and developers who are going to survive are the ones who are going to learn to work with each other -- until time heals the current recession," said Henry A. Berliner, president of Annapolis-based Second National.
After the hotel, a 7-year-old franchise operation near the Annapolis Mall, defaulted on its loan, the bank had intended to foreclose.
But Second National became convinced it would be better to keep the hotel in operation until a buyer could be found rather than to force a sale by auction, according to Paul M. Nussbaum, a Baltimore attorney who represents the hotel and helped pull together the cash flow mortgage.
"The hotel has to have a chance to operate in a consistent, profitable manner without having to worry every month that the lender is going to close its doors," Mr. Berliner said.
The Annapolis Ramada filed for bankruptcy protection in July 1990, when its $23 million debt load became unmanageable, Mr. Nussbaum said. At that point, it owed $9 million to suppliers and $13 million to its biggest creditor, Second National.
While debt to the hotel's suppliers was discharged, or canceled, by the bankruptcy court in Baltimore, the hotel and Second National negotiated over the bank debt, which is secured by the hotel itself.
"For us it is much more desirable to arrive at an agreement that is economically workable for all parties rather than engaging in continuous litigation with the hotel's owners," said Mr. Berliner, who said the bank has also agreed to a cash flow mortgage for a few other commercial borrowers who faced distress.
Second National's deal with Ramada comes as the federally insured thrift faces increased financial pressure itself after its pile of troubled loans roughly tripled over the past year.
The thrift, which lost $18 million last year after adding nearly $37 million to its reserves for bad loans, lost an additional $442,000 through the first six months of this year. With two of its three capital ratios below required levels, the company has signed an agreement with federal regulators that calls for it to reach compliance by the end of 1994.
In the case of the Ramada, the bank has set up elaborate mechanisms to make sure it receives financial information on the hotel's cash flow, Mr. Berliner said.
There is a ceiling on the amount the hotel will have to pay on its mortgage each month but no floor, Mr. Nussbaum explained. If the hotel misses a payment one month, it can make up part or all of the shortfall in later months from cash surpluses it generates. And in months when it does well, the hotel's owners could turn part of their profits back into the operation or retain them as dividends, he said.