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Hawaii Hotels in Foreclosure

Hawaii hotel owners are overdue on billions of dollars in debt

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Bad timing

At the Aston Kauai Beach at Makaiwa the impact was felt as occupancy plummeted. The 311-room oceanfront hotel had been under new ownership for roughly two years, having been purchased by Gaylord Entertainment Co. and a Deutsche bank division – the RREEF Global Opportunities Fund II – in 2006 for $68.8 million.

Gaylord Entertainment’s Securities and Exchange Commission filings show the purchase was funded by a $52 million senior loan, an $8.2 million mezzanine loan and other financing.

The owners defaulted on the loan as the hotel’s performance sank. SEC documents show that, during the 12 months ending Aug. 31, 2010, occupancy was below 50 percent, while the average room rate per available room was just $45 a night.

A special servicer for the property was brought in to oversee its operation before the lender agreed to its sale for roughly $30 million less than what Gaylord and RREEF had paid.

In another well-known case, the Makena Beach & Golf Resort went through foreclosure just a couple of years after its owners paid a record $575 million for the property, which includes the Maui Prince Hotel, two Robert Trent Jones Jr.-designed golf courses and 1,800 acres of resort land.

     Sheraton Keauhou
     Photo: Courtesy of Sheraton Keauhou

The 2007 purchase by one of Morgan Stanley’s vaunted real estate funds and a group headed by Maui developer Everett Dowling carried a $192.5 million first mortgage, with another $225 million from a mezzanine loan.
But the Morgan Stanley Real Estate Fund V walked away from $250 million of equity it had as the property started losing a reported $1 million a month.

By July 2009, the owners were in default of the $192.5 million first mortgage.

The lenders, a UBS commercial mortgage securities trust, were able to take the property back in a foreclosure auction through a $95 million credit bid.

Since that time, an investor in a lending trust, AREA Property Partners, has assumed ownership with two local partners – Trinity Investments LLC and Stanford Carr Development LLC – with hopes of revitalizing the property as the Makena Beach and Golf Resort.

Waiting Period

It’s difficult to predict what will happen since each situation differs. But there’s general agreement the problems will work themselves out if the Hawaii visitor industry continues to improve along with room rates in coming years.

It appears many lenders are extending loans to give owners more time to cure their defaults or restructure loans, some at lower interest rates. These properties generally are receiving an extra two years on what are typically five-year loans, Bratton says. The owners may also be required to put more money in.
“The minority is the lender that takes it back and sells it,” Bratton says, noting lenders typically don’t want anything to do with operating hotels, which are management and labor intensive.

“They really want to avoid it.”

There are those lenders who’ve taken back hotels but have a wait-and-see approach to unloading properties. Vieira sees room rates getting back to their 2007 levels sometime in 2013, bringing with them rising hotel values.

“It just depends how patient you are,” he says. Meanwhile, “There are a lot of people out there looking.”
Outrigger will be interested if and when properties become available, Carey says, adding that a number of investment funds also are looking at Hawaii. He sees the current situation being sorted out over the next two to four years.

Another reason to suspect that buyers will appear is there are few new hotels on the drawing board. Investors hope to pick up bargains at less than replacement cost.

Positive outcome

Hospitality Advisors’ Toy sees hotel sales picking up this year, with the transactions generally being a plus for the visitor industry.

Some people say hotels with distressed loans suffer physically because there is no money for renovations or to a lesser extent, repairs and maintenance. In some cases, owners may need to get approval from lenders’ special servicers or receivers in order to spend money.

Toy, who has advised or overseen distressed debt cases totaling $3.8 billion over the past 20 years, says he sees ownership turnover as a good thing. In many cases, a new owner has more money, including funds to renovate and reposition properties.

That’s what happened at the Aston Kauai Beach, which was sold to a partnership of Dallas-based Behringer Harvard Opportunity REIT II and JMI Realty, a firm partially owned by San Diego Padres owner John Moores.
The new owners came in with an $11.7 million renovation plan and have repositioned the property as the Courtyard by Marriott at Coconut Beach.

“Foreclosures are typically a good thing because it is what really needs to occur to rejuvenate the property,” Toy says.

“It rebalances debt to the property.”

 

Hotels in Financial Straits

Outrigger’s David Carey estimates that half of the loans on luxury properties in the state are underwater. Others say maybe 20 or so hotels have problem loans. Here are prominent properties in financial distress:


Grand Wailea

The 840-room hotel was among the luxury hotels sold in a multibillion-dollar deal to a Morgan Stanley fund in 2007. The owner tried to restructure the loan, but, in January, the hotel was among eight properties nationwide taken over by lenders to the fund.


Ritz-Carlton Kapalua

The bankruptcy estate of the Lehman Brothers Holdings filed a foreclosure lawsuit in September on the 463-room hotel after owners Gencom Group and Goldman Sachs’ Whitehall Street Global Real Estate Group defaulted on a $255 million renovation loan.


Four Seasons Maui

MSD Capital LP, the private investment firm of Michael Dell and his family, reportedly has been trying to restructure $425 million of loans on the 380-room hotel after missing mortgage payments in early 2010.


Fairmont Orchid

Westbrook Partners LLC and other investors deeded the 540-room hotel to lender Barclays Capital in lieu of a foreclosure on the Kohala Coast property. The transfer occurred four years after Westbrook paid $250 million for the property in 2005.


Turtle Bay Resort

Also the subject of a deed in lieu of foreclosure with Oaktree Capital Management last February turning over the 858-acre property and 443-room hotel to lenders that included Credit Suisse.


Sheraton Keauhou

Bank of America took over the 521-room hotel from Koa Hotel LLC, which had taken out a $60 million loan on the property.


Ilikai Hotel

The 203 units under the hotel’s ownership went to iStar Financial after developer Brian Anderson defaulted on $72.6 million in loans taken out in June 2007. The lender has held on to the property since taking it over in April 2009.


Aloha Beach Resort Kauai

This 216-room Anderson property also has been the subject of a foreclosure action, while another Anderson property, the 350-room Kauai Beach Resort, was taken over by iStar in 2009. Still another former Anderson property, the Lotus at Diamond Head, was sold for $8.5 million in a foreclosure auction in August 2009.

 

Highest distressed-hotel debt per room

 

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