Hotel Foreclosure Bloodbath Begins

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With the economy bottoming out, and pundits forecasting an end-of-year upturn in the hotel business, a lot of lodging operators seem to have found a spring in their steps. Yet, while business was soon be getting better (or at least not getting worse), there are a lot of owners waiting for the other shoe to drop, i.e., the wave of foreclosures, property givebacks, bankruptcies and forced and unforced takeovers that seem to be just over the horizon.

News this week seems to suggest the cycle has started. On Monday, Sunstone Hotel Investors simply walked away from its W Hotel in San Diego, in effect giving the keys back to the lenders. The decision is in the numbers: Sunstone bought the 258-room property at the height of the boom for $96 million; depressed occupancies and a local rate war have all but drained the hotel's cash flow; and, as the kicker, the company owes $65 million on the property, or $252,000 room, more than it's currently worth.

Sunstone hinted that other properties in its portfolio may receive a similar fate.

Up the California coast in Dana Point, a similar scenario is playing out, as the owners of the St. Regis Monarch Beach fell into default on a $70-million note it owes to Citigroup. Foreclosure proceedings have been scheduled in federal court. The hotel became infamous last fall as the site of the ill-fated $400,000 retreat AIG booked at the hotel days after it took a bailout from the feds. The incident has since cast a pall over the entire luxury hotel segment, as corporations and other groups are loathe to seem imprudent in their business expenses. This so-called AIG effect is in part responsible for a 30-percent decline in RevPAR for luxury hotels so far this year.

While the overall outlook for the industry is improving, we're bound to see more foreclosures and givebacks, some as high profile as these two, but many quiet and just as painful. It could be a bloody summer for hotel ownership and a wealth of opportunity for vultures with cash or access to financing.

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