California's Hotel Foreclosures Triple

Atlas Hospitality Group, a commercial real estate brokerage in Irvine, Calif. specializing in hotels, reported that in the first nine months of 2009, hotel foreclosures more than tripled from 15 in 2008 to 47. Hotels in default also quadrupled to 259. Most of the troubled hotels were in Southern California, with more than 70 percent of imperiled California hotel loans originating between 2005 and 2007, said Alan Reay, president of Atlas Hospitality. Both Riverside and San Bernardino counties had nine and six foreclosed hotels respectively.

However, the entire state has been affected by hotel defaults and foreclosures. One Northern California example is the Fremont Marriott Silicon Valley, whose owners, AEW Fremont LLC, a division of Everest Holdings, defaulted on a $38 million loan last month. The owners took out the loan in May 2007, arguably at the peak of the real estate boom.

Most of California's real estate problems, both residential and commercial, stem from the easy -- and often no-questions-asked -- credit that was trading hands until the end of 2007. Previously when credit dried up investors still had capital, but the new breed of buyers were already in deep debt. Faced with paying off a losing proposition or walking away, many chose the latter. The sad part is that many of these hotels are relatively new and were foreclosed on as quickly as their paint dried.

The good news is that investors are buying foreclosed hotels, especially the newer ones. The bad news is that means lenders could only receive $4 million for a property in default of its $11 million loan.
Photo of Motel 6 in Hesperia, Calif. courtesy of Motel 6