Distressed Hotels Abound, and Some are Trying to Capitalize

Hotel industry insiders are predicting relief for the industry starting in 2011. Until then, hotel property prices continue to fall, and well-capitalized companies are either entering into management contracts with underperforming hotels or trying to buy distressed ones.

Crescent Hotels & Resorts recently announced eight new management contracts with some big-name brands, including Sheraton, Crowne Plaza and Holiday Inn. Crescent, headquartered in Fairfax, Va., added 18 of these contracts last year and plans to add a total of 12 this year.

Efrem Harkham, chief executive of Luxe Hotels & Resorts, created Hotel Control Management Group late last year in response to requests for management services from banks that had foreclosed properties in their possession. HCM Group is negotiating with eight U.S. and international hotels to take on management contracts, according to a company spokeswoman. Harkham, HCM's chief executive, hasn't ruled out the possibility of purchasing some of these struggling hotels.

Other groups whose focus is on ownership include Unique Hotels, which started out as a hotel business consultancy before switching to purchasing distressed properties. The Newport Beach, Calif.-based company has been focused on buying since November as prices have fallen below replacement value. So far, Unique has put offers on six hotels and is in negotiations with three.

As the hotel and travel businesses continue to wane, hotels are becoming more and more distressed. For example, the number of hotels in California that have filed notices of default has increased nearly 40 percent in the last three months, from 73 at the end of January to 102 at the end of April, according to Atlas Hospitality Group in Irvine, Calif. That should mean more work for banks and lawyers this year, and eventually property sales.

So why aren't more properties actually changing hands? Sellers are holding out for top dollar, even in this down market. "There is still a big gap between lenders' and buyers' price expectations," said Alan X. Reay, Atlas president. While many hotels are in financial trouble -- 25 in California have gone into foreclosure since September -- only one of those properties, the Lake Tahoe Inn in South Lake Tahoe, Calif., has actually been sold to date.