If you own a hotel heading into foreclosure, chances are fairly high that you are an independent, meaning unbranded, hotel owner. According to the Atlas Hospitality Group, 90% of foreclosed hotels in California aren't part of a chain. And foreclosures are growing -- up 27% in only three months. In the state's Bay Area alone, 106 hotels were in "distress," meaning either in default or foreclosure in the first three months of 2010, a rise of about 10% from the fourth quarter of 2009 in the nine-county region. (The group's president also admits that the report only touches on the state's trend and that the numbers are closer to about 1,000 hotels in some kind of financial distress.)
It's an unfortunate cocktail of heavily leveraged property and lack of available credit paired with low rates and few customers. Owners who bought or built during the boom now owe more than the property is likely worth -- and without a full hotel of paying customers, they can't pay their staggering monthly or quarterly payments. Others find walking away an easier proposition than trying to hold onto a property that they can't afford (although according to the Wall Street Journal article, most of those walking away were not independent owners but publicly traded companies.)
"The amount of leverage that was put on in the late 1990s wasn't as high for the public companies as what some of them took on more recently," said David Loeb, a lodging analyst with Robert W. Baird & Co. "Pricing for hotels really got out of control in 2005 to 2008 and the public companies were aggressive in buying assets, so they piled on a lot of mortgage debt."So essentially, independent owners don't have the backing of a publicly traded company, but like their corporate counterparts still can't get loans. Wait -- scratch that! Apparently Sunstone Hotel Investors was able to get their debt renegotiated after they walked away from a $65 million hotel and defaulted on $300 million in loans.
Would that also happen for the independent owner of, say, the Casa Madrona Hotel & Spa in upscale Sausalito, Calif.? Oh, of course not. That hotel was sold at a foreclosure auction in February. Boutique hotel owners obviously face more risk in the market without connections or the clout to demand loan modifications. They will also continue to bear the brunt of the commercial property downturn.
So if you're an independent owner, I hope you bought before 2005 or after 2008. If not, you may soon lose your hotel.
Photo: Casa Madrona Hotel & Spa