California Hotel Defaults Jump 125% in Last 60 Days

Vacation News » Vacation & Leisure Real Estate Edition | By Alex Finkelstein | June 29, 2009 8:00 AM ET

(IRVINE, CA) -- The bells are tolling for financially strapped California hotels.
Hotel loans originated in California from 2005 to 2007 are coming due this year and the borrowers are stuck.  They can't repay the loans.

The number of California hotels in default or foreclosed on jumped 125% in the last 60 days. The state now has 31 hotels that have been foreclosed on and 175 in default, according to California-based Atlas Hospitality.

Alex Reay, founder of 12-year-old Atlas Hospitality, says San Bernardino County leads the state in the foreclosed hotels column with 19.6% of the total. Riverside County follows with 16.1% and San Diego County has 12.9%.

In the default, but not-yet-forecolosed-on column, Los Angeles County leads with 12% of the total. San Bernardino County is next with 9.7% and San Diego County follows with 8.0%, according to Reay

Non-franchised hotels account for a disproportionate number of foreclosures. They make up about 87% of the total. However, franchised hotels make up 59% of the defaulted properties.

Initially, the wave of distress in California was seen by the smaller, non-flagged hotels in secondary and tertiary markets.

However, "as the hotel economy worsened, we have seen it impact all property types," says Alan X. Reay of Atlas Hospitality.

The properties range from the luxurious St. Regis Monarch Beach Resort in Dana Point to the more economical Extended Stay and Red Roof Inn chains.

"No market or brand is immune in this downturn," notes Reay.

" In reviewing the hotels in default or foreclosed on, we found that over 75% of the loans originated from 2005 to 2007.

"During this period, over 2,500 California hotels either refinanced or obtained new purchase loan financing. Unfortunately, based on today's market values, we estimate that none of these hotels have any equity remaining.

"The unprecedented decline in room revenues (California is down 21.5% year-to-date) combined with the jump in cap rates has resulted in a massive loss in values.

"We estimate that values are currently 50-80% lower than at the market's peak in 2006-2007."

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