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Downtown Stockton, California Sheraton Hotel Turns into a Case of Financial Indigestion;
42 Condominiums Atop Hotel Fail to Sell, 26 Mechanic's Liens Filed

By David Siders, The Record, Stockton, Calif.McClatchy-Tribune Regional News

Apr. 20, 2008 --STOCKTON -- At a Dec. 13 gala to celebrate the opening of downtown's Sheraton Hotel, a crowd sipped scotch and applauded the largest private investment downtown since American Savings Bank built its Main Street headquarters in 1989.

Yet even in December there was trouble at the hotel. San Joaquin County's housing market -- as elsewhere -- was collapsing, and hotel owner Regent Hotel LLC had failed to sell any of 42 condominiums atop the hotel. The bank from which Regent had secured a $40 million construction loan backed off -- disbursing just $33 million before withholding payment in September, Regent said -- and contractors lined up to be paid.

Since Dec. 21 -- eight days after the hotel's opening gala -- 26 companies have filed mechanic's liens against the property, demanding a total of $8.9 million for work they claimed to have done. At least two of those companies brought lawsuits against the hotel in San Joaquin County Superior Court.

"They keep putting us off and keep telling us, 'Oh, we try to have meetings with the bank. The bank is holding our money,'" said Mike Jackson of Tracy's Artistic Terrazzo and Tile, which filed a lien claiming $22,226. "It's just turned into this fiasco at this point."

On Friday, Rick Oshinski, chief operating officer and general counsel of Sacramento's Regent Development Inc., the parent company of Regent Hotel, said, "We've got to do something about it, and it has to happen soon. ... The (subcontractors) need to be taken care of. It's as simple as that."

Oshinski declined to discuss liens or litigation in detail, but he said Regent will "vigorously defend" itself in court. Regent is negotiating with its lender, Missouri-based First Bank & Trust, to be paid the remainder of its loan and, in turn, to pay contractors what they are owed, he said.

First Bank did not return telephone calls last week for comment, and Oshinski said it is unclear why the bank withheld payment.

"It's a very difficult credit market," he said. "The entire financial industry is just very skittish right now."

Even in a healthier market, liens and lawsuits are not unusual for a project of the Sheraton's size. To build the seven-story, 179-room hotel cost $62 million -- much of that money from Regent itself, the company has said -- and Mike Self, executive director of the Builders' Exchange of Stockton, said there is nothing to suggest a crisis.

El Dorado Hills-based McClone Construction Co., which claimed in a lawsuit that it is owed $172,927, said that, too. McClone's Bill Patterson said, "Sometimes it takes awhile for the owner to get the job closed out. ... The last I heard is that they weren't that far apart on what they needed to get it all taken care of."

Still, Regent has incurred more debt at the Sheraton than it has paid, and if financing is not resolved, the bank and contractors will eventually come after the hotel, Oshinski said. If it comes to that, "it's going to be a feeding frenzy," he said.

The housing market was more robust in 2004, when Regent promised to build a hotel on the north bank of the Stockton Deep Water Channel, part of its successful bid to develop the city's adjacent Stockton Arena and Stockton Ballpark. The hotel was to be built on land the city would sell to Regent for $1, and it required a city subsidy of $500,000.

The following year, Regent obtained financing for the hotel's construction, based in part on its expectation of an infusion of revenue from the sale of condominiums at the hotel.

And then the housing market fell.

"The condos, that's what's killing us," Oshinski said. "The condo market has gone totally into the toilet."

The condominiums are not yet finished but are in a "fairly advanced stage of construction," hotel Vice President Jeroen Gerrese said. The number of people who have committed to buy one has fluctuated between eight and 14, he said. None has sold yet.

As Regent tries to sell those condominiums and to press First Bank, it also is attempting to obtain permanent financing, a loan to pay off its construction debt and to carry forward, not unlike a home mortgage.

To obtain that credit, Regent has sought assistance from City Hall. A permanent lender would like the city to back the loan in some way, perhaps assuring it would make payments on the debt if Regent was unable to, Oshinski said.

Stockton Redevelopment Director Steve Pinkerton said there has been a "wide-ranging discussion of just different ways of looking at credit enhancements," but he declined to explain that or discuss it in any detail. He said, "I'd rather keep the negotiations private at this point."

It is unlikely the city would agree to such an arrangement as Oshinski described. Though Mayor Ed Chavez and City Manager Gordon Palmer both said they are unfamiliar with the details of Regent's financial situation and would at least consider a proposal if one is made, it is widely believed that city officials have or will tell Regent that Stockton is not willing to assist.

"The problem is between (Regent owner John Thomas) and his bank," City Councilman Steve Bestolarides said. "To the city's credit -- I mean Gordon and Ed -- it is not on the table."

At the hotel last week, a crew neared finishing a waterfront pool. Hotel rooms are occupied, and the bar is busy, Gerrese said. Operationally, the Sheraton is a success, he said. Though not yet profitable, the hotel is losing less money than it was expected to after four months, Regent officials said. It was unclear exactly how much the hotel is losing or how much it expected to lose.

"I can't tell you how pleased we are to be where we are today," Gerrese said. "Even in the dreariest economy, to be ahead of our pro-forma ... that is really encouraging."

Jackson, of Artistic Terrazzo and Tile, is not encouraged.

"I'm going to go to the hotel, and I'm going to rent a room," he said. "And in the morning when I wake up, I'm going to go, 'I'm sorry. I don't have any money. I'll pay you in about six months' -- because that's what (Regent) did."

Contact reporter David Siders at (209) 943-8580 or dsiders@recordnet.com.

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Copyright (c) 2008, The Record, Stockton, Calif.

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