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Distressed Hotel Loans Continue to Soar in San Diego and Riverside Counties

By Pat Maio, North County Times, Escondido, Calif.McClatchy-Tribune Regional News

Jan. 30, 2011--SAN DIEGO -- The more than $1.5 billion in distressed hotel loans in San Diego and Riverside counties were among the highest in California in 2010 despite improving revenue and overnight stays, according to a hotel survey that examined foreclosures and defaults.

Foreclosures in the region totaled $255 million, while defaults were listed in excess of $1.3 billion, giving the region more than $1.5 billion in distressed hotel loans, said Alan X. Reay, president of Irvine-based Atlas Hospitality Group Inc., and author of the survey.

"It is not slowing down," said Reay, who sees distressed hotel loans continuing to rise through mid-2011 before beginning to level off.

Defaults occur when borrowers stop making loan payments. They are generally the first step in a legal process that precedes a foreclosure, which happens when the lender repossesses the property.

In addition to the defaults and foreclosures, he also estimates that as many as 1,500 hotels in California are on a watch list of properties that could slip into default with lenders, or even worse, be foreclosed on.

"At the end of the day, it's anyone's guess on what'll happen to these hotel loans," said Reay, who estimated this "shadow inventory" to add $400 million to $560 million in potential bad loans in San Diego County, and $300 million to $500 million in Riverside County.

Many of these troubled hotel loans, or those that make up this so-called shadow inventory, could end up in default or foreclosure, or be bought by speculators looking to buy them from banks wanting to shed them, Reay said.

"I just spoke to a lender who has a hotel loan where the borrower hasn't paid on the loan since October 2009," he said.

San Diego's bad loans

San Diego County's share of the two-county region's $255 million in foreclosed hotels represented 85 percent of the total, and is considered its most ever, according to Reay. The remaining foreclosures come from hotels mainly in resort-rich Coachella Valley in Riverside County -- and are mostly smaller, independent hotels, not name brands like Hilton or Marriott.

Besides foreclosures, defaults on local hotel loans also are among the highest in the state.

Defaults in the two-county region jumped to 60 hotel properties in 2010 versus 51 reported in the previous year. Reay estimated $750 million in hotel loans have slipped into default in San Diego County and $550 million in Riverside County.

Reay predicted that the spike in distressed hotel loans should begin to improve later in 2011. This is because the economy is improving, and revenue per available room, or RevPar in industry parlance, has also improved greatly in the past year, he said.

"Revenues are rebounding. That may help some properties out," he said.

Reay predicted that the spike in distressed hotel loans should begin to improve later in 2011. This is because the economy is improving, as is revenue per available room, or RevPar in industry parlance.

"Revenues are rebounding. That may help some properties out," he said.

Henderson, Tenn.-based Smith Travel Research recently said RevPar, which is used to measure hotel performance, rose in San Diego County to $81.36 in 2010 versus $78.59 in 2009.

Independent hotels continue to account for 71 percent of all hotels foreclosed on in California. San Diego County saw 16 foreclosures in 2010 compared with three in 2009. In Riverside County, foreclosures rose to 14 in 2010, up from 10 in the previous year. San Bernardino County led the state with 17.

Opportunities to buy

Some investors see opportunities with independents.

For instance, San Diego-based Kalthia Group Hotels LLC bought the 83-room America's Best Value Inn in Escondido a few months ago, after the previous owner's lender had foreclosed on a $4 million loan, according to Reay's survey.

Kalthia, which has a small portfolio of 10 hotels in California and six other states, is renovating the Escondido hotel with new carpeting and furniture, and has plans to spruce up the outside.

Mitesh Kalthia, who formed Kalthia Group in 1991, was not available for comment. Hemant Patel, the Escondido hotel's new general manager, is confident that Kalthia will turn around the hotel at 555 N. Centre City Parkway. "It won't be foreclosed again," Patel said.

Rising occupancy rates for San Diego hotels are fueling some of the turnaround.

Smith Travel Research also said recently that occupancy rates for San Diego hotels stood at 66.7 percent in 2010, versus 62.7 percent in the year-ago period.

Overall, California continues to lead the nation in foreclosed hotels, according to Reay.

In 2010, 465 California hotels were in default or were foreclosed.

To give an idea of the magnitude of the meltdown, according to Atlas, last year's foreclosures in San Diego County accounted for 1,696 total rooms, up from only 77 rooms in the prior year. Hotel rooms affected by foreclosures in Riverside County, which is heavily influenced by the Coachella Valley's stretch of hundreds of hotels from Palm Springs to Indio, rose to 401 rooms in 2010 -- a 40 percent jump -- versus 286 in 2009.

On hotel defaults, Los Angeles County led with 35, followed by San Bernardino with 32, San Diego County with 31 and Riverside County with 29.

Defaults rose 6.9 percent in 2010 in San Diego County and accounted for 4,681 total rooms, up from 4,139 rooms in 2009. Riverside County's defaults rose 31.8 percent to 29 hotels in 2010, and accounted for 2,501 rooms, up from 2,160 rooms in the year-earlier period.

Reay said the volume of bad loans far exceeds any that he has ever seen.

Call staff writer Pat Maio at 760-740-3527.


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Copyright (c) 2011, North County Times, Escondido, Calif.

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