May 06, 2011--The lender for the Ritz-Carlton Kapalua scooped up its investment in a foreclosure auction yesterday on Maui, with a $75 million credit bid on the luxury hotel.

Lehman Brothers Holdings Inc. outbid two other qualified bidders for the 404-room luxury property, which was foreclosed in September after institutional investors and Maui Land & Pineapple Co. defaulted on a loan, most recently valued at $268 million.

Lehman Brothers filed for bankruptcy in September 2008 and is in the process of being liquidated.

The auction was held at the state courthouse building in Wailuku with local real estate executive Chris Lau serving as foreclosure commissioner. A confirmation hearing by a Circuit Court judge hasn't been scheduled. It is possible for a judge to reopen bidding if someone offers 5 percent above Lehman's bid, Lau said.

"I think it's a good possibility," he added.

However, if the bid is confirmed, the investment banking firm will focus on ensuring the hotel continues to operate and the value of the property is preserved, according to Barry Sullivan, an attorney for Lehman.

"When lenders take a property back, they're looking to maximize the value for it to try to recover their loan," he said. "The idea is to do what's in the best interest of the property so that we can do the best we can to recover the investment that was made."

While the five-star hotel is a high-quality asset, it carries significant debt, so the lender will likely wait for the property's value to rise and sell it when the market's stronger, said hotel consultant Joseph Toy.

"The lenders don't really want to be hotel owners," he said.

"At some point in time they'll want to sell the asset," likely in a private sale where the owner can get more value through negotiations, he added.

Like other hoteliers, the Ritz-Carlton's owners fell into trouble when the downturn in the economy and real estate market hindered sales of 107 residential condominium units.

Condominium sales were to pay down debt accrued for a $180 million renovation in 2008. Lehman initially issued $232 million in loans to finance the renovation and condominium conversion plan.

If no other bidders emerge at a confirmation hearing, Lehman would be in a position to resume condo sales efforts or restructure the existing operating plan.

Yesterday's auction included the bulk sale of 73 unsold condo units, 297 hotel units, common areas, commercial space and 21 acres of undeveloped land.

The Ritz-Carlton Kapalua was built in 1992 by Japan-based Nissho Iwai Corp., Ritz-Carlton Co. and Maui Land for $206 million.

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