Much has been written lately of the wholesale divestiture of hotels in Hawaii by Japanese owners as a result of the bursting of Japan's "bubble economy" and the recent recession in Asia. 

The fact is that most of the hotels that were acquired or built during the so- called bubble economy were too costly to be economically viable. Acquisition and/or development costs during the peak period ranged from $300,000 to $800,000 per key, while average daily rates in Hawaii's upscale and luxury hotels ranged from $175 to $350. 

This disparity presented a major challenge to hotel operators to produce sufficient income to cover debt in a Hawaiian hotel industry that has operating costs significantly higher than hotels on the U.S. mainland. In fact, Japanese hotel operators and owners, have not been able to produce sufficient income from operations to service their debt. 

As a result, owners have had to refinance their loans, restructure their ownership, and, when all efforts have failed, give up title to their lenders. Currently, hotels in Hawaii are selling for substantially less than replacement cost, and at less than half of the original acquisition or development cost. Still, the question is this: Are these fire sale prices low enough to be able to produce a sufficient yield to satisfy the investors? 

For example, is the 761-room Grand Wailea Hotel on the island of Maui, which recently sold for $263.5 million ($346,300 per room) or about 40 percent of development cost, a good investment? This was the highest priced hotel sale in Hawaii since 1993. 

In comparison, other notable sales in the past five years included the Kahala Hilton Hotel at $149,100 per room, the Hyatt Regency Waikoloa at $44,300 per room, the Ritz-Carlton Mauna Lani at $138,400 per room, the Kapalua Bay Hotel at $97,900 per room and the Alana Waikiki Hotel at $119,800 per room. 

Several hotels are expected to change hands in 1998 at prices ranging from $50,000 to over $400,000 per key. The 720-room Maui Marriott is scheduled to go to foreclosure auction, and the 194-room Kapalua Bay Hotel will be resold after just under two years of ownership by its current owner. 

According to the Hawaii Visitors and Convention Bureau, total visitor arrivals are expected to be down more than 2 percent in 1998 and Japanese visitors are expected to be down about 4 percent. The downturn in the number of Japanese visitors will mean a 3.5 percent drop for Oahu, which receives the majority of its visitors from Asia, while Maui is expected to be up nearly 5 percent and 
Kona up nearly 10 percent. 

Kona has especially benefited from the non-stop Japan Airlines flights from Tokyo. The irony is that, notwithstanding the positive outlook and trends on the neighbor islands, current hotel owners are forced to dispose of their hotels. Despite the mixed outlook for the visitor industry, Hawaii's hotels are being targeted by buyers including REITs, opportunity funds, chain operators and entrepreneurial individual investors. Numerous articles that have appeared in The Wall Street Journal, The New York Times, The Los Angeles Times and other publications extolling the fire sale of hotels in Hawaii have created a strong interest in Hawaiian hotels. 

However, most potential buyers are disappointed to find that Hawaii hotel deals are, in the vernacular of acquisitions people, "full of hair," including onerous land leases, complicated ownership structures, deferred maintenance (particularly in the older Waikiki hotels) and high operating costs. In addition, most acquired hotels will require renovation, repositioning and reflagging. 

In order to not duplicate the mistakes of the current owners and achieve successful economic results, a clear understanding of the market is needed. This understanding of the market will be the key to a successful hotel investment in paradise.