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SAN FRANCISCO-A receiver has taken control of the Renaissance Stanford hotel and adjacent parking garage. Funds of JER Partners paid approximately $93 million in January 2007 for the 393-room luxury hotel on Nob Hill and then spent $32 million completely renovating the eight-story property. The property continues to be operated by Marriott International, which has reportedly been keeping occupancy high at the expense of room rates
Barclays Capital, the lender, says in court documents that the borrower, a pair of JER funds, defaulted on its $89-million loan for the acquisition, renovation and operation of the hotel and then essentially walked away from the asset, prompting it to litigate for the foreclosure and sale of the property, for the immediate appointment of a receiver, and for actual damages, including the $89 million outstanding plus interest, late fees, etc.
A San Francisco Superior Court judge has thus far given Barclays some of the relief it sought, ordering last month the appointment of Douglas Wilson Cos. of San Diego as receiver and prohibiting the borrowers from interfering in the operation of the property. The man now overseeing the asset is Reint Reinders, a hotel and tourism executive who spent 21 years with Marriott and also directed the San Diego Convention & Visitors Bureau.
“We become the substitute owner,” Reinders tells GlobeSt.com. “We come in and stabilize the asset.”
While not opposing the receivership, the borrower has disputed the allegations of default, according to Barclays, and apparently requested alternative dispute resolution; a related case management conference has been scheduled for Oct. 16, 2009, according to court documents. JER and Barclays could not immediately be reached Thursday for comment.
Barclays complaint states that mechanics liens totaling $800,000 were filed against the property in February and that in March the general contractor and the property manager claimed the borrower owed it more than $3.7 million and $1 million, respectively. That same month the property manager informed the borrower that it had insufficient gross revenues to make April payments for ground rent ($124,357), impositions ($395,895) and insurance ($482,000), according to Barclays’ complaint.
On or about March 25, according to Barclays’ complaint, the borrower told the general contractor, Howard S. Wright Constructors LP, that it “has more debt on the hotel than the hotel is worth” and that it “intended to turn the hotel over to [lender].” Barclays allegedly notified the borrower of their defaults on that same day and filed its complaint last month after the borrower “failed and refused to take any steps to remedy the default.”
Barclays also alleges that the borrower distributed $1 million to the property manager for payment of the contractor’s most recent draw request and that the contractor never received the money. “Plaintiff is informed and believes that [the funds] have been wrongfully diverted to reimburse hotel operating expenses,” Barclays states in its complaint. “In addition, contractor itemized the material work left to be completed at the hotel, including work that raises serious life-safety and permit issues…”
The official lender is BCREO I LLC, having been assigned the loan by Barclays Capital Real Estate Inc. on May 12. The official borrowers are Stanford Court Hotel LLC and JER 875 California Street LLC. Both are 100% owned by a JV of JER Real Estate Partners III LP and JER Real Estate Qualified Partners III LP, which are both approximately 98% owned by “taxable investors” and “tax exempt investors,” respectively, according to court documents. The remainder is owned Joseph E. Robert Jr., according to court documents.
The hotel is currently hosting lots of guests but not achieving anywhere near the room rates expected prior to the recession. Reinders tells GlobeSt.com he was there two days this week and the property was 92% occupied both days.
“It’s basically a brand new hotel; the whole thing has been redone, but rates have really suffered,” Reinders says. “First class hotels here are having to charge $120- to $130 per night [to maintain occupancy] when in a world-class city like San Francisco rates for such properties should be $200 or more.”
The property was expected to underperform through most of 2007 and 2008 due to the renovations. What wasn’t expected in 2006 was a deep recession that would cause the value of the hotel and room rates to decline precipitously.
“Could anybody have foreseen in 2006 that we were basically at the top of the market and that three- or four years later it would be worth 40% less? No,” Reinders says. “In fact, based on occupancy and rent trends the assumption was it would be 20% to 30% higher.
“Nothing grows to the sky, as we have found out.”
Stanford Court is the only hotel in California for which Douglas Wilson is acting as receiver, but it is not expected to be the last, in California and elsewhere around the nation. Most hotels that changed hands in 2006 and 2007 at the top of the market are now facing problems both because rate and occupancy assumptions are not coming to fruition, and because the drop in value is preventing refinancing.
At the start of the month, Sunstone Hotel Investors chose not to make the June 1 payment on the $65 million mortgage on its W Hotel in San Diego, a voluntary move it said reflects a “significant and continuing deterioration in demand for luxury lodging.” Sunstone cited “a number of unique, market and hotel-specific factors” that drove its decision, adding that it might pursue similar options with certain of its other mortgaged hotels.