AMERICAN LAWYER MEDIA
Commercial Real Estate Annual
It’s back to the ’90s for a growing number of troubled hotel properties.
Sale prices for some South Florida hotels have declined to levels not seen in 10 years.
Judging by two recent hotel deals, the hospitality industry could be the hardest hit of all commercial real estate sectors, experts say. A former Holiday Inn in Fort Lauderdale and the Doubletree Hotel Coconut Grove sold earlier this month at prices lower than their values in the 1990s.
With hotel property owners drowning in debt and a recession that has discouraged Americans from traveling, the hospitality industry will struggle for years, said real estate litigator Steve Silverman, a partner in Kluger Kaplan Silverman Katzen & Levine in Miami.
In South Florida alone there are $1.2 billion in distressed hotel loans, according to Real Capital Analytics.
“The hotel sector is driven by disposable income,” Silverman said. “Given the problems in the general economy, hotel stays are going to be considered a luxury item for several years. Business travel is down and will continue to be depressed for several years.”
Knowing some hotel owners basically have to sell off their properties, investors are becoming increasingly “vulturistic” in the hunt for bargains, said broker Jeff Cohen, head of the commercial real estate division of Esslinger Wooten Maxwell’s Miami Beach office.
“Those who are suffering need to dispose of their assets,” he said. “With the pressure on the whole industry on the liquidity side, buyers are scrutinizing every possible deal to get it as cheap as they can.”
Insite Development Group of Weston is one investor that found a bargain. Insite affiliate Insite Sunrise Beach bought the former Holiday Inn hotel at 999 N. Fort Lauderdale Beach Blvd. for about $500,000 less than it sold for in 1998, according to Broward County records.
Insite closed on the purchase of the 240-unit hotel and two parking lots for $13.75 million on Sept. 15.
Representatives of Insite could not be reached for comment.
The seller of the hotel was the real estate arm of Blackstone Group, a New York-based private equity firm. Blackstone Real Estate Advisors took title to the hotel in January 2006 after its parent company acquired Bethesda, Md.-based MeriStar for $2.6 billion. MeriStar paid $14.04 million for the hotel and parking lots totaling 1.22 acres in 1998.
Glenn Alba, vice president of Blackstone Real Estate Advisors, did not return calls for comment.
The condition of the Fort Lauderdale hotel most likely reduced the sale price to pre-1998 levels, said Guy Trusty, president of Lodging & Hospitality Realty in Coral Gables. Trusty had looked into the development potential of the property in 2005 but was not involved in the Insite purchase.
“Most properties that are coming to market need a considerable amount of work,” Trusty said. “Any hotel that hits the market in the next two years will be similar. The prices reflect a discount for the work that needs to be done.”
If the hotel has been closed for a substantial amount of time, the lower sale price is justified, said attorney Suzanne Amaducci-Adams, a partner at Bilzin Sumberg Baena Price & Axelrod. Amaducci-Adams heads the firm’s hospitality industry practice group.
“A closure ruins the value of a hotel,” Amaducci-Adams said. “It is an ongoing business. To get it going again you have to get new employees, buy new inventory and start marketing efforts all over again.”
While the Doubletree Hotel Coconut Grove has remained open since 1972, the need for significant renovation depressed the sale price of the property.
Coconut Grove PT Ltd., an affiliate of General Electric Pension Trust, sold the 196-room hotel on Sept. 4 for about $13 million, according to Holliday Fenoglio Fowler, which brokered the deal. Coconut Grove PT acquired the hotel for $13.85 million 14 years ago, according to Miami-Dade County property records.
The sale price was recorded at $11.4 million in Miami-Dade County property.
The hotel needs between $5 million and $8 million in improvements, Trusty said.
Coconut Grove PT “didn’t put any money into it,” Trusty said. “They did just enough to keep the doors open.”
Bay Harbor Islands-based Robert Finvarb Cos., headed by Robert Finvarb, bought the property to convert it to a Courtyard by Marriott. Finvarb told the Daily Business Review earlier this month that he plans extensive renovations for the hotel but for now will work on improving the public areas such as the lobby, the pool deck and the meeting space.
Investors such as Finvarb must know going in that they could spend millions of dollars just to stay in business, Amaducci-Adams said.
“These are very expensive to own and maintain,” she said. “Every three-to-five years a hotel needs a face-lift. You need to freshen the linens, the lobby. Every seven-to-10 years a full makeover is needed.”
Since the maintenance and improvement needs of each hotel are unique, property appraisers are struggling to value these assets, Amaducci-Adams said. That could hurt future sales.
“There are so few trades out there and a lack of liquidity,” she said. “Appraisers are having trouble figuring out the real value.”
While the Fort Lauderdale and Coconut Grove deals show some buyers and sellers are coming to terms on prices, a sizable gap still exists, Silverman said. Unlike the residential real estate market, investors and property owners are unsure if the bottom has been reached.
“We will not see major activity until the market does flatten and there is a general consensus that we are starting to rebound,” he said.
But South Florida should see an increase in sales as loans come due, Amaducci-Adams predicted. Some hotel owners with mortgages set to mature in the next few years are under such pressure from lenders that they must try to sell their properties.
“First you have the monetary defaults because properties are not able to meet their debt service requirements,” she said. “More broadly, there is the issue of maturity defaults. If the [borrower] has no prior default but is unable to refinance due to tightness in the capital markets or not demonstrating enough cash flow, the only choice is to sell and get out.”
Eric Kalis can be reached at (305) 347-6651.