Hotel bankruptcy sign of San Diego's future?
[Posted: Jun 28, 2010 10:53 PM EDT Updated: Jul 07, 2010 1:18 PM EDT
By News 8's Craig McKee
What's going on behind closed doors at 5th Avenue Partners LLC, owner and operator of Se San Diego, has many wondering what the future holds for this upscale hotel.
Steven Rebeil, Managing Member of 5th Avenue Partners, filed Chapter 11 bankruptcy before a court hearing Monday due to a $67 million default on outstanding loans. According to court papers, the filing blocks the bank from taking receivership of the hotel.
In a release from the Public Relations Department of 5th Avenue Partners, the Hotel remains open and will continue operating to the highest level of standards. The statement goes on to say that a number of factors played a role in this decision, one of which dated back to 2007, while the hotel was still under construction.
By December 2007 the general contractor was significantly over budget and in trouble. By April 2008 the general contractor had abandoned the project and removed all of its employees and equipment. In May 2008 Highland Partnership was terminated by 5th Avenue Partners. The company was able to re-contract with most of the sub-contractors to finish the project but this required the company funding nearly 30 million dollars that was the financial responsibility of the general contractor. Aside from the dramatically increased cost of construction the hotel opened for business in late December 2008, nearly a full year later than the original and intended opening date of December 2007.
The hotel opened with much fanfare, but in a time where the country's worst recession in decades was gaining momentum, the hotel was in the right place at the wrong time. The down economy, lack of business and tourism, the hotels bottom line began to hurt. And the bank began knocking on their door.
After being open for business for just five months the company's three-year construction loan with West LB AG bank matured and became due in full in May 2009. After opportunities to re-finance the construction loan became nonexistent, West LB AG filed a Notice of Default on the construction loan in March 2010, some 10 months after the loan expired.
The financial struggle of 5th Avenue Partners could be a sign of what's to come for many San Diego businesses. Chief Economist for San Diego Association of Governments or SANDAG, Marney Cox says, what happened in the housing market is starting to pop up in our commercial market, to include the hotel industry.
"You can take a look at hotel occupancy rates and throughout this recession they've continued to decline. They're usually in the mid seventies and today they're in the mid sixties and so they've lost ten percent occupancy that's across the board," he explained.
With lower numbers of room occupancy, the laws of supply and demand don't play out in the hotel's favor.
"We've seen a lowering of the room rates. Fewer people and lower room rates less revenue to the hotel," Cox said.
While some hotel investors may have enough cash in reserves to get their property through the recession, Marney says companies not prepared find themselves in bankruptcy in the near future.
"The similar trends that took place in the residential market look like they're beginning to unfold in the commercial market, including hotel, office, retail space," Cox says. "If they can't get some kind of relief from whomever holds the debt outstanding, the next step is to sort of reorganize."
The issue will not be solved by next year, or the year after that, Marney says. He believes it could take three to five years to get things back to peak prior to the recession. He adds that the slow rebuild could have positive effects on everyone across the board, forcing both consumers and businesses to change the way they do business and how they handle credit in general |
