The Real Deal Miami

Debts could force early hotel check-outs

By Mike Seemuth | February 06, 2009 02:33PM

If the South Florida winter seems chillier for hoteliers this year, it’s because they face not only low temperatures but also fierce competition for guests and loan default risks linked to king-sized collateral valuations.

“The hotels that will go sour are the ones that over-leveraged,” said Michael Cannon, executive director of real estate consulting and valuation firm Integra Realty Resources in South Florida.

Condominium-hotel construction and conversion projects, in particular, attracted money from lenders based largely on their condo profit potential. As the condo market collapsed, that potential evaporated.

But some condo-hotel ventures that borrowed based on forecasts of flipped units have flopped under heavy debts the hotels alone can’t carry. Prominent among floppers is Chicago-based developer Robert Falor, who lost control of the Royal Palm, Breakwater and Edison hotels in South Beach after failing to transform them to condo-hotels.

The lender that provided mezzanine financing for the acquisition and condo-hotel conversion of the Breakwater and the Edison ultimately acquired control of the two hotels from the first mortgage lender. The lender sold the properties at auction.

“Possibly $30 million was lost on that deal [by the lenders] because they lent under a form of ownership that never occurred,” Cannon said, referring to unsold condo units. “The value on paper was greater as a condo-hotel than as a hotel. I don’t believe there was ever a condo-hotel market in South Beach.”

Hotels nationwide are accommodating unmanageable amounts of debt. PKF Hospitality Research reported in January that the number of full-service U.S. hotels lacking sufficient cash flow to pay their debt will increase by 25 percent in 2009. “The combination of a weak economy and rising levels of supply have caused one of the deepest and longest recessions in the history of the domestic lodging industry,” Atlanta-based PKF reported last month.

Revenue erosion in South Florida could increase default risk among owners of pricey hotels with too much debt. In December, PKF forecast that revenue per available hotel room will drop this year from last year’s level by 10.3 percent in Fort Lauderdale and by 12.9 percent in Miami.

Revenue pressure increases as consumers spend less amid an increased regional supply of rooms from news construction and redevelopment projects. Last year’s reopening of two renovated Miami Beach landmarks, the Fontainebleau and Eden Roc hotels, put thousands of additional rooms on the market ahead of winter season.

But “if you have money, now is a good time to be buying” hotels in South Florida, said Carlos Rodriguez, president and managing principal of a group of real estate investment funds based in the Coconut Grove section of Miami. “I am looking at deals where people are already bankrupt. Right now, we’re looking at two.”

Some hotel owners could lose control of newly built South Florida properties financed with construction loans that mature in two years or less.

“A lot of that was done with construction loans, and the owners are going to be looking for permanent financing,” said Miami-based hotel investment and management consultant Scott Brush.

“Balloon payments are coming up on some of these things. They’ve got to refinance,” Brush said. But bank capital destruction has inspired greater caution among lenders, and “refinancing isn’t all that easy these days.”

He agreed that many lenders stumbled by over-appraising the potential of condo-hotel ventures in South Florida that went nowhere on the condo side.

“What happens with that type of deal is they pay more than you would pay for a hotel,” Brush said. “The potential for making money on a condo was a lot quicker and a lot bigger than with a hotel. Hotels make money in the long term. They aren’t short-term deals.”