Club Quarters SF delinquent on big loan, could be up for sale

Consultant asks for zoning verification letter about the 346-room hotel

Blackstone's Stephen Schwarzman with 424 Clay Street
Blackstone's Stephen Schwarzman with 424 Clay Street (Getty, Google Maps)

The Club Quarters San Francisco is delinquent on a major loan, which could indicate a future “for sale” sign.

The 346-room business hotel, owned by a Blackstone Group real estate fund, could be up for “a possible disposition” at 424 Clay Street, the San Francisco Business Times reported.

The fund, Blackstone Real Estate Partners VII, bought four hotels in San Francisco, Chicago, Philadelphia and Boston in February 2016 for $283 million. The seller was Masterworks Development, an affiliate of the membership-based Club Quarters network.

Blackstone received a $274 million CMBS loan in October 2017. Wells Fargo is the master servicer.

This month, a consultant requested a zoning verification letter for the 130,000-square-foot, 11-story hotel property on behalf of an unknown client — often a part of the due diligence process for prospective large property deals, according to the Business Times.

The Blackstone Group fund was considering walking away from a $274 million commercial mortgage-backed securities loan from 2017, which anchors the San Francisco hotel and three other Club Quarters hotels in Chicago, Boston and Philadelphia, CoStar News reported last year.

The loan was transferred to special servicer CWCapital in June 2020 after the fund skipped payments, citing pandemic-related closures, according to an industry report from 2020.

Typically, a special servicer will work with the parties to work out a plan. The loan is now 32 months late, a January CMBS report says. CWCapital has declined to comment.

Loan servicer filings indicate Blackstone has steadily drawn on cash reserves since then, as the efforts to find a resolution dragged into a third year. The reserves are down to $9 million, according to the most recent CMBS report, according to the newspaper.

The Blackstone Group real estate fund declined to comment to the Business Times.

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A reappraisal of the San Francisco hotel property in February 2022 found it to be in “good condition.”

The appraiser valued the property at $168.6 million, a $9.6 million increase in value since its initial 2017 appraisal, according to a CMBS industry report. However, the most recent CMBS report finds that as of mid-October, the property value had slid back to $160.8 million for an overall appreciation of $1.8 million.

Despite Downtown San Francisco’s woes, the Club Quarters is the most valuable of the four properties on the loan, and the only hotel to appreciate since 2017, increasing 1.13 percent to $160.8 million, as of October.

Compare that to the rest of the portfolio over that time: Club Quarters Chicago Central Loop (down 40 percent to $69.4 million); Club Quarters Boston (down 12 percent to $71 million); and Club Quarters Philadelphia (down 13 percent to $58.8 million).

Club Quarters San Francisco appears to be profitable, generating $10.8 million in revenue against about $8 million in expenses through the first nine months of 2022, according to CMBS industry reports tied to the loan.

“This is a very small investment that had been written down prior to COVID-19 as a result of unique operational challenges,” a Blackstone spokesperson told CoStar News in July 2020, regarding the hotel portfolio. “We will continue to work with our lenders and the hotel management company to create the best possible outcome under the circumstances for all parties, including the employees.”

The value of Blackstone’s real estate portfolio dropped in the fourth quarter, hurting profits as rising interest rates dragged down the investment giant’s asset values. 

— Dana Bartholomew

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