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Ritz-Carlton Kapalua foreclosure could work to buyers' advantage

By Allison Schaefers

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The Ritz-Carlton Kapalua, which completed a $180 million renovation in 2008 as Hawaii tourism was softening and ventured into second homes just prior to the real estate meltdown, has joined the growing list of Hawaii hotels that are unable to meet loan obligations.

And, that's not necessarily a bad thing, said Joseph Toy, president and chief executive officer of Hospitality Advisors LLC.

"In my view, foreclosure is a positive and necessary step in the recovery process," said Toy, who represented the lender in 1997 when the Ritz-Carlton's then owner, Osaka, Japan-based Nissho Iwai Corp defaulted. "It reduces debt to a more sustainable level for the owners, and creates an opportunity for new investment to come into the marketplace. Ultimately, you end up with a much more stable and financially secure asset."

The Wall Street Journal reported that the Ritz-Carlton had been in distress for more than a year as its owners, GenCom Group and Goldman Sachs Group Inc.'s Whitehall Street Global Real Estate LP, tried to restructure their $255 million debt.

GenCom and its partners bought the hotel for $175 million in 2006, the benchmark year for Hawaii tourism when visitor arrivals peaked at more than 7 million and the luxury residential real estate market was still hot.

The strong economy drove the company to convert the 548-room hotel into 363 guest rooms and add 107 full-ownership condominiums. At the same time, they expanded the property's spa and fitness center to 11,000 square feet and overhauled the rest of the property.

Initially, potential buyers took to the suites, which could be placed in the hotel rental pool. Buyers paid an average of $1.9 million to scoop up 87 percent of the units in the project's first release, according to an earlier interview with S&P Destination Properties, which handled the sale.

But the transformation and the condominium project came to market just as the 2008 Lehman Bros. collapse and the Wall Street shakeup sent shock waves around the world. Ultimately only 34 of the project's 107 condominiums were sold, and when the Lehman loan came due in 2009, GenCom and its partners were unable to refinance it or repay it, the WSJ reported.

They weren't alone. During the downturn, which began in 2006 and continued through last year, Hawaii's hotel industry lost 30 percent of its revenue per available room and 15 to 20 percent of its occupancy and average daily rates, Toy said.

"In the second quarter of 2008, we began to see steep declines that were much further and faster than anticipated," he said.

As a result, many hotel owners like GenCom that made purchases or significant investments during the last up-cycle have seen their properties become distressed, said Mike Hamasu, director of the research and consulting division for Colliers Monroe Friedlander.

"They invested when the real estate bubble was at its height," Hamasu said.

In 2005, $4.3 billion of commercial real estate was purchased in Hawaii and another $3.8 billion changed hands in 2006, he said.

"A huge amount of capital was funneled into the hotel industry and it all unraveled subsequent to that time period," Hamasu said.

Although it will still be several years before Hawaii's hotel industry returns to its prior peak levels, a foreclosure sale of the Ritz-Carlton Kapalua should attract strong interest, Toy said.

"Maui sells itself and this is a prime destination," he said, adding that in July Maui's luxury properties were running above 75 percent occupancy.

GenCom's heavy investment will appeal to buyers, Hamasu said.

"It's an opportunity for a buyer to take advantage of the fact that someone spent $180 million to renovate and then buy the asset at a fraction of that cost," he said.






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