Financial challenges are mounting for developer Lowe Enterprises, which has received a default notice from another major lender on Terranea Resort in Rancho Palos Verdes and has stopped making mortgage payments on its Sheraton Universal Hotel in Universal City.
Brentwood-based Lowe's money problems underscore the dramatic change in the fortunes of hotel owners since the recession began, driving down occupancy and room rates, according to hospitality industry experts.
About 275 California hotels have received notices of default or already faced foreclosure by their lenders, said consultant Alan Reay, president of Atlas Hospitality Group. About 80% of those hotels received financing during the boom years from 2005 through 2007. Since then, hotel values have plummeted, and in many cases "there is no equity left" for the owners, Reay said.
Lowe completed the luxurious 582-room Terranea Resort in June at a cost of $480 million. Last week, Lowe said that it had fallen into default on its secondary loan with Cascade Investment. Thursday it confirmed that it also had received a notice of default from its primary lender, Corus Bank.
The financial headaches come as the posh coastal hotel on the former site of the Marineland of the Pacific aquatic theme park gains business, said Robert J. Lowe, chairman and chief executive of Lowe Enterprises, the resort's principal owner. Terranea remains open and is performing better than expected, Lowe said.
On Thursday, a company representative confirmed that Lowe Enterprises had stopped making payments on its mortgage for the Sheraton Universal, which the firm bought at the top of the real estate market in 2007 for $122 million. The firm then spent millions of dollars more on renovations and improvements.
Robert Lowe said he couldn't discuss the company's loan on the Sheraton Universal, but Lowe Enterprises did release this statement:
"Lowe has made a significant investment in renovating the Sheraton and we believe in the long-term value of the property. . . . We have entered into negotiations with the lender to seek a loan modification that would be of benefit to all parties and allow us to manage through this difficult market."
Lowe is in talks with its lenders to restructure its debt on the hotels. It's unclear whether Lowe will be able to hang on to Terranea and the Sheraton Universal, but it's unlikely that their mortgage holders are in a rush to foreclose, Reay said.
"Lenders are loath to take these properties back, especially something as management-intensive as hotels," Reay said. "Foreclosure is the last resort on a resort hotel."
Lowe Enterprises worked on Terranea for almost a decade but had the misfortune of completing it in a down market, said investment banker Donald Wise of Johnson Capital. He predicted that lenders Corus Bank and Cascade Investment would renegotiate terms of the debt in a way that would keep Lowe in control of the resort.
"There is no reason for the lenders to jettison Bob Lowe," Wise said. "He knows the asset best. He did all the heavy lifting" to build it.
Corus Bank, a Chicago lender, announced this year it was undercapitalized and in danger of being taken over by federal regulators. Corus hasn't given Lowe the promised final $12.5 million of the construction loan that the company counted on to build the hotel, Robert Lowe said, further complicating the financial picture.
"We continue to work with our lenders and continue to be optimistic we will get something resolved that will be to the best interest of Terranea," Lowe said. "In the meantime, all operations are a go."
The hotel is 100% booked for Saturday night, and as many as 200 rooms have been rented on weekdays, Lowe said. Three weddings will be celebrated at Terranea this weekend.
This is the high season for summer leisure travel, investment banker Wise said, but overall business meeting travel is down about 50%. Southern California's large coastal resorts, including Terranea, were designed to host large business events, yet many companies have canceled resort get-togethers to save money or avoid the appearance of being wasteful. Hard times for the hotel industry are expected to continue through 2010, Wise said.
Terranea is the only full-fledged spa resort on the coast in Los Angeles County, Lowe said, which gives it some competitive advantages against similar resorts from Santa Barbara to San Diego.
But real estate broker Bob Brown of Cove Realty Co. in Palos Verdes Estates thinks Terranea's remote location on the peninsula might work against it.
"It's on a lightly traveled two-lane road in a geologically challenged area en route to San Pedro," Brown said, "without the major entertainment or luxury shopping sites that can be found in Carmel or Laguna Beach."
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At a glance
Chief executive: Robert J. Lowe
Business: The firm develops, buys and manages properties nationwide. An affiliate manages more than $4 billion in real estate assets for institutional and investment clients.
Employees: 7,000 nationwide
Owners: 47 employee shareholders
Selected properties: Terranea Resort, Rancho Palos Verdes; Sheraton Universal Hotel, Universal City; Estancia La Jolla Hotel & Spa, La Jolla; Royal Palms Resort & Spa, Phoenix, Ariz.; Vail Cascade Resort & Spa, Vail, Colo.; the Gant, Aspen, Colo.
Source: Lowe Enterprises