I’ll pick up where I left off in my previous bankruptcy blog. We were at the front end of a massive development project. The business owner had been sold to Morgan Stanley in late 2007. Every project and every community was loaded up with construction debt. I think by my count we had seven different construction loans outstanding in late 2009 of various sizes.
We had a 4-bank consortium providing the largest loan in company history on the new Ritz-Carlton hotel. The same bank group also provided funding for the Hyatt Residence Club project. The Village condominiums had debt, the golf course lots had debt, the Sunset Dream House had a mortgage, the fractional units had debt, and some random townhomes also had mortgages. We were all in, having taken full advantage of the easy money paired with the skills of a hyper-aggressive CFO. The models showed the debt produced better equity returns and the debt was so cheap and easy you couldn’t not take it.
The hotel loan was huge, I believe close to $150 million and it was maxed out. The hotel was due to open in December 2009. The planning….looking for a site, signing up for high-end operator, finding a contractor, and getting funds committed took almost 10 years and here it was set to open in the teeth of the deepest economic downturn since the Great Depression.
On a side note, I do remember getting my first tour of the hotel site with the project manager. He had built some scaffolding on the mountain in the middle of the trees to give the team an idea of where to situate the property to get maximum views from the front of the hotel. RIP Jack Berga, it was his baby.
The hotel loan was supposed to be paid down significantly soon after opening with proceeds from the sale of 23 high-end residences in the property. If they were roughly 2,000 square feet each and would sell (and do now) for over $1,000 per square foot then you could relieve $50 million of debt quickly and then refinance based on the hotel operations. It was a reasonable plan, just de-railed by the lack of financial commitment from the new owner and inability to close the units at expected prices when real estate values cratered.
The bigger problem was all the other development assets in the region guaranteed the hotel debt. The Club that was completely built out ahead of the real estate development was also collateral. The hotel lenders could take everything in the structure. Based on the way they mismanaged the hotel over the next two years after they foreclosed it is likely they would have decimated the value of the other assets, too. No one know which way was up in 2010 and the banks were in total CYA mode. To make no decision and take no action was better to them than possibly being on the hook for a decision that didn’t work out. I saw total ineptitude at some of the country’s largest financial institutions during the crisis. Another side note, but the smaller local banks with local decision makers were the best to work with and could make timely decisions to move towards reasonable resolutions.
So we gave up the hotel to Bank of America and their associates but the rest of the companies that owned assets filed bankruptcy so that we didn’t lose the bigger projects which had so much time and money invested and still so far to go.
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Ed Morgan Real Estate Fundamentals 