Makar Properties LLC may be looking to use land it retains around the St. Regis Monarch Beach Resort to try to regain ownership of the Dana Point hotel.
The Newport Beach-based real estate investor and developer still owns three pieces of land next to the St. Regis that could be used as bargaining chips, sources familiar with Makar said.
The trophy resort was turned over to New York-based lender Citigroup Inc. last month after Makar and its financial partner fell behind on mortgage payments.
The three parcels that Makar owns surround a majority of the 400-room hotel and largely separate it from the Robert Trent Jones-designed Monarch Beach golf course that’s also part of the St. Regis.
The parcels weren’t pledged as collateral for the $300 million in debt that Makar and its partner, San Francisco hedge fund investor Farallon Capital Management LLC, fell behind on earlier this year.
The delinquent payments led to mezzanine lender Citigroup initiating foreclosure proceedings on the St. Regis in June. It took over the property last month. It’s the most notable example of a high-end hotel going back to a lender during the recession.
Citigroup has a $70 million investment in the St. Regis through its mezzanine loan. About $230 million in senior debt on the hotel is held by Newark, N.J.-based Prudential Financial Inc. and a unit of Seattle-based Washington Real Estate Holdings LLC.
The Parcels
The horseshoe-shaped stretch of land Makar still owns,which circles a large portion of the hotel around its Niguel Road entrance,is used in the operation of the St. Regis.
Land under Makar’s control includes a site at the back of the St. Regis where big-dollar weddings are performed, as well as a parking lot and land used for the resort’s golf course.
Makar’s largest parcel is a large strip of land partly facing the ocean that now is used for employee parking and maintenance facilities but is zoned for housing.
If Makar opted to play hardball, sources said it could hinder two of the resort’s biggest money makers,weddings and golf,while making operations tricky for the resort as a whole by building more homes next to the hotel.
Attempts to reach Makar officials for comment last week were unsuccessful. Citigroup officials also couldn’t be reached.
A source familiar with Citigroup downplayed the significance of the Makar parcels.
“There’s plenty of room at the hotel to hold weddings,” the source said.
Some golf support operations now on Makar land are being relocated, he said.
The parcels “don’t have anything of significant value to offer the hotel owner,” he said.
Any leverage Makar has with the land wasn’t enough to prevent Citigroup’s takeover of the hotel after two months of talks between the two sides, the source said.
Makar could be betting on how strong Citigroup’s stomach for losses is at the hotel. Largely because of debt payments, Citigroup is expected to lose $1 million or more a month operating the resort, according to sources familiar with the operation.
Summer occupancy rates at the resort are said to be down as much as 30% from a year earlier, they said.
The resort has been hit hard in the past year with declining corporate business amid the hotel downturn and after the heavily criticized retreat at the St. Regis by bailed-out insurer American International Group Inc. last year.
Cancellation fees have been a small consolation to St. Regis’ declining revenue, according to sources. But Citigroup won’t have those in 2010 with fewer bookings this year, they said.
Figuring out the next steps for Citigroup and Makar is providing for plenty of speculation among real estate watchers and hotel industry insiders.
Litigation over the land is possible.
Makar is expected to try leveraging its land surrounding the resort to get back the entire property at a discounted price, some industry watchers believe.
Competing bids to buy the property appear unlikely. The split ownership of the hotel and surrounding land could complicate a bid to sell the St. Regis.
Investors may be hesitant to step in and buy the resort without knowing what Makar’s plans are for the neighboring land it still owns.
How long Citigroup would be willing to incur losses on top of its $70 million investment,which in the current market is probably worth little, if anything,is unclear.
Question of Value
At the time of Citigroup’s foreclosure move, a source told the Business Journal the company sees the hotel as having long-term value as one of the last large coastal resorts to be built in the state.
If the hotel had to be sold today and had no seller-carried financing, the St. Regis would trade for a substantial discount to the $300 million of debt the property now carries, said Alan Reay, president of Atlas Hospitality Group, an Irvine-based hotel consultancy.
The source familiar with Citigroup says the company’s move to foreclose on the hotel shows it believes there’s still significant value, even in today’s market.
Land issues could have been why no serious bids were put on the property in last month’s foreclosure-driven auction attempt, a source said. A planned auction was put off twice before the ownership transfer to Citigroup was announced on July 20.
If ownership of the St. Regis does somehow revert back to Makar, it doesn’t mean the developer is out of the woods financially.
Another Makar-owned property in Costa Mesa’s arts district also appears to be in distress.
The Wyndham Orange County Hotel in Costa Mesa was put into receivership in late July, according to Superior Court records.
Bank of America Corp. began proceedings against the hotel’s ownership, which goes by Makar Baynorth Costa Mesa LLC.
Jeffrey Kolessar, a vice president with Philadelphia-based hospitality management company GF Management, was installed as the hotel’s receiver.
Makar purchased the 238-room Wyndham, on Avenue of the Arts near South Coast Plaza, in 2006 for a reported $42 million.
The project was eyed for a major makeover, with plans filed to build a 23-story condominium tower while cutting back the number of rooms at the boutique hotel.
The Wyndham acquisition was financed under the assumption of condo development. But with the diminished demand for high-rises amid the housing downturn, the project made less economic sense, sources said.
