A foreclosure move on the St. Regis Monarch Beach Resort is a bid to take over the upscale coastal hotel and shop it as a long-term “trophy” in a market that’s been devastated in the short term, according to sources familiar with the situation.
A unit of Citigroup Inc., which holds a secondary $70 million mezzanine loan on the Dana Point hotel, started foreclosure proceedings on a portion of the hotel’s debt after co-owners Makar Properties LLC of Newport Beach and San Francisco hedge fund Farallon Capital Management LLC fell behind on payments.
Representatives from Makar and Farallon declined to talk for this story.
An auction of the St. Regis, which opened in 2001, is scheduled for July 7 at the offices of Santa Ana-based title insurer First American Corp., according to a document outlining the terms of the proposed sale.
News of the foreclosure and auction had some scratching their heads last week.
A buyer of the St. Regis at auction would assume the hotel’s $230 million in senior debt, leaving many to ask who would take such a deal in today’s market, where hotels have lost half their value in the past two years.
But Citigroup isn’t looking to the auction to unload the hotel, according to a source familiar with the matter. Instead, it’s seeking to gain title of St. Regis and then take its time shopping the hotel, the source said.
Despite the hotel downturn, Citigroup still sees value in its investment and is trying to save it, according to the source.
The St. Regis is “an irreplaceable class of real estate” that still could fetch a price that salvages part or all of Citigroup’s investment, the source said.
Some hotel industry sources are skeptical. They estimate the St. Regis now to be worth $125 million to $150 million, or about half of what’s owed on the hotel.
But Citigroup could bide its time and hold the St. Regis as “a long-term play,” a hotel industry source said. It could try to sell the hotel a few years from now and possibly end up “winning” on the deal, the source said.
The St. Regis is something of a rarity as one of the last large coastal hotels to be built in the state. Finding seaside land and getting approvals to build a similar hotel elsewhere wouldn’t be easy, sources said.
If the St. Regis ends up going to auction, Citigroup could bid on it, essentially trading one asset,debt on the hotel,for another,the hotel itself.
That would formally strip Makar and Farallon Capital of their stakes in the St. Regis, which many observers suggest already have been lost with the hotel’s drop in value.
New York-based Citigroup originated the hotel’s senior debt in a 2007 refinancing by Makar and Farallon.
It’s unknown whether Makar or Farallon took profits by cashing out any part of their stakes in the refinancing. Hotel owners usually refinance to get a better interest rate or a cash infusion, a hotel industry source said.
Citigroup sold the mortgage in two chunks last year.
A limited liability company that’s part of Newark, N.J.-based Prudential Financial Inc. acquired $175 million of the $230 million mortgage.
A unit of Seattle-based Washington Real Estate Holdings LLC, which invests in real estate throughout the western U.S., acquired $55 million worth.
Both are senior debt holders.
Citigroup Global Markets Realty Corp. holds a $70 million mezzanine loan on the St. Regis. That’s the debt that’s being foreclosed.
A source familiar with the thinking of one of the senior debt holders said the investor isn’t happy to be in the situation it is in with the St. Regis but welcomed Citigroup’s moves.
Citigroup presumably would continue to make senior debt payments to Prudential and Washington Real Estate Holdings to prevent being foreclosed on itself as it shops the St. Regis, the source said.
The senior debt holder isn’t working with Citigroup but is “in the loop,” the source said.
It’s unclear whether Makar and Farallon still are up to date on their senior debt payments, the source said.
Citigroup’s motives also could be geared more toward the short term.
The foreclosure proceeding could be a “game of chicken,” said Marc Winthrop, a bankruptcy lawyer and founder of Newport Beach-based Winthrop Couchot Professional Corp., a law firm that’s not involved in the St. Regis matter.
The move could be designed to spur Makar and Farallon to get caught up on their payments, Winthrop said. It’s likely the two sides are in ongoing talks, he said.
A lot could happen between now and July 7, Winthrop and others said. A bankruptcy filing by the hotel’s holding company, Makallon Resorts I LLC, is a possibility, they say.
Some suggest Makar and Farallon, which had $20 billion under management at the end of 2008, could end up as bidders in an auction, potentially buying back some of their own debt for pennies on the dollar.
St. Regis Background
Makar opened the St. Regis in 2001 and turned it into one of the county’s most posh resorts, known for lavish holiday parties, political fundraisers and corporate retreats.
Last year, the St. Regis became infamous for hosting bailed-out insurer American International Group Inc.
The event to reward salespeople took on a public perception of excess and cast a pall over corporate events, sending already struggling corporate business at hotels down even further.
For the St. Regis, the AIG fallout brought a “taint” that caused many corporate meeting planners to avoid the hotel, one industry source said.
The St. Regis is one of several hotels owned by Makar. Farallon is believed to have stakes in most of them.
In 2006, Makar paid $42 million for the Wyndham Orange County hotel in Costa Mesa. A year later, it paid an estimated $160 million to $200 million for the Hilton Anaheim, the largest hotel in the county.
Makar put another $50 million into upgrades at the Hilton.
The Hilton Anaheim carries debt of about $200 million and could be “underwater,” said Alan Reay, president of Atlas Hospitality Group, an Irvine-based hotel consultancy.
Makar is limited in what it can do to cut costs at the unionized hotel, Reay said.
“You’re fixed costs are just so high,” he said.
The situation for the Wyndham Orange County is unclear, though plans to build condominiums at the hotel are off, according to Reay.
Makar also bought Korakia Pensione, a Palm Springs boutique hotel, for $7.5 million in 2007. Because of the deal’s smaller size, it might not be in the same boat as Makar’s bigger hotels, according to Reay.
But the hotel market in Palm Springs “has been completely wiped out,” he said.
Another big Makar project is the 31-acre Pacific City development in Huntington Beach. The company envisions spending some $750 million to build a 200-room boutique W Hotel, 191,000 square feet of shops, restaurants, offices and more than 500 condos.
That project is on hold amid the downturn.
Mark Mueller and Michael Volpe contributed to this story.
