Friday, August 21, 2009

Recession Hurls InterContinental Chicago O’Hare and Radisson Los Angeles Airport Into Chapter 11

CHICAGO, IL—The 21-month-old Recession has claimed two major U.S. hotels – the one-year-old, 556-room, 12-story InterContinental Chicago O’Hare (top right photo) and the three-year-old, 580-room Radisson Los Angeles Airport. (middle left photo)

Both hotels continue to operate normally while their bankruptcy petitions are being reviewed by the courts. The petitions were filed by the hotels’ owner, Harp Group of Oak Brook, IL.

With about $278 million in combined debt -- $158 million on the O'Hare property and $120 million on the Los Angeles property -- Harp is seeking a reorganization plan to continue operation of both hotels.

“Launched with high expectations less than a year ago, the newest luxury hotel at O'Hare (International Airport) is the latest victim of a crushing economic downturn that has devastated occupancy rates, forcing hotels to cut deals to lure customers,” the Chicago Tribune reports.

"It was absolutely necessary to request loan modification from our lenders," Harp Group president Peter Dumon (bottom left photo) told the Tribune. "Unfortunately, we had a very hard time even communicating with them."

The hotels were financed by San Diego National Bank, a unit of Oak Park-based financial-services firm FBOP Corp., and Amalgamated Bank, a New York-based lender owned by hotel workers union Unite Here.

Negotiations to refinance the debt began in October and broke down this spring, according to Dumon.

While the hotel industry has been rocked by the recession, the O'Hare market has been particularly hard-hit, according to Elmhurst, IL-based hotel consultant Ted Mandigo.
(middle right photo)

He told the Tribune that year-over-year airport hotel occupancy is down from 68.2 percent to 52.6 percent through June, while average room rates have declined from about $120 to $99 during the same period.

The InterContinental has been running at just over 50 percent occupancy, according to Dumon.

"They're struggling with everyone in that airport market area, offering discounts, cutting rates, packaging anything to stay alive during the recessionary period," Mandigo says.
He adds, “Many hotel owners across the country are in negotiations with lenders, hoping to rework financing that has become unsustainable during the recession.

“…Most banks would rather adjust the terms -- perhaps seeking lost revenue on the back end of the loan -- than take the keys to the property through foreclosure.

"Today, they're not getting checks. If they pick up the keys, then they've got to start writing checks."

When negotiations break down, filing bankruptcy is a way to get the lender back to the table, Mandigo says."Bankruptcy filing is just something that gets the attention of the banks and it pushes them to be more creative in the solution," he says.

"It puts pressure on the lender."Dumon agrees that Harp Group is still seeking new terms from its lenders, adjusted to reflect "more realistic values" than the current debt does.

Of the Chicago hotel, he says, "It's a beautiful hotel in what historically has been an outstanding market. We expect when the economy recovers, that will be true again."

He adds, "Our goal is to restructure the debt and the equity on each asset so that we can continue to own them on a long-term basis.

"We certainly understand that that obligates us to bring new equity to the table, and we're prepared to do that."

In addition to two of its own developments, the Harp Group acquired six properties for about $350 million between 2005 and 2007, including the Ambassador East in Chicago.

Dumon says the bankruptcy filing does not affect the other properties, but he acknowledges the prices of all hotels purchased during that (2005 to 2007) time frame now seem too high, given the current environment.

"If you had a crystal ball and a rear-view mirror, nobody would have bought anything," he says.

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