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The Honolulu Advertiser
Posted on: Thursday, May 16, 2002

Florida leads nation in delinquency of hotel loans

By Mike Schneider
Associated Press

KISSIMMEE, Fla. — There are no outward signs of turmoil at the Orlando Hyatt.

The floors are polished, the bellhops' uniforms are freshly pressed and the ficus trees and bromeliad plants are well-maintained in the spacious foyer.

But late last month, the owners of the 919-room hotel filed for bankruptcy to avoid a public auction of the property after they defaulted on a loan from LaSalle Bank National Association of Chicago.

The hotel owners, Orlando Hyatt Hotel Associates, aren't alone in failing to make mortgage payments. The $957 million in delinquent loans held by the lodging industry nationwide during the first quarter this year were the highest since records started being kept in 1995, said John Kemp, associate director at Standard & Poor's in New York.

Led by hotels in the Orlando area, Florida held the nation's highest delinquent loan balance in the industry, according to a report S&P put out last month.

The report looked at delinquent loans in commercial mortgage-backed securities in the first quarter of this year. The lodging industry surpassed all other industries.

After the tourism slowdown since Sept. 11, common wisdom held that luxury and first-class hotels would face the most difficulty. Instead, the economy and midscale properties in secondary markets have the greatest number of delinquent loans, Kemp said.

Five value-oriented chains account for almost half of all the delinquent loans in the industry: Holiday Inn, Shilo Inn, Ramada Resort, Best Western and Comfort Suites, according to the report.

Holiday Inn had the most delinquencies — $256 million involving 45 properties in 20 states. Most of the delinquent hotels are independently owned franchises and aren't actually owned by the hotel companies.

Although midscale and economy lodging chains tend to fare better than their upscale competitors during an economic downturn, such chains generally have properties owned by franchisees often highly leveraged with debt, said M. Chase Burritt, national director of Hospitality Services Group for Ernst & Young.

"Sometimes, when it's an entrepreneur ... , they borrow up to the hilt," Burritt said.

The Florida market accounted for $177 million of the delinquent loans and involved 23 properties. Florida's ranking was caused primarily by Orlando-area hotels, which saw occupancy rates decline by almost a quarter in October and November of last year compared with the same time in 2000, according to a report by Ernst & Young. The Orlando area has about 108,000 hotel rooms, second only to Las Vegas.

There are signs of improvement in the industry, however. At the end of March, the percentage of hotels and motels nationwide that had fallen behind on mortgage payments was 7.6 percent, down from February, when it peaked at 8.3 percent, according to the Standard and Poor's report.

Hotels that serve leisure and nonbusiness travelers had the strongest recovery from missing loan payments. Markets that depend more on business travelers, such as Boston and San Francisco, were still struggling.

Orlando Hyatt Hotel Associates stopped payments on the $22 million it owed LaSalle in November after the hotel's occupancy rate dropped 25 percent compared with the same time the previous year, said R. Scott Shuker, an attorney for the hotel owners.

The hotel occupancy rate has since returned to a normal range of about 70 percent. Including interest and penalties, the hotel owners owed the bank $29 million.

Built in the 1980s, the pink-and-green stucco hotel is located on prime real estate, just over a mile from the entrance to Walt Disney World. Hyatt Corp. manages the property but doesn't own it.

The hotel's bankruptcy filing and other delinquent hotel loans might eventually just be a "blip" in the cyclical nature of the lodging industry, said Kimberly Ashby, an attorney for Miami-based Lennar Partners Inc., which is servicing the loan for LaSalle.

"The market is so vast, you see expansions and compressions," Ashby said. "If people haven't accounted for down cycles, that's when you will find yourself in trouble."