More hotels are facing foreclosure, bankruptcy

When it opened on Waikiki in 1964, The Ilikai was the first luxury high-rise hotel in Hawaii. The oceanfront property also gained fame for appearing in the opening credits of the 1960s TV series Hawaii Five-O.

But a rough economy has the landmark condo hotel facing possible closure if it can't find a buyer. A large portion of its hotel units — a majority of its rooms are privately owned condos — was forced into foreclosure after its owner failed to repay a loan due.

"Many (customers) won't notice the difference in service," says court-appointed commissioner George Van Buren. "It's unlikely that it'll close." Still, he couldn't "give an unqualified assurance" that it will remain open.

The U.S. hotel industry is bracing for more foreclosures or bankruptcies this year as owners increasingly fail to pay back maturing loans or fall behind on payments.

Until now, hotels have been spared from waves of foreclosures that have rocked the housing market. But that could change this year, says Los Angeles hotel attorney Jim Butler. "It's like a water balloon and someone forgot to turn off the water. But it hasn't burst yet."

Occupancy and revenue are expected to plummet this year. About 36% of full-service U.S. hotels will lack the cash flow needed to pay their monthly mortgages in 2009 vs. 21% in 2008, says Mark Woodworth of PKF Hospitality Research.

Though it's rare for hotels in foreclosure to shut down completely, since debtors still want operating incomes, they are increasingly cutting back on services to save money. That means fewer restaurants will remain open and room-service hours will be cut. There will be longer wait times at the front desk and fewer bellhops working in the lobby.

Among other large hotels that have undergone foreclosure or under notice for foreclosure: Renaissance Grand & Suites Hotel in St. Louis, and W Hotel and InterContinental Montelucia Resort, both in Scottsdale, Ariz. Owners of Ritz-Carlton Lake Las Vegas, Sheraton Downtown Orlando and The Tropicana in Las Vegas have filed for bankruptcy. MGM Mirage said this month that it "might not be able to stay in compliance" with a loan, which could lead to default.

Hotel operators generally insist that it's business as usual at distressed hotels. Many hotels have a "non-disturbance" clause in their contracts with their brands to retain certain standards, says hotel consultant Richard Warnick. "But in bankruptcy, courts can void management contracts."

Warnick advises customers to try to book at hotels that have "been around a while." "The newer they are, the more likely they're in trouble."

Bob Eaton of PKF Capital adds that customers should read contracts carefully when paying deposits for weddings or large meetings since customers are generally considered unsecured creditors and are last in line for repayment in bankruptcy.

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