Embassy Suites requests change in redevelopment plan
Decisions made by city leaders and key business partners in the next 30 days may be critical to the future of South Lake Tahoe’s current and future redevelopment endeavors.
Embassy Suites Resort, the cornerstone of South Shore redevelopment, was issued a notice early this month of default on its $53 million balloon loan payment and is in danger of foreclosure, said Tim Tosta, attorney for hotel owners Koar-Tahoe Partnerships.
“The law would have a foreclosure able to occur three months after the notice was given, but often loaners will negotiate for time if they think a payment can be made,” he said. “We are in the process of trying to get some additional time.”
Preventing the 400-room hotel from going under is Tosta’s primary objective, which he believes can be accomplished by converting 188 of the hotel’s suites to time-share use.
City officials have not yet agreed to such a deal.
“We are in the process of looking at whether there is some solution that will work out for the Embassy hotel that will also work out for the city,” said Judith Von Klug, redevelopment manager. “If we find the solution, possibly we can support the conversion, but if we don’t find the solution, maybe we can’t.”
Of particular concern is how the change will affect the massive, multi-million dollar Park Avenue Redevelopment Project, which includes a 200-unit time-share complex.
Negotiations for the private financing of the Park Avenue effort are continuing, and the lack of a solid deal has pushed the groundbreaking date two years behind schedule.
“I think the city has two concerns – protecting our revenue stream and ensuring that Park Avenue remains economically viable,” Von Klug said.
But Tosta argued allowing Embassy Suites to go bankrupt, which he said is certain to happen if a time-share conversion is not allowed, could just as easily put Park Avenue and the city’s bond payments in jeopardy.
The proposed time-share deal would be revenue-neutral as far as TOT is concerned, he said, where the source would change but the revenue stream would stay the same.
If the property goes into bankruptcy, there is no telling what will happen, he said.
“We’re trying to convince the city and others that it is in their best interest not to have the scenario play out to foreclosure and bankruptcy,” Tosta said. “A bankruptcy essentially puts everything about redevelopment and this property in suspense. There’s a lot for the city to carefully consider, particularly as it looks forward to new redevelopment projects.”
The Embassy property contributes about 60 percent to the city’s redevelopment debt payments, Von Klug said, and those payments are on schedule.
“The hotel is making more revenue than what we said it would make, but less revenue than what Koar said it would make, which is why we’re not having a problem and they’re in trouble,” she said.
She said a bankruptcy does not necessarily mean the city will lose all that money or that Park Avenue will fall apart. While the hotel is in bankruptcy it will continue to operate and the city will continue to collect TOT, she said.
“If there is a bankruptcy, it could have an impact on future financing,” Von Klug said. “It is certainly a serious situation, but I don’t take it as a given that a bankruptcy would destroy Park Avenue, and in fact I think there are many ways to mitigate that.”
If the conversion is allowed, a time-share developer would buy the 188 suites, providing a lump sum payment that could in turn be put toward the $53 million bond debt, Tosta said.
Refinancing the hotel is not an option, he said, because the current assessed value of the hotel – which cost $76 million to build – is substantially less than the outstanding loan payment.
The city is in the second year of a five-year moratorium on time-share conversions. The ordinance was instituted in order to prevent a saturation of the market, which is what some say happened with hotels and motels in the 1970s and ’80s.
Any deviation from that policy would require an ordinance amendment by the City Council.
But Kerry Miller, city manager, said the issue is not so cut-and-dried. It is extremely complex with some enormous implications, which is why it is important to work out the best possible business deal that makes sense for the community, he said.
“Right now, converting the hotel to time share would not bring the public benefit required for us to feel favorably toward it,” he said. “It could be a public improvement project, or possibly something that would help facilitate or jump-start Park Avenue or Project 3.”
Tosta said the only way he will be able to do that is to creatively leverage what the property can afford.
“This is a property that’s economically strapped and what the city would like is a benefit that results from money,” Tosta said. “If we had money, we’d pay the loan. What I’m trying to make people understand is there are some situations where a good win is preventing a big loss.”
Indications are that the city and Koar will try to come to a resolution before bringing the issue to the City Council, which Tosta said needs to happen within the next 30 days in order to pitch the deal to the investors.
The bottom line seems to be a need for both parties to quickly analyze the situation and work hard on finding a common ground.
“This is not a negotiation between adverse parties, but a problem-solving session amongst equally concerned parties,” Tosta said. “Everyone benefits from the Embassy surviving and everyone loses from us going down. As a consequence, there’s a need for a joint solution.”
Miller said he is unsure as to whether or not they will find one.
“Our ability to craft this so it makes sense for everyone is so constrained, that at this point I really don’t know,” he said. “All I can say is we are proceeding in good faith with the community’s interest at heart to try and work it out.”
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