Past optimism blamed for hotel’s financing woes
Negotiations are continuing between city officials and the owners of Embassy Suites Resort on a proposed partial time-share conversion, with a public discussion on the matter tentatively scheduled for next week.
Meanwhile, there seems to have been an outbreak of confusion, rumors and speculation in the community as to why the situation has occurred and what it all means.
Koar-Tahoe Partners, L.P., have been issued a notice of default on a $52 million balloon payment for the loan they took out to build the state line-area hotel in 1991. If the owners do not present a solid payment plan to their lenders within 30 days of that notice, the bank could foreclose on the property, and Koar most likely would go bankrupt.
Koar is asking the city to lift its five-year ban on time-share conversions so they can transform the hotel’s top four floors – 188 suites – to vacation ownership units. The change would provide quick cash to downsize the loan payment and refinance the now-smaller hotel.
Koar’s problem stems from the original financing on the hotel property that was negotiated in 1990 between the company and its lender, Mitsui Trust & Banking Co., Ltd. Los Angeles Agency.
The estimated cost to build the hotel was $76 million, of which Koar-Tahoe could contribute about $24 million out-of-pocket. The remaining $52 million came in the form of a five-year construction loan. Koar would make interest payments on the loan, and in 1997 the $52 million “balloon payment” would be due. Normally, that large payment would be refinanced over a longer period of time – usually about 30 years.
But in the financing agreements, Mitsui apparently required a high “coverage factor” of revenue over debt in order for Koar to refinance. Therefore, if the hotel did not generate revenues in a certain amount over the debt owed, the investors would not roll over the balloon payment.
While Embassy is still generating enough money to make the monthly interest payments on the loan and pay operations expenses, it is not performing at the level Koar’s lenders required.
Tim Tosta, Koar’s attorney, said it was reasonable for his clients in 1991 to believe the hotel would be worth enough to refinance in 1997.
“At the time the hotel was about to be undertaken, the sense of optimism bordering on euphoria about the future of Tahoe is what brought on the projection,” Tosta said last week. “Unfortunately, the entire economic picture of Lake Tahoe has changed, from the downward trend in gambling to hotel room rates being lowered across the board.”
But Kerry Miller, city manager, said the hotel is flourishing from the city’s perspective, because the city made a more conservative revenue estimate on the redevelopment bonds.
“In the financial world, a normal coverage factor is about 1.2,” he said. “In hindsight, it could be said that it was an unrealistic requirement from the beginning.”
Steve Solberg, general manager of the Stateline Embassy, confirmed that the hotel is running in the black, with an average 70 percent annual occupancy rate.
He also pointed out that Embassy Suites, a hotel management company owned by Promise Hotels – a very large conglomerate that also owns Hampton Inns and Homewood Suites – has nothing to do with Koar’s potential bankruptcy.
“The property is having one of the best years it’s ever had,” Solberg said. “The financial problems here are strictly with financing and debt service, not operations.”
Solberg said he would support Koar’s proposal to covert 188 suites to time-share units, if that’s what it takes to ensure the hotel continues to be managed by Embassy.
“If the building went into Chapter 11 and was sold, whether the new ownership would retain Embassy, we don’t know,” he said.
That very issue has also been a source of confusion and speculation within the community.
Judith Von Klug, redevelopment manager, said she doesn’t think a bankruptcy would mean an immediate selling off of the property.
“This would probably be a reorganization as opposed to a liquidation, and in a reorganization, any bank judge is going to try to preserve the ownership,” Von Klug said. “I think the chances of it going up for sale are slim.”
If the end result was a sale, city officials said it would probably not be difficult to find a company to purchase the property to prevent the hotel from going dark.
“There generally are (interested buyers) when the bankrupt property is a newer one, because frankly, it is a way to get a modern hotel for a discounted price,” Von Klug said.
A similar situation occurred at the Embassy Suites near the Los Angeles Airport, which was also owned by Koar. The hotel filed bankruptcy and was purchased by Selcor, Inc. – a company that owns many Embassy hotels nationwide.
“The change didn’t affect business or operations at the hotel,” said Sandy Murphy, general manager. “No one would have had any idea.”
Both Von Klug and Miller stressed the public should not be worried about Embassy Suites shutting down. Even if it was not purchased right away, the bank would appoint a trustee to ensure hotel operations continued and the city collected the Transient Occupancy Tax needed to pay off redevelopment bond debt, they said.
“Our motivation to work something out is not that we’re afraid Embassy will close its doors, but that a bankruptcy may make it difficult to negotiate favorable terms when we bond for Park Avenue,” he said. “When we try to sell investors on purchasing or underwriting bonds and they see our showcase project just declared bankruptcy, what does this mean?”
Another concern related to the Park Avenue Redevelopment Project is what will happen with the private investors in the event of a bankruptcy and a conversion to time shares.
“From Koar’s perspective, it’s much cleaner and smoother to do a conversion. To them it’s a very simple answer, because it gives them enough cash to buy down the loan and refinance,” Von Klug said. “Our concern has been and remains, once we lift the moratorium we lift it for everyone, and we have to look at what kind of an effect that would have on the community. From our perspective, conversion has a downside.”
If city officials agreed to Koar’s proposal, she said they will ensure a direct, tangible benefit to the community as a result of allowing the hotel to be partially converted.
“We are looking at things the time-share developer (in Park Avenue) had to fund, and seeing if there’s a way Embassy could contribute,” Von Klug said. “Maybe they could help finance Park Avenue to help mitigate the affect a time-share conversion would have on that project.”
Other things that have been talked about include financing the South Tahoe Ice Center at the Recreation Complex – currently incomplete and suffering from a lack of funding – or pay for a mile of curbs, gutters and sidewalks along U.S. Highway 50.
Von Klug said if such a deal was made and the city’s time-share moratorium was lifted, the public improvement aspect would apply to any property wanting to switch to time share use.
The City Council meeting on Sept. 2 will likely include a council subcommittee report on the status of negotiations with Koar, Miller said. The item will give the council an opportunity to discuss the issues together as a body, which they have not yet been able to do.
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