Three San Diego hotels are headed for foreclosure after a decision by their Orange County owner to stop making payments on debt that exceeds the rapidly declining value of some of its properties.

 

Sunstone Hotel Investors Inc. opted last fall to default on a $246 million loan covering 11 hotels, including the three in San Diego, but indicated that it was talking to its lender about renegotiating the terms. Those talks, however, proved to be unproductive, and Sunstone announced this month that it would turn the hotels back to its lender, Massachusetts Mutual Life Insurance Co.

 

The move will allow the San Clemente real estate investment trust to avoid what would have been a financial drain this year of $40 million after debt service and capital expenditures for the 11 hotels securing the loan, said Chief Financial Officer Ken Cruse.

 

The affected San Diego hotels are Courtyard by Marriott San Diego and Holiday Inn Express San Diego, both in Old Town, and the Holiday Inn in downtown San Diego.

 

“The decision to deed back the hotels was made after six months of negotiations with our lenders,” Cruse said. “... We have paid for the option to give back the assets, and we are obligated to exercise this option when conditions warrant.”

 

Sunstone, which last year defaulted on its loan for the hip W Hotel downtown – now in the hands of a receiver – is hardly alone in its effort to unload troubled holdings. An increasing number of hotel owners are having a difficult time carrying properties that have become a drain on their bottom line.

 

With business travel down sharply and consumers reining in spending on leisure trips, hotel operators have been forced to sharply discount room rates. As of the end of November, average revenue generated by San Diego County hotel rooms was down more than 21 percent from a year earlier, according to Smith Travel Research.

 

One consequence of the declining revenue hotels are seeing is a rapid increase in the number of defaults on hotel loans.

 

A year-end report by Irvine-based Atlas Hospitality Group said there were 307 California hotels in default, up from 53 a year earlier. In San Diego County, hotel defaults climbed from just six a year ago to 29 by the end of 2009.

 

The most recent San Diego hotel reported to be in default is the 182-room Ramada Plaza in Mission Valley. The owner filed for bankruptcy protection this month, which may keep the hotel from falling into foreclosure, said Alan Reay of Atlas Hospitality.

 

He foresees a rough 2010 for the hospitality industry, especially for tonier hotels, which have struggled the greatest during the recession.