The Four Seasons Hotel San Francisco has escaped looming foreclosure as owner Millennium Partners and a new equity partner have paid down a significant amount of the debt on the property.

 

Millennium and private equity group Westbrook Partners have paid down the mortgage on the Four Seasons San Francisco from $90 million to $55 million. Under the agreement Westbrook becomes two-thirds owner of the hotel while Millennium holds on to a one-third ownership interest in and continues to asset manage the hotel.

 

The deal comes nearly a year after Millennium Partners started strategically withholding payment of debt service in order to initiate discussions with the debt holders of the hotel. Millennium Founding Principal Christopher Jeffries said the decision was driven by the fact that vacancy rates at the Four Seasons had tumbled to 50 percent and it was unclear if or when the luxury end of the hotel market would bounce back.

 

While Millennium was public in its decision to stop making mortgage payments, from the beginning the developer was determined to hold onto the hotel, Jeffries said.

 

“If you are going to play in the market and play on a consistent basis, you have to really be there when there are problems and survive them. We are so happy about (the agreement) because we survived, fixed it, and now we can move on,” said Jeffries. “This is a whole new beginning for the hotel. It’s a whole new beginning for Millennium as an organization here because we have spent almost a year being on the defensive. It’s not a position we like being in but we were forced into it.”

 

In addition to the Four Seasons, which included 142 condos, Millennium is currently selling the $600 million 419-unit Millennium Tower project at 301 Mission St., the tallest residential tower west of the Mississippi. In addition, Millennium owns 706 Mission St., a site that is slated for a mixed-use project with the Mexican Museum.

 

“We have been here for a long time we have been building in the city for a long time,” said Jeffries. “We pride ourselves on the commitments that we make. We follow through.… We have a position in this town that it was not feasible for us to allow this mortgage to be given back.”

 

The agreement between Millennium and Westbrook Partners will reach far beyond the Four Seasons in San Francisco. Westbrook will also become two-thirds owners of two other Millennium properties, the Ritz-Carlton in Boston and the Four Seasons in Miami. In addition, Millennium and Westbrook will seek out other distressed luxury hotels to buy.

 

“With the combination of our operational and management skills, and their capital skills, we have a partnership will go forward and be aggressive in terms of putting together a collection of luxury hotels,” he said. “There are plenty of luxury hotels that are with special servicers right now, that will need capital in order to work out a deal with the special servicers. We have the capital and the skills to redo these assets.”

 

Kathleen Taylor, Four Seasons president and chief operating officer, said “we are gratified by the efforts Millennium Partners made to identify an equity partner who shares our long-term approach to business and our commitment to customers.”

 

“This financial agreement is an outstanding example of the favorable outcome that can be achieved when the cornerstone of the business — the guest experience — is protected, and value is created for the long term,” she said. “We look forward to working in close partnership with both Millennium and Westbrook going forward.”

 

As recently as December, the Four Seasons seemed bound for foreclosure after lenders rejected Millennium Partners’ proposal to renegotiate the loan on the property, according to the credit-rating agency Realpoint.

 

In June Millennium Partners “strategically withheld payment of debt service” on the $90 million loan in an effort to force the servicer on the loan, LNR Property Corp., to enter into negotiations. In October Millennium “submitted a proposal that the servicer deemed to be unacceptable,” according to Realpoint. The servicer — loans are generally placed with a special servicer when they are in or approaching default — then issued a notice of sale to proceed with the foreclosure.

 

A Realpoint analysis of the loan estimates that the current value of the loan on the 277-room hotel would be $55.7 million. a 38.2 percent decline from the loan’s $90 million value. Since the beginning of 2009 the number of hotels in default in California has jumped 391 percent from 53 to 260, according to Atlas Hospitality Group. California currently has 27,893 hotel rooms in default, an increase of 426 percent over last year.