A loan discounted by more than two thirds isn't only secured by the buildings of the La Costa Resort & Spa, but the two golf courses, 17 tennis courts, a 1,000-seat tennis stadium and a private water park.

 

As reported by Commercial Real Estate Direct, a $380 million Citigroup (NYSE: C) note was discounted to $120 million -- the approximate amount the resort sold for in 2001. Not only that, an entity controlled by the resort owners themselves ended up purchasing the note despite the fact it was offered on the open market. The property had sold for about $250 million in the mid-1990s.

 

The note was bought by KSL Capital Partners, a related entity of resort manager KSL Resorts. The property is owned by KSL-related entities and Whitehall Street Global Real Estate Limited Partnership, the real estate arm of Goldman Sachs (NYSE: GS). Whitehall bought into the resort's ownership in 2007 but the structure and the amount of the buy-in wasn't immediately clear.

 

The La Costa Resort includes 474 hotel rooms and 81 condominium resort villas. The resort also includes about 100,000 square feet of meeting space.

 

"The old note was based on a value of $770,000 per room. Now that it's about $245,000 per room, that's comfortable ..." said hotel consultant and developer Robert Rauch. "In most of the deals with old debt, the values have been overstated."

 

Largely on the strength of the Goldman Sachs' capital, the owners spent some $140 million upgrading the property in 2007.

 

"The rest of the $380 million was mezzanine debt," said Alan Reay, Atlas Hospitality Group president.

 

The upgrades were extensive. As noted in a 2006 Luxury Hotels report, they included 37 new guest rooms, a fifth pool, an 18,000-square-foot ballroom, a new golf practice facility, new shops and two new restaurants. The project also included the renovation of all existing guest rooms, and enhancements to its two golf courses and gardens.

 

The upgrades couldn't counteract a bad economy. Commercial Real Estate Direct reported the resort's operating income dropped by a third during the last calendar year to about $10 million. Reay estimated the resort's regular hotel rooms are running at about 60 percent occupancy.

 

The renovations came right before the economy collapsed. Now hotel values are deeply underwater and properties such as the St. Regis Monarch Beach in Dana Point have been seized by their lenders (also Citigroup) while at the W Hotel in downtown San Diego, the owner -- Sunstone Hotel Investors -- walked away without a fight.

 

Commercial Real Estate Direct reported last week that Dallas-based Ashford Hospitality Trust Inc. (NYSE: AHT) accepted $20 million in cash and a $4 million secured note from the owner of the 302-room plus 188-condo hotel unit Ritz-Carlton Key Biscayne hotel in Miami to settle a $38 million mezzanine loan it held on that property -- which was only about 43 percent occupied as of the end of the year.

 

Ashford, which also owns the 394-room Hilton Torrey Pines in La Jolla, the 260-room Sheraton in Mission Valley and the 150-room Residence Inn by Marriott in Sorrento Mesa, has been having trouble with its balance sheet lately. While the fourth quarter figures have yet to be published, the company lost $204.39 million on $700.23 million in revenues through the third quarter -- compared to a $9.35 million loss on $877.8 million in revenues for the comparable period a year earlier.

 

Reay said he expects to see a lot more discounted luxury hotel loans in the coming months and years.

 

"Especially resort hotels. Lenders hadn't been willing to discount the value, but now they're saying let's take the hit and move on," Reay said.

 

Rauch, who also said he wasn't surprised by the La Costa loan discount, said loans such as these are going to be an issue especially if they were taken out in the 2004-07 time frame.

 

Rauch, predicted there will be a lot of note sales "because lenders aren't equipped to go through the foreclosure process" and take the properties.

 

"Most lenders would much prefer a workout," Rauch said.

 

With loans being sold for a fraction of their original worth and luxury hotel owners giving up their keys in the wake of depressed vacancies and room rates, it is hardly surprising that hotel consultants such as Rauch have predicted it will be several years before new hotel construction makes sense.

 

What may be surprising is Reay's outlook for new resort hotels.

 

"I've been in the business for 30 years and I've never seen anything like this," said Reay. "I don't believe anybody is going to build a resort hotel in California within the next 20 years."