Hotels on Bank Owned Foreclosure List Increasing

A study of foreclosures in the state of California showed that a significant number of hotels are set to be placed on bank owned foreclosure list. Results of a study, released by the Atlas Hospitality Group, are expected to have broader implications and significance for the hotel industry across the country.

According to the study, a whopping 125 percent increase was reported in the number of hotel foreclosures and defaults for the past two months. In California, there are currently 175 delinquent hotels and 31 on bank foreclosure list.

About 2,500 hotels in California were either refinanced or financed from 2005 to 2007, the report stated. Also, hotel values in the state are estimated to be lower by 50 to 80 percent compared with the 2006-2007 market peaks.

Added to the woes of the hotel industry is the almost 21.5 percent decline in room revenues this year and the increase in cap rates.

According to Alan X. Reay of Atlas Hospitality Group, the drastic decline in hotel values means that no equity is left in any of California’s 2,500 hotels which were financed between 2005 to 2007. Additionally, California hotels are pressured to generate sufficient cash to cover the operating costs, such as utilities and payroll and to pay for the mortgage.

The report noted that the problem in distressed hotels started with small, non-flagged properties belonging in secondary and lower markets. However, the problem now spreads to affect all types of properties, from luxury to economy.

Real estate specialists said that during the last industry downturn sometime in 1990, there were 2,000 hotels reported on bank foreclosure list. Today, the report suggested that the number of hotels in California that are on the brink of foreclosure is much more than what was reported.

Nationwide, commercial mortgage-backed security (CMBS) loans accounted for a third of the overall debt in commercial real estate, while about one third of the debt is owed to banks and the remaining to lenders.

Meanwhile, another market data showed that mortgage defaults last month were five times higher than the previous year. Market projections showed that default rates by the end of 2009 will rise by 4.4 percent, to a maximum of 5.7 percent.

Florida, California and Texas accounted for 30 percent of hotels that are on the brink of being placed on bank foreclosure list.

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