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January 10, 2011 
 
 
HOTEL COMEBACK

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Who would’ve thought hotel recovery would be leading the other CRE sectors? Jeffer Mangels Butler & Mitchell’s Jim Butler says that’s what’s happening, and to prove it, he points to the recent sale of the Sheraton Universal Hotel to Shenzhen New World Group Co.

 

Jim, as a founding partner and chairman of JMBM’s Global Hospitality Group, reps hotel owners, lenders, and investors worldwide. The group repped the Sheraton Universal’s receiver and structured the sale so the lodging could be sold while in receivership. (JMBM’s Guy Maisnik was the lead lawyer in the transaction—reportedly worth $90M—brokered by JLL’s John Strauss.) Jim tells us the deal reflects several trends in the hotel industry. The fact the lender sought a receiver and took action to get control of the property is significant because for the last couple of years most lenders ignored defaults, extending loans and rolling them over. He notes that receivership sales of hotels are uncommon, but in the past six months JMBM has handled two (the other was the Marriott Ontario) and six in the past 18 months.

Sheraton Universal

Jim says the property was extremely complex with a number of mechanics liens, unpaid subcontractors, mini-bar charges (ok, we added that one), and a union with an expired contract that filed various labor grievances. Thankfully, no mention of bed bugs. The 20-story, 451-room property was losing money on an EBITDA basis when the receiver was appointed. Noting that the Sheraton Universal’s flag was about to be pulled because of poor guest satisfaction scores, he says receiver RIM Hospitality deserves credit for turning the property around. In 11 months, the hotel earned $3M in EBITDA compared to the previous losses, “while bringing the property up to standards and maintaining the franchise.” In another trend, Jim says the early numbers suggest 2010 will reflect at least a 10% increase in hotel values on a per-room basis.

Butler & Mitchell’s Jim Butler

Jim’s English bulldogs, Gigi and Bella, pose sweetly for a cookie. He says the original plan was to hold the property for another year or two until prices recovered, but the combo of the Sheraton Universal’s improving economics along with a market recovery enabled the receiver to get an offer sufficient to satisfy the lender. The buyer, Shenzhen, is representative of a coming tide of foreign investment, especially by Koreans and Chinese, who regard US hotels as cheap right now due to the exchange rates, he says. With the rise of a Chinese middleclass, they anticipate waves of their own countrymen flocking to the US as tourists. Hotel investors will see 2011 as a time to jump in or miss the window, with at least a doubling in transactions and a 23% increase in values. At the same time, Jim expects to see lenders become more aggressive and take action, either foreclosures or receivership sales.


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DCT’S INDUSTRIAL ACQUISITIONS

 

Underscoring the importance of SoCal’s industrial market, Denver-based DCT Industrial Trust Inc acquired nine properties in the Inland Empire, LA and Orange counties including this one on Palmyrita Ave in Riverside, for $80M—as much as 20% below replacement cost. We spoke with VP Dan Floriani, who says the sellers in the three transactions were all private investors. He points out three of the properties are cross-dock truck terminals, totaling 233 dock doors on 25 acres in Sun Valley, Orange and Downey. The propeties have low building coverage totaling just 97k SF, but they accounted for about $30M of the purchase price alone. He notes there’s a huge barrier to entry to duplicate that product type and they’re tough to get entitled. The three that DCT purchased are in strong infill locations, he tells us.

DCT also bought 2160 S. Haven Ave in Ontario. The acquisitions bring its consolidated portfolio in SoCal to 3.5M SF. The properties also include a 48% interest in five distribution buildings totaling 818k SF and a 50k-plus SF bulk distribution facility in Ontario. Other than a 20k SF vacancy in one building, the newly acquired buildings are fully leased. Dan tells us the company hopes to continue its SoCal buying momentum in 2011. While DCT has the capacity to make a significant amount of acquisitions here, there’s no target level. But he calls this one of the best industrial markets in the US, driven largely by the ports of LA and Long Beach, with a huge amount of local and national distribution that takes place, so it’s a core market focus for DCT.


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REGARDING HENRY’S

 

Faris Lee Investments sold this 24k SF single-tenant Henry’s Marketplace at 27765 Santa Margarita Pkwy in Mission Viejo for $7.2M. What makes this stand out? The firm, through its Faris Lee Capital unit, also advised buyer DAP LLC of Burbank and seller Trabuco Hills O5 LLC throughout a complicated CMBS loan assumption process. (The lender required the buyer to either assume the $4.2M, 5.91% fixed-rate loan or pay a hefty defeasance penalty.) President Rich Walter notes loan assumptions are challenging in today’s volatile market because lenders often demand adjustments to the existing loan terms, “using the assumption application as their opportunity to improve their security position.” (We assume you smarties got all that.) However, he says, by meticulously preparing documentation to the lender, his firm was able to obtain favorable terms for the buyer.

 

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