2 hotels in Napa, Sonoma counties in foreclosure amid nationwide lodging industry stress

2 hotels in Napa, Sonoma counties in foreclosure amid nationwide lodging industry stress


Two Wine Country hotels with a combined 222 rooms are at risk of being sold in foreclosure early next month to cover at least $80.7 million outstanding on the financing.

Trustee’s sales are set for the 90-room Cambria Napa Valley hotel at 320 Soscol Ave. in Napa and 132-room Cambria Sonoma Wine Country hotel at 5870 Labath Ave. in Rohnert Park, according to notices filed in Napa and Sonoma counties on July 13.

If respective owners Pacific Hotel Napa LLC and Pacific Hotel Sonoma LLC, managed by Southern California-based Stratus Development Partners, don’t make good with the lender, they could lose the Napa hotel to auction on Aug. 4 and the one in Rohnert Park on Aug. 11.

Some of the reasons reportedly given for why these hotels ran into financial trouble are unique to the North Bay and California. Yet the purported financing challenges also parallel what some commercial real estate experts are saying is a looming wave of foreclosures nationwide on hotels and office buildings beset with low occupancy during and since the pandemic.

Availability and pricing of financing have been big problems for hotel owners nationwide and are key reasons behind high-profile foreclosures recently, according to Alan Reay, president of Newport Beach-based Atlas Hospitality Group, a lodging property brokerage and private financier.

“(There were) a number of loans with a five- to seven-year duration, and if they’re coming due in the next 12 to 24 months, the owners are in a difficult position because it’s difficult to get financing,” Reay said, noting that many lenders have stopped or paused lending on hotels. “And if you do get it, it’s much more costly. And you’re going to have to bring more money to pay the loan debt. But a lot of those owners don’t have that capital.”

A year ago, hotel financing could be secured in the low 4% range, but now loans start in the 7.5% to 8% range, Reay said.

Hotels in financial stress were first seen in New York and Chicago, but owners are now walking away from a growing number of lodging properties in San Francisco and other metropolitan areas, he said.

The owner of San Francisco’s largest and fourth-largest hotels — the 1,921-room Hilton San Francisco Union Square and the 1,024-room Parc 55 San Francisco — announced last month that it had stopped payments on the properties and likely would turn them back over to the lender, reported MeetingsNet. Citing Atlas figures, the convention industry publication said those hotel’s room revenue had fallen 83% and 68%, respectively, last year, attributed to widespread vacancies in the city’s office buildings.

At least 30 other hotels in the city have loans coming due in the next 12 months, according to MeetingsNet.

Dallas-based real estate investment trust Asford Hospitality Trust intends to walk away from 19 hotels, including four in the East Bay, because paying $255 million to reduce the amount owed as a condition of renewal would hurt the real estate investment trust’s value, CoStar reported in early July. The trust is paying down $129 million on 15 other hotel mortgages for one-year loan extensions.

The delinquency rate of mortgages on lodging properties shot up in the first months of the pandemic from around 1% of loans to nearly 10% and has trended down since, reaching about 8% in the first quarter of this year, according to commercial property financing analytical firm Trepp.

By comparison, the next most at risk category of commercial property loans are for office space, with a default rate ticking back up to almost 4%, Trepp reported.

This credit crunch also has greatly slowed the market for buying and selling lodging properties, Reay said. Preliminary figures from Atlas’s mid-year hotel property sales report, set for release next month, shows a 50% drop in California transactions from the first half of 2022.

“The last time we saw a decline like that was back in 2009,” Reay said. That was the second year of the Great Recession.

Andrew and David Wood, principals of Irvine-based Stratus, could not be reached for comment.

David Wood earlier this year reportedly attributed financial challenges for the hotels to soaring interest rates for commercial property loans and to heavy winter rains that reduced hotel occupancy. Notices of default were filed in Napa and Sonoma counties March 30 on an outstanding balance at that time of $1.7 million on a $72 million mortgage secured last year for the two Cambria hotels, according to public records.

Wood reportedly told the Napa Valley Register in April that Stratus had sought a loan modification because of the rising interest rates and lower room income and that the company was working with the lender. “We were successful in restructuring our construction loan during the COVID-19 pandemic shutdown, and are confident in a similar outcome today,” Wood is quoted as saying in the newspaper.

Construction loans typically carry higher interest rates and shorter terms of a few years, and project owners usually replace them with permanent financing after project completion. Wood said new financing had been challenging to secure for the Napa and Rohnert Park hotels, and interest rates had increased from 6% to 14%, the news outlet reported.

The Rohnert Park hotel opened in May 2020, just two months after state and county pandemic stay-at-home orders forced hotels to only house “essential” workers. As a result, hotel occupancy in Sonoma County plummeted, reaching 38% at the time the Sonoma County hotel opened. That was down from 78% a year before, according to figures from travel industry analytics firm STR provided by Sonoma County Tourism. In May 2020, revenue per available room, an industry metric for comparing hotel cash flow, fell to $38 a night from $154 a year earlier.

Sonoma County Tourism CEO Claudia Vecchio said occupancy and room revenue is down so far this year when compared to the very strong travel seen in the first half of 2022. That’s when the last pandemic restrictions were lifted. Yet this year, the slump in local travel has extended well past the extended rainy season, she said.

“Rains in the winter were challenging,” Vecchio said. “But the travel patterns of this summer, with people going in Europe and doing some of the things that they were had not really felt comfortable or have done since the pandemic, some of these things are definitely playing into a lower occupancy rate year over year.”

Construction of the Napa Cambria hotel started in 2018, a year after Stratus bought the project as part of a five-location franchise deal with Choice Hotels, the newspaper reported. Work on the Napa hotel stalled in 2020 and resumed in May 2021. Stratus announced the Napa opening August 2021.

At the beginning of the pandemic, Napa County hotel occupancy slid to 12%, going up and down with renewed then eased public-spaces restrictions in fall 2021 and 2022. Occupancy was nearly 40% in January of this year and has gradually risen, reaching 68.2% in May, according to the latest figures from STR. Revenue per available room countywide was $11.24 in April 2020. At the start of this year, it was $123 a night and continued rising, reaching almost $343 in May.

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