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San Diego Hotel Operator, 5th Avenue Partners, Files for Bankruptcy

By Jennifer Davies, The San Diego Union-TribuneMcClatchy-Tribune Regional News

June 29, 2010--Burdened by crushing debt, the owner of the high-end boutique hotel Se San Diego has filed for Chapter 11 bankruptcy protection.

The move by 5th Avenue Partners, which owns and operates the 184-room hotel, was designed to prevent the hotel's main lender WestLB AB Bank from appointing a receiver Monday to take over the company's assets. As of May, Fifth Avenue Partners owed the German-based lender some $73 million.

The downtown hotel, which opened in December 2008, has struggled mightily in its short existence -- a casualty of bad timing and a moribund market for luxury hotels. Cost overruns, lawsuits and construction delays all meant the project, which also includes 23 upscale -- and unsold -- condos, opened a year behind schedule and during one of the bleakest months of the spiraling economy.

The hotel's three-year construction loan came due in May 2009 -- just five months after it had opened -- and drum-tight credit markets made it impossible to refinance the loan.

Robert Rauch, a local hotel consultant, said the Se's troubles are hardly surprising. Not only was the hotel located far from the hub of the Gaslamp, but it also was an unknown quantity -- making it a hard sell for many travelers.

"It was a property that had an inferior location and no brand and a huge amount of debt in a terrible market," he said.

Of course, the Se's not alone in its struggles. Last year, owners of the W Hotel walked away from the property after determining that it was worth much less than what they owed.

While the reasons for its troubles are clear, the hotel's future is a bit more murky, said Alan Reay, president of the Irvine-based Atlas Hospitality Group. The bankruptcy could drag on as each side tries to demonstrate to the judge that it has a better plan to operate the hotel.

For its part, Fifth Avenue Partners said in a statement that it is continuing to negotiate with its lenders during the bankruptcy process.

On Monday, the judge overseeing the case said Fifth Avenue could use its cash to continue to pay its 224 employees. The company had argued that any lapse in payment would lead to staff defections and negatively impact service.

"The hotel business is very competitive and one of the most important variables that customers weigh when choosing a hotel is the level and quality of service," the filing said.

In the filing, Fifth Avenue said it has substantial revenue and estimated it would make almost $4.7 million over the next 13 weeks. It also estimated that its payroll for that same time frame would be around $1.9 million and its other expenses, like food and beverage costs, would be $2.5 million.

While the hotel does have relatively strong revenue, Reay said it's unclear what the Sè is worth as the unsold luxury condos confuse its evaluation. Looking at the amount Fifth Avenue Partners owes its main lender, he estimated that the hotel rooms alone cost about $364,000 per unit.

The hotel market is seeing signs of life, Reay added, pointing to recent sales of high-end hotels in cities such as San Francisco where price ranges have ranged from $200,000 to $350,000 per room.

Rauch said the property will eventually be worth more than the loan but it's unclear when that will happen. He estimated it could be as soon as two years but as long as five.

Jennifer Davies: (619) 293-1373; jennifer.davies@uniontrib.com

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To see more of the San Diego Union-Tribune or to subscribe to the newspaper, go to http://www.signonsandiego.com/.

Copyright (c) 2010, The San Diego Union-Tribune

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