Real Estate Forum - January 2008

Condo Hotels

Fall Victim to

By Maria Wood

WHAT A DIFFERENCE A YEAR MAKES. IN MARCH 2006, Orlando CityPlace LLC began to convert a former Holiday Inn in Orlando, FL into a condo hotel with 228 keys. Backed by a $30-million first mortgage from iStar Financial Inc., the plan was to sell all the units to individual owners.

But on July 23, after selling only 31 condotels, the developers filed for bankruptcy—a casualty of the subprime mortgage meltdown.

“The original thinking was that since sales were so hot and people could readily get mortgages, the units would be sold out in a year. That obviously didn’t happen,” says R. Scott Shuker, a bankruptcy partner at Latham, Shuker, Eden & Beaudine LLP in Orlando who is handling the Chapter 11 proceedings for Orlando CityPlace. “The loan matured on April 1, and we went through three months of negotiations with iStar to restructure the debt, to give us more time, but at the end of the day, what iStar wanted was to exit this loan. We reached an agreement to file Chapter 11 consensually with them and then agreed on bid procedures to seek the highest and best offer for the sale of the building.”

A brokerage firm, the Plasencia Group Inc., was hired to market the project and a sale hearing was scheduled for Dec. 20, according to Shuker. However, prior to the hearing, no qualified bidders had been found to acquire and take over the entire project, though many expressed interest, the attorney relates. “Of the bidders I spoke with, they simply weren’t able to secure financing. All of them blamed the meltdown in the consumer mortgage market, which has extended to the commercial mortgage market. They didn’t have lenders willing to lend at any reasonable terms,” Shuker says.

The units were selling for between $165,000 and $250,000, Shuker says. As he sees it, the project was hurt by several factors, beginning with an oversupplied residential market. “Orlando had been going crazy for a couple of years, and toward mid-’06 to the beginning of ’07, that bubble started to burst and then completely flattened out. That’s what caused the original individual sales to slow,” he relates. “Then when the subprime market crisis hit, there was no chance of doing more sales. It also impacted a third-party’s ability to purchase the whole project.”