Reorganized Grant Now Out of Bankruptcy
The historic U.S. Grant Hotel emerged from 14 months of bankruptcy proceedings Friday with its debts reorganized and its owners hopeful that the 283-room landmark will at last begin turning a profit.
U.S. Grant Hotel Associates will be under extreme pressure to operate the troubled hotel profitably: The partnership will automatically forfeit the hotel by foreclosure to lender Home Federal Savings in January, 1991, unless it can refinance up to $50 million in debt or find a new buyer in the meantime. Home Federal has operating control of the hotel.
The hotel is still losing money and probably is worth less than $35 million, according to recent estimates. Developed by the son of the Civil War hero and former president, the downtown landmark has struggled with low occupancy rates since reopening in December, 1985, after a four-year, $40-million refurbishing.
Hotel manager Chris Venner, who has been asked by Home Federal to stay on for the “immediate future,” is accentuating the positive.
The emergence from bankruptcy proceedings “means stability at last for the hotel and its future and gives it a chance to prove itself,” Venner said. Neither Venner nor Home Federal spokeswoman Monica Wiley would say how long Venner is likely to stay on.
The opening of the San Diego Convention Center in late 1989 is critical to the hotel’s attempt to attract more guests, said attorney Ross Pyle, who represented the hotel owners in the bankruptcy. Pyle echoed the hopes of many downtown hoteliers who have seen their market soften with the addition of hundreds of hotel rooms over the past two years.
The hotel’s original redeveloper Christopher Sickels, as well as many city officials, hoped the renovated hotel would become a beacon of downtown redevelopment. To aid the project, the city arranged a $6-million federal Urban Development Action Grant loan, of which $1.2 million came from city coffers.
Heavy losses, however, caused the hotel owners--a 400-member partnership headed by Sybedon Corp. of New York that bought the property from Sickels--to default on Home Federal’s $32-million second mortgage in January, 1987. The partnership fell behind on other debts and filed for protection under Chapter 11 of the U.S. Bankruptcy Code on Feb. 22 last year, two days before Home Fed planned to sell the 79-year-old hotel at a foreclosure auction.
Under terms of a reorganization plan approved by U.S. Bankruptcy Judge Louise Malugen on Feb. 17 and consummated Friday when new liens were recorded on the property, the $41.5 million in principal and back interest owed to Home Federal Savings was “recast” as a single loan due in January, 1991.
Home Federal also agreed to release a $1.7 million “plan enabling loan” to pay certain of the hotel’s unsecured creditors as well as $800,000 in back interest on the first mortgage owed to the Drown Foundation. The hotel occupies a full block bounded by Broadway, 3rd and 4th avenues, and C Street.
Home Fed will also pay out more than $2 million in back taxes owed by the hotel over the next two to three months, as well as pay operating losses projected at about $1.2 million through January, 1991, or about $50,000 a month, Wiley said.
To bolster the security of its loan, Home Federal on Friday took title to the hotel’s parking garage, situated on the north half of the hotel block, a property that has been slated for hotel expansion. In exchange, hotel owners received a $2-million credit on money owed to Home Fed. To buy the property back from Home Fed in 1991, however, the owners must pay $3.2 million for the garage.
Home Fed’s agreement not to foreclose on the hotel--at least until 1991--saved the hotel’s 400 limited-partner investors from having to repay to the government $5.5 million in tax benefits that a change in ownership would have triggered, said Michael Aguirre, a San Diego attorney who has filed a class-action investor lawsuit against Sickels, Home Federal, Prudential Bache and others on behalf of investors.
As a result of the agreement, Home Federal was dropped from the investor lawsuit that alleged the defendants committed securities violations and misrepresented the true value of the hotel. Sickels was also dropped from the suit late last year after agreeing to pay $1.2 million in cash to the investors.
Aguirre said he is in the midst of court-ordered “settlement negotiations” with Prudential-Bache, a securities firm that sold the limited partnership units to investors, and Pannell Kerr Forster, an accounting firm.
The UDAG loan, typically made to inner city projects that boost employment, has been wiped out by the reorganization. The city has filed a lawsuit against Home Federal, alleging that misrepresentations by the S&L; entitle the city to improved loan seniority.
To enable the reorganization to proceed and, at the same time, remove the city’s lien from the hotel, Judge Malugen accepted a Home Federal’s offer to put up a letter of credit covering the city’s claim in the event the S&L; loses the lawsuit.
