Solid Beachhead

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Solid Beachhead
Rancho Palos Verdes’ $480 million Terranea Resort

After months of stress, Robert J. Lowe got a phone call in early October 2009 that finally put his mind at ease.

The chief executive of real estate developer Lowe Enterprises Inc. had tried without much success to negotiate new terms with lenders to his company’s signature project, Terranea Resort in Rancho Palos Verdes. Since opening the $480 million luxury hotel resort that June, Lowe Enterprises had defaulted on several loans and watched as its primary lender, Corus Bank, was closed by federal regulators.

When a group of investors led by real estate mogul Barry Sternlicht’s Starwood Capital LLC bought the loan on Terranea, whispers began to grow that Lowe Enterprises could lose its ownership stake. To Lowe’s surprise, Sternlicht phoned him within days to say he had no intention of edging him out.

“He committed to me on that first phone call that he (would) work with us in a very positive way to resolve the restructuring together,” Lowe said last week. “From that day on, I was confident that we could get it resolved.”

That resolution came last week when the L.A. developer announced that it negotiated an extension on its loans and secured $100 million in new capital from a group of investors including Starwood and San Diego’s JC Resorts.

The deal ends more than a year of uncertainty over the future of Los Angeles County’s newest posh resort – and will now allow Lowe Enterprises to complete work on retail space that had been put off since the company’s financial troubles emerged.

Bruce Baltin, a hospitality industry analyst at Atlanta-based PKF Consulting Corp., said the company’s timing could be right to cash in on an expected rebound in the upscale hotel business. Though Terranea struggled by opening during a historically difficult downturn, bookings at high-end resorts are coming back.

“We’re seeing good recovery,” Baltin said. “Last year was horrible. But this year the segment described as the luxury segment is coming back faster than the overall market.”

Lengthy struggle

Getting to this point, however, was not easy.

Lowe Enterprises spent 10 years planning and building Terranea on oceanfront property that was once home to the aquatic theme park Marineland of the Pacific. To finance the project, the company turned to Corus Bank, a large Chicago-based lender known to make real estate loans across country, including local projects such as downtown L.A. condominium tower Concerto.

Amid the financial crisis, however, Corus ran into problems of its own. Loan losses drained the bank of capital, and in spring 2009 it stopped funding the last $25 million on the loan to the Terranea project, Lowe said.

First, Lowe Enterprises turned to the city of Rancho Palos Verdes for an $8 million loan, which allowed the developer to complete enough work to open on time in June 2009, replete with 582 rooms, multiple restaurants and a golf course. But without the money from Corus, the developer fell behind on loans to other lenders and received multiple notices of default.

“There were many people that we owed money to that we couldn’t pay because Corus Bank stopped funding,” Lowe said.

Just as the company reached a deal with Corus to get the rest of its money, regulators closed the bank and the Federal Deposit Insurance Corp. was appointed receiver for its assets. Lowe said he tried to work with the FDIC, but it was not interested in negotiating.

Last October, the FDIC reached a deal to sell the assets to ST Residential, a consortium of investors led by Starwood, and including Perry Capital and WLR Lefrak. But despite Sternlicht’s private assurances that they could renegotiate the terms of the Terranea loan, rumors began to fly that the group could seize the property from Lowe Enterprises.

(Lowe’s plight wasn’t helped by a high-profile struggle that L.A. developer Sonny Astani was having with his $300 million Concerto project. The high-rise was among the Corus assets scooped up by ST Residential, and Astani still has not reached new loan terms with Sternlicht’s group.)

Lowe said that suddenly a number of groups canceled events at the resort and took them elsewhere, prompting booking agents to work overtime.

“There was a great deal of speculation privately and in the press that we wouldn’t survive,” he said. “We had to convince particularly the larger groups that wanted to book here that the project was not in trouble and would stay open.”

Management also had to manage cash flow very strictly to ensure that it could survive at least until the loan situation was resolved. The negotiating process, Lowe said, was lengthy largely because there were so many entities involved.

Now that the financial difficulties have been put to bed, he said the company can refocus its efforts on managing and improving the resort. Among the unfinished business is space for retail shops that the company plans to build out.

“We are very happy to be now focused on building the long-term success of Terranea,” Lowe said.

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