The lender on the Holiday Inn Los Angeles Airport, the largest West Coast investment of New York hotel king Sam Chang, has begun foreclosure proceedings.
Chang, who has built more hotels in New York than anyone in history, quietly purchased the 405-room hotel next to the Los Angeles International Airport through a limited liability company in 2007. But his lender, an investment arm of Hollywood developer CIM Group, now claims he is in default on the entire $40.1 million purchase price and it is seeking to place the property into receivership.
The hotelier bought five California properties prior to the downturn, but has since seen values decline and development plans stall. All but two have been sold off and one planned development in Valencia has been on hiatus for years.
Chang did not return requests for comment.
Industry analysts said his lender troubles could stem from having his money tied up in projects in New York, where he is actively developing again after lying dormant for several years. In the past, he has been known to run up high debt as he juggles several projects at once.
“It might just be a leverage issue,” said Tom McConnell, an executive managing director at New York’s Cushman & Wakefield Inc., which has done deals with Chang. “He picked up a couple of new sites.”
The foreclosure filing comes despite a strong rebound in the hotel market, particularly in the LAX area. Occupancy and room rates are again rising, and loan defaults for L.A. hotels have become rare, industry experts said.
“The market has already turned,” said Alan X. Reay, president of Atlas Hospitality Group in Irvine. “It is very, very unusual to see new foreclosure filings on hotels, especially anywhere like Los Angeles or Orange County.”
No airport-area hotel with more than 100 rooms has traded hands in two years as owners have held on to their assets through the rebound. If the Holiday Inn LAX, at 9901 S. La Cienega Blvd., were to hit the market, interest figures to be keen. Experts said it would be worth more than the $40.1 million loan, possibly in the $45 million-$50 million range.
L.A. roots
Though he has made his name in New York, Chang has L.A. roots. A native of Taiwan, he reportedly dropped out of high school at 17 to move to the United States and help his parents run their 11-room Richards Motel in downtown Los Angeles.
He moved in the early 1980s to the East Coast, where he had huge success in New York by cheaply building budget travel hotels, many in manufacturing zones, and then flipping them. A 2009 article in the New York Times said he had built 37 hotels in the city and had 22 more in the pipeline.
His holdings were concentrated on the East Coast until the mid-2000s, when he started expanding into California. In 2006 and 2007, he purchased the Holiday Inn LAX, paid $20.4 million for an Embassy Suites in Covina and purchased a planned Sheraton hotel development site in Valencia for $6 million, according to CoStar Group Inc. He also reportedly purchased the Northwoods Resort in Big Bear for $12.5 million and a Holiday Inn in Fresno for $5.5 million.
But the hotel market crashed along with the economy and many of his New York projects were put on hold.
“He was always buying and selling, building and selling,” McConnell said. “Then land prices collapsed and his ability to finance both the acquisition of dirt and development of buildings was constrained tremendously.”
His L.A.-area investments fared particularly poorly. He sold the Covina hotel in 2011 for $14.8 million, about two-thirds of what he paid for it. The Valencia hotel plan received approval but the building remains unbuilt seven years later.
He also delayed making loan payments for the Holiday Inn LAX, according to CIM’s foreclosure lawsuit in Los Angeles Superior Court, as the LAX hotel market suffered from depressed rates and vacancies.
His original $40.1 million loan from Column Financial Inc., a New York subsidiary of Credit Suisse Group AG, was taken over by CIM in 2008; Chang extended the loan agreement four times between 2009 and 2012, according to CIM’s filing. CIM officials declined to comment, but in court papers the company alleges that Chang has been in default on the entire principal amount since May. The city also sued the Chang company that owns the hotel, Brisam LAX LLC, for failing to pay city taxes last year.
Union issues
The airport Holiday Inn has had other troubles. It was the subject of strikes and a class-action lawsuit last year by workers attempting to unionize. Brisam LAX responded by countersuing the workers and union organizers at Unite Here for interfering with its business, but that lawsuit was dismissed.
The workers’ lawsuit remains pending, and organizers are still calling for a boycott. Kurt Petersen, organizing director at Unite Here, said the union is monitoring the foreclosure situation and expects any new owner to recognize the “desire for a fair process to unionize.”
Meanwhile, the national hotel market has come back significantly. Chang, who is in his early 50s, has bought up new properties in New York and reportedly has filed his first development plans in four years. However, he has also told the New York press that he plans to retire at the end of this year.
The hotel market near the airport has enjoyed a bump as part of the overall rebound. Through the first four months of the year, the LAX market averaged better than 85 percent occupancy and a room rate of $108.18, up from 82.8 percent and $103.70, respectively, for the same period a year ago, according to Bruce Baltin, senior vice president at the L.A. office of PKF Consulting. What’s more, this year’s numbers are higher than the prerecession levels of 2007.
Baltin speculated that if none of the principal has been paid that would make it easier for Chang to walk away.
But Reay said he believes the owner will still find a way to cure the alleged default because the asset is too valuable to let go.
“I would be surprised if that went all the way through to the lender getting it back, because of its location, the strength of the airport combined with the strength of the West Los Angeles market,” he said. “But if it goes to auction, I can tell you, you will have people bidding.”
