Maui Hawaii Makena Resort investors default on loan - By Chris Hamilton Maui News 08-26-09

Maui Hawaii Makena Resort investors default on loan - By Chris Hamilton Maui News 08-26-09

Makena Resort investors default on loan
Development stalled indefinitely; fate of more than 500 employees uncertain
By Chris Hamilton
The Maui News
August 26, 2009

MAKENA - Skittish lenders and real estate buyers apparently accomplished what hundreds of protesters couldn't: halt the massive Makena Resort development in South Maui.

A least for now. Everett Dowling, the Wailuku developer who spearheaded the project, said on Tuesday that he hopes to be back on board with new investors in six months.

However, on Monday, Honolulu attorneys for the resort's trustee, Wells Fargo Bank, filed a complaint in 2nd Circuit Court alleging that the partnership of Dowling Co. Inc. and Morgan Stanley Real Estate, together called Makena Land LLC, defaulted on the original $192.5 million loan to purchase the 1,800-acre Makena Resort.

Dowling said the debt for just buying Makena Resort actually totals $411 million; and he accepts the foreclosure as the singular viable alternative now. Lenders not included in the foreclosure suit could lose their investment, he said.

"To ensure the successful continuation of the resort redevelopment, the current debt must be reduced in order to be able to secure construction financing," Dowling said. "It's the only way to bring it back in line with the economy."

He added that he firmly continues to believe in the Makena Resort and the 517 people it employs.

Dowling and a few other partners at the time bought the Makena Resort - and the Maui Prince Hotel - more than two years ago, just months before the real estate markets crashed and the visitor industry with it.

The resort came with lucrative and ambitious plans - which the County Council rezoned after many hours of debate this winter - for up to 1,100 luxury homes, condos and apartments. The resort already has two golf courses, the hotel and Makena Landing. The 15-year build-out process was expected to cost $800 million.

The long-term fate of the hotel employees remains uncertain, said officials from both the employees' union and the resort's private management company. But the hotel is expected to stay open, they said.

Dowling also said construction work on his neighboring Maluaka project, which was supposed to be "phase one" of Makena Resort, will continue. That has separate financing and is organized under Dowling Co.'s Keaka LLC.

When asked Tuesday if it's true that resort owners defaulted on a $192.5 million loan for Makena Resort, Dowling said: "That's correct for that loan. We've been in discussions with the lenders for the past four months and trying to get the capital structure in line, but we're stuck; and only way to reboot the project is for it to go through foreclosure.

"What equity we've invested in the project is lost fully," Dowling said. "The current debt level coupled with the current financial crisis is just too much. But we hope to continue to be part of the project."

He said the loan default will not force him or his company into bankruptcy.

It's estimated that Dowling and his partners have invested more than $100 million in Makena Resort - above its record-setting purchase price. In May, Dowling started construction on the first phase of a solar photovoltaic array for Makena Resort's wastewater treatment plant. He also said he'd spent money preparing for the special management area permits required before presales can be made - and the cash infusion they provide - as well as on planning and design work and site preparation.

In June of 2007, Dowling Co. and Morgan Stanley bought Makena Resort from the Seibu Group of Japan for $575 million, the largest sum ever for a Maui hotel and housing development.

But the master plan first needed county rezoning, which had been virtually ignored for almost a decade by the County Council. Proponents on the Maui County Council said that the added resort jobs and construction work was needed more than ever to aid the island's ailing economy.

Opponents said the development will wipe out the pristine environment and establish further socioeconomic disparities between longtime Maui residents and wealthy Mainlanders who buy up property here for second or third homes.

Hundreds of people spoke out both for and against the project.

The Maui News retrieved a copy of the foreclosure complaint on Tuesday, which was filed Monday. A court date has not yet been scheduled.

The plaintiffs have asked a judge to foreclose on the entire property and sell it outright, but also left open the option of liquidation.

The judge could also appoint a conservator, receiver or trustee to oversee the assets.

"Right now with the global economy the way it is, we're no different than someone who bought a house in 2007," Dowling said. "Today, it's probably not worth what they paid for it. It's unfortunate for everyone involved and unfortunately a sign of the times."

On Friday, Donn Takahashi, president of Prince Resorts Hawaii, gathered the employees to let them know the resort had received an informal notice from the lenders' lawyers, Bickerton, Lee, Dang & Sullivan, that Makena Resort had defaulted on its bank note.

"We're completely surprised by this," Takahashi said.

He added, however, that the company plans to continue to run the hotel and Makena North Golf Course as usual and accept reservations, until told otherwise by the lenders.

International Longshore and Warehouse Union Maui Division Director William Kennison said he also met with the employees.

"We told them we know we're going to go to a foreclosure, but we don't know all the legal ramifications," Kennison said. "As far as we know, the hotel will continue to operate through this process and however long it takes to get new investors."

He described the union-represented employees as "really nervous." In June, the Maui Prince Hotel and Makena Resort signed a two-year contract extension with ILWU Local 142 that already included a furlough of 49 bargaining-unit workers, about 25 percent of union members.

But there is no indication that the Prince Resorts, which owned the hotel for most of its life, will not continue to run the property. And the law states that the labor contract stays in effect until it's either legally terminated or renegotiated with new owners.

"They (Prince Hotels) did not say anything about layoffs," said Kennison. "The issue is we go to the auction block again."

The original lender was Swiss banking giant UBS, which sold commercial mortgage pass-through securities to investors. Wells Fargo is the trustee for the registered holders of those mortgage securities, according to the complaint.

An attorney for the lenders, Barry Sullivan, said Tuesday this was simply an instance where the borrower was unable to pay off its loan. In cases like this, there is no choice but to protect the property and start the transition of new ownership, he said.

"There will inevitably be some uncertainty, but we will continue to keep the borrower, hotel manager and union informed as everyone works through this transition," Sullivan said.

Other Hawaii hotels have undergone foreclosures and ownership transitions and remained in business. These days more hotel and resort foreclosures are expected as Maui grapples with its lowest occupancy rates on record and banks that continue to be stingy with loaning money.

The 310-room Maui Prince Hotel was built in 1985, and it was expected to be torn down and rebuilt as part of the new Makena Resort master plan. The Prince will be a prize for someone - if and when the economy rebounds. Makena's 600-plus rezoned acres represent perhaps the largest swath of undeveloped land set aside by planners and the community for a new resort community.

Eight months ago, several critics of the rezoning predicted that Morgan Stanley, which already had reported losses in the billions, would not stay on long enough to see the deal though.

A Morgan Stanley representative could not be reached for comment Tuesday.

But if a new buyer for Makena Resort emerges, the new owner would need to honor the 44 building conditions, which Dowling said are tied to the rezoning.

Conditions include conducting studies on the area's archaeology, traffic impacts and water supply, as well as the construction of 400 off-site affordable-housing units at a yet-to-be-determined site in the Kihei-Makena district.

Meanwhile, Dowling said he will continue work on Maluaka. He purchased Maluaka's 10.8 acres as part of a $35 million land deal he made prior to buying Makena Resort.

But in what now could be 20-20 hindsight, in mid-June he sought county permits to dramatically downsize Maluaka from 71 luxury condominiums to 13 lots with recreational facilities. At the time, Dowling said they'd lost their funding and could not attract any legitimate new lender.


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