In April 2009, the owners of The Ritz-Carlton, Kapalua defaulted on the loans they had taken out to rebuild the hotel in 2007.
The amount owed, principal and interest, approached $300 million, but the lender, Lehman Brothers Holdings Inc., in bankrupty itself, did not press the issue for another 16 months. This week, the Lehman estate in bankruptcy filed for foreclosure against Gencom Group and Whitehall Street Global Real Estate, claiming it is owed $255 million.
The move was reported by The Wall Street Journal.
The Maui News / AMANDA COWAN photo
The estate of Lehman Brothers Holdings filed for foreclosure against The Ritz-Carlton, Kapalua this week.
How the principal was reduced over the past year is unknown. Many resorts in Hawaii are in default, but most do it in privacy. The Ritz-Carlton's trouble became known because Maui Land & Pineapple Co. was a 16 percent partner, and as a regulated public company, had to disclose the default in its reports, which it did in May 2009.
Neither then nor since have any of the parties been willing to say much. The hotel continues to operate under a management contract signed in 2000, during one of the many ownership changes of the relatively young hotel, which opened in 1992.
Since then it has had more ups and downs than many older Maui resorts.
Its original developer, Nissho Iwai, lost control in 1997 - delayed fallout from the bursting of the Japanese real estate bubble and the sluggish visitor industry of the mid-1990s.
It was bought by Gencom in 2006, at the peak of a hotel boom, and plans were made to spend over $100 million to rebuild the hotel, which was only 15 years old. Since the older Kapalua Bay Hotel had been closed and was being torn down, Kapalua Resort operated for the last half of 2007 without any hotel, and only resort condominiums available for rent.
The plan was to remake both the hotel and the resort into something more luxurious, with a reborn Ritz, now with fancy condos, paired with the $350 million Residences at Kapalua.
For a while, it looked good. When the 107 plain rooms were converted into condos - with the expectation that most buyers would put them back into the hotel rental pool - orders were taken for $176 million in a single day.
Not many weeks later, a Bear Stearns hedge fund failed, which should have warned the world that leveraged investments were heading for a fall. The Ritz-Carlton, Kapalua was part of a highly leveraged strategy, as both of its owners were flying on borrowed money.
In 2008, Wall Street deleveraged, almost taking down the nearly-completed Residences, which had borrowed from Lehman Brothers.
When Lehman filed for bankruptcy in October 2008, the last feeding of construction loans was put in abeyance. Although broke, Lehman was not completely without resources, and eventually new lenders in Europe were found, with Lehman adding few tens of millions to the pot, and the Residences were completed - although for a market that had gone cold.
Lehman was also a principal lender to the owners of the Ritz next door, who were themselves highly leveraged.
According to the Financial Times, Whitehall managed to lose 98 percent of its capital by 2009. Gencom, which was reported earlier to have written off $2.1 billion out of $3.7 billion of hotel investments, sold half itself to an Argentinian investor for $250 million and reportedly used that money to restructure debts at some of its other troubled hotels.
But the Kapalua hotel was not on the to-be-saved list.
Gencom could not be reached for comment, but The Wall Street Journal reported that it did not intend to "fight the foreclosure."
Some resorts have been sold at foreclosure auctions, including the Makena Resort a few weeks ago. Others, like the Fairmont Orchid on the Big Island, have just left the keys with the lenders.
In most cases, the hotels stay open, usually under the same nameplate, and customers are shown nothing to indicate the financial difficulties.
* Harry Eagar can be reached at email@example.com.