The Republic reports today that the Wigwam Resort & Spa in Litchfield Park faces imminent foreclosure by its lenders. This follows on the heels of the foreclosure action against the W Hotel in Scottsdale and the Intercontinental Montelucia Resort in Paradise Valley.
Owner Kabuto Arizona Properties received the notice of trustee's sale from lawyers for lender Citigroup Global Markets Realty on April 8th and sale at public auction is scheduled for July 9th. The NTS filing indicates Kabuto has failed to make loan payments since November of 2008.
Included in the foreclosure action are two golf courses at Bilmore Golf Club in Phoenix proper, also owned by Kabuto. They will also be auctioned on July 9th to help settle Kabuto's debts.
The Business Journal also notes an even more ominous sign for the Wigwam. Starwood Hotels, the manager of the Wigwam, has indicated they will not renew their contract with Wigwam that is up at the end of May and will no longer be affiliated with the resort. This will deprive Wigwam of the status of being affiliated with a major hotel chain, and all the benefits that come along with it (the reservations network most importantly). The Business Journal reports that Starwood will lay off all of its 330 employees.
The Wigwam was built in 1929 and has historically been the main luxury resort operating on the west side of Phoenix - hosting many celebrities during its heyday - and still catering to a high end clientele today. It is now questionable whether it will be able to remain open due to the foreclosure action and loss of management.
Presumably, the lenders will want to keep the property operating if it is cash flow positive to preserve some of the value of the property. Auctioning off a shuttered property with no management company in place will attract only low bids. But due to the timing of loss of management and the foreclosure sale, it would seem difficult to get a new management company in place without jumping through some major legal and operational hurdles.
The question will be whether Citigroup buys the property at auction, installs new management and runs it for a couple of years until the economy recovers and they can sell it at a higher price - or whether they just dump it to the highest bidder and take the loss. If Starwood was staying on board, the decision may have been easier as the work to maintain cash flows would not have been so great. I'm sure there will be more to this story in the coming months....
Full text of the notice of trustee's sale can be found here (pdf). David Weatherwax of Fennemore Craig is acting as the trustee.
I expect this to be just another in a long line of foreclosed commercial properties over the next year as the commercial market in Phoenix continues to struggle. For investors sitting on the sidelines with cash, there will be plenty of opportunities during that time period to pick up some great properties at foreclosure auction, prior to auction or even post-auction directly from the lenders.
Update: The COO of Wigwam, in an article appearing in the Republic, indicates they are "confident they can find a resolution" with the bank to avoid auction. Considering that Kabuto hasn't made a payment for 6 months, I'm not sure why the lender would have mercy on them. The bank has little incentive to assist a delinquent owner that may be insolvent. The only advantage to providing assistance or forbearance may be some amount of continuity in operations, but there is already going to be a fair amount of change over due to Starwood pulling out.
According to the article, the COO would not comment when asked if a new property management company was going to be put in place in time to take over for Starwood and to save the jobs of the 330 employees. But the article makes the same point I do above - it is to Citigroup's advantage to keep the property operating to maintain some amount of cash flow. But only so long as the property is cash flow positive. It will be interesting to see if Citigroup tries to put the property into receivership so it can take over ownership immediately and negotiate its own contract with a new property manager in preparation for taking over ownership - or even try to re-open negotiations with Starwood to stay on under their ownership.
It would certainly be a big blow to Litchfield Park if the Wigwam were to close.
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