Financial pressure mounts for owner of hipster hotels.

Ian Schrager, the impresario behind the Sunset Strip's Mondrian Hotel and its Skybar nightspot, is under mounting pressure to repay or restructure debt totaling more than $400 million.

Last week, Ian Schrager Hotels LLC, co-owned by Schrager and New York investment firm Northstar Capital, received a 30-day reprieve from repaying a $185 million securitized loan that came due on July 9. Four hotels secure that loan, including the 245-room Mondrian and the Royalton in New York, the first hotel Schrager opened in 1984.

According to ratings agency Standard & Poor's, Schrager Hotels went into technical default on the loan after it came due on July 9.

While confirming that an extension was granted, Schrager spokesman Michael Sitrick denied that the loan had ever gone into default. Northstar Capital co-chairman W. Edward Scheetz wrote in an e-mail to the Business Journal that "we are definitely not in default."

Kevin Wodicka, a spokesman for LNR Property Corp., the special servicer that granted the extension, declined comment. Special servicers are loan administrators and investors that are called in to collect when other investors fear a default.

Schrager declined comment.

The extension gives Schrager Hotels until Aug. 9 to pay off both the $185 million loan and a related $100 million mezzanine loan owed to Deutsche Bank A.G. of Germany. (The mezzanine loan, which also came due this month, received an extension as well, Sitrick said.)

If Schrager cannot find refinancing or a deep-pocketed investor willing to help bail out the group, LNR could seize the properties through foreclosure, then hire a third party to manage them. Schrager Hotels could also be forced to place the properties into bankruptcy in order to stave off such an action.

Sitrick dismissed any possibility that Schrager would lose the hotels.

Multiple problems

Schrager, the former co-owner of New York's Studio 54 nightclub, has been struggling with high debt levels amid the hospitality industry recession.

LNR took over supervision of the $185 million loan last month for the second time in a year after Schrager Hotels said it could not repay it. This led Moody's Investor Service to downgrade three classes of mortgage-backed securities tied to the loan for the second time in a year, from a ratings range of Bal to Ba3 to a new range of Ba3 to B2.

In May, Santa Barbara Bank & Trust began foreclosure proceedings on the shuttered Miramar Hotel in Santa Barbara after Schrager Hotels defaulted on a $16 million loan used to buy the property five years ago. Sitrick said that the company is in the middle of refinancing the property in order to repay the debt.

In October, Schrager Hotels also has to pay off a $89 million construction loan held by three banks including British firm Barclays Plc. and Corus Bankshares. Another $39 million loan on the faltering Clift hotel in San Francisco -- packaged into a 1999 mortgage-backed securities issue -- has a balance that is higher than the property's value, according to Moody's, which downgraded the securities last year.

Schrager, who ran the ultra-hip Studio 54 in its late '70s heyday, did a 20-month prison stint along with his late partner Steve Rubell after being convicted in 1979 of evading $800,000 in taxes.

More than a decade later, Schrager's empire nearly crumbled under its debt load during the recession of the early 1990s. Two of his New York hotels, Morgans and Royalton, fell into bankruptcy while another, the Barbizon, was seized by a contingent of lenders, including the now-defunct Bank of Tokyo. Later, Schrager, an attorney by training, bought back all three.

The continued poor performance of the hotel industry -- including the once-hot boutique sector he helped innovate -- has exposed his deficiencies as an operator, competitors say.

"Schrager is great at getting buzz, but he's never been considered a hotelier," said Atlas Hospitality Group President Alan Reay.

While most hotel companies such as Hilton Hotels Corp. and Marriott International Inc., have moved to centralize their sprawling operations, most of Schrager's operations remain decentralized.

Guests generally still have to book reservations through individual hotels instead of a central system. Each hotel buys such items as stationery, furniture, food and until recently, even Egyptian cotton towels through its own vendors instead of a centralized purchasing department.

Schrager Hotels also has never issued a chain-wide manual that lays out standards for training and service.

Such inefficiencies have their consequences: Schrager Hotels spends 25 cents of every dollar of revenue on hotel operations costs; the major hotel chains and their owners spend only 20 cents.

For years, Schrager Hotels could overcome these problems by simply charging higher rates, thanks largely to Schrager's genius for marketing and spotting trends, as well as the allure of his celebrity clientele.

Refinance blues

Now Schrager can't outprice his costs.

Schrager Hotels reported that operating income for the four hotels tied to the $185 million loan was $28 million the year ended April 30, down from $29.6 million in the like year-earlier period. Average revenues per available room, a key indicator of performance, was $199.35, a slight decrease from $204 in the like year-earlier period. When the loans were securitized, it was $287.50.

The Mondrian retains its luster on the Strip, but thanks to the opening of rivals such as hipster hotelier Andre Balazs' Standard, it's not the most chic anymore. Occupancy for the hotel inched up to 64.2 percent for the year ended April 30 from 63.5 percent, but it still trails the rest of the West Hollywood market, which averages 71 percent.

Schrager Hotels has begun to address some of its operational problems. After conducting a study on improving efficiency last year, the company recently started its own buying department. Last July, it hired former Four Seasons veteran Sue Pollack as a director of training.

Meanwhile, the company is scouring for a refinancing package. A $415 million loan package it secured from the hotel lending units of British banking firm Royal Bank of Scotland and L.A. real estate developer Lowe Enterprises collapsed when Deutsche Bank refused to renegotiate terms of its mezzanine loan, according to a trade publication, Commercial Mortgage Alert. Deutsche Bank declined comment.

Last month, the publication also reported that Schrager Hotels began efforts to borrow against the 1,000-room Hudson in New York and use the proceeds to repay its loan on the other four hotels. Sitrick would only say it was "always looking" to refinance its debt.

There's also the possibility of a rescue.

According to one source, Schrager Hotels has been in talks with Apollo Management L.P., the Leon Black-controlled vulture fund that is developing the Sunset Millennium hotel, office and retail project. Apollo had been an investor in Schrager's previous hotel projects.

Sitrick denied that Schrager Hotels is in talks with Apollo about a rescue, but said, "we're always talking to investors about various projects."

Calls to Apollo hotel executive Richard Koenigsberger were not returned.