Hotels garner little interest in an overbuilt market.

Many hotels exist on the drawing board, few are built

By most industry estimates, there could be as many as 20 hotels on the drawing boards in Los Angeles County. But none is even close to being built.

Right now there are probably three hotels under construction, a sharp drop from the 1980s when at any given time there were twice that number being built and opened.

Last year, in the county that is the country's second-biggest market with 9 million people, two major hotels started operations -- and one of those was a reopening after a major renovation.

What those numbers mean is that hotel construction has virtually ground to a halt in Los Angeles County -- the reason is that traditional sources of financing are virtually nonexistent. And that hotel room occupancy in the county is at its lowest point in decades is secondary.

"Right now I don't know of any available sources of financing for a hotel," said Robert Patterson, director of hospitality consulting of the western region in the Los Angeles office of Coopers & Lybrand, the Big Six accounting firm.

"You might be able to get a loan to buy an existing hotel but there's really nothing out there to build a new one," added Saul Leonard, president of Saul F. Leonard Co. Inc., a hotel and gaming industries consulting firm in Los Angeles.

Traditionally, financing to build or buy a hotel has been available through savings and loans, commercial banks and insurance companies. The savings and loan industry has just about collapsed, commercial banks have tightened policies on development loans and insurance companies, for the time being, have stopped lending to hotel developers.

About the only ways to finance hotel construction is to raise capital from outside the United States, or form a partnership with individual investors, according to industry experts.

The main source of financing for hotel construction has always been commercial banks but, with the recession and the growing burden of bad real estate loans, they have tightened the reins on lending and stiffened the requirements for hotel financing.

Many banks now require that a hotel developer put up between 30 percent and 50 percent of a property's cost before they will even look at a loan application. In the 1980s, when there was a lot of money available for real estate development, banks would routinely finance 80 percent of the cost of a hotel. In some cases, banks would go as far as financing 100 percent of a hotel project.

Another deterrent to hotel construction is that many banks no longer will accept the completed or purchased hotel property as collateral for the loan. They reason that the hotel market is overbuilt and few if any properties are making money -- at least right now.

"Money for any real estate development is very tight right now but I think it's the worst for hotels," said Leonard.

Meanwhile, in Los Angeles County, hotel room occupancy is running in the low 60 percent range, the lowest point in years and well below the break-even mark of about 66 percent. In the mid- to late-1980s, occupancy topped 70 percent, which of course contributed to the big buildup in room inventory that now hurts both the industry locally and nationally.

An indication of how bad the hotel industry is in Los Angeles and an example of why it's so hard to get financing is the situation at the Westin Bonaventure in the downtown business district. Last fall the hotel's owners, a partnership led by Mitsubishi Trading Co. and developer John Portman, put the landmark property into Chapter 11 bankruptcy protection.

The move was necessary to prevent The Equitable Life Assurance Society of New York, the main lender on the property, from foreclosing on the hotel because its owners had defaulted on payments on a $70 million loan.

Local industry experts say that Bonaventure's owners are not alone in having trouble meeting debt payments. Patterson estimated the industry has become so highly leveraged -- a factor that makes potential lenders wary of development financing -- that more than 15 percent of a hotel's revenues now go to pay the interest on the mortgage, as opposed to less than 6.5 percent in 1980.

In Los Angeles, the ratio of interest cost to revenue ranges from 15 percent to a high of 41 percent, said Patterson. He noted that if the ratio had remained at early-1980s levels, the local industry would most likely be turning a profit, despite the lower occupancy rates.

Another factor weighing in against financing for a hotel is the nature of the business. A hotel is built for only one purpose and cannot easily be converted to other uses if the bottom falls out. In addition, the industry is labor-intensive, meaning that it costs a lot of money to staff a hotel; and there is no guarantee of success.

"Right now, there is simply too much risk involved in hotel financing," said Leonard. "And I don't see it getting much better soon."