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La Valencia deal may falter

The proposed sale of the historic La Valencia Hotel in La Jolla and the Rancho Valencia Resort and Spa in Rancho Santa Fe is on the verge of unraveling because of the current scarcity of capital.

San Diego-based American Property Management Corp. (APMC) had agreed to purchase the two hotel properties for an as yet undisclosed sum from the Collins Cos. and a Getty trust.

Michael Gallegos, president and CEO of APMC, said it’s an enormous challenge getting a transaction of this magnitude done in this lending environment. The problem, he pointed out, is that there are not many bankers with the ability to lend for this type of deal.

Gallegos said that his sources have told him that this is the worst lending environment in 70 years. “We’re seeing virtually no transactions being conducted in the market. Only a mere trickle of what we are accustomed to seeing,” Gallegos said.

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Gallegos’ sources have also told him that the market is approaching a bottom. But they expect that it will take at least another 12 to 18 months before the U.S. will climb out of this situation.

Concerning the La Valencia and Rancho Valencia deal, Gallegos said, “Our timing could not have been worse. There were indications that things weren’t looking good, but no one could have predicted it would have been this bad.”

He said that the company is still passionate about the deal. The company has been approaching European banks to gauge their interest.

Although APMC’s growth is primarily related to acquisitions, for now management has decided to focus on assets currently in their portfolio. “We’re solidifying and enhancing our existing operations,” Gallegos said.

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APMC is experiencing a reduction in corporate travel customers. They are currently working to increase the leisure travel business, but everyone in the hotel industry is concerned because of the rising cost of air travel. As gasoline and food prices continue to rise, people are left with less in the way of discretionary spending.

APMC has been forced to shift its marketing focus. The company is actively marketing to non-corporate travelers, but leisure business rates have been softening also. Wherever necessary APMC is lowering rates. Gallegos said, “We’re well prepared. Our business is cyclical. We’ve been through three other down cycles in the past. We know how to weather the storms. We already operate a streamlined business. We’re looking for efficiencies wherever they may exist.”

If APMC can’t find a lending partner to setup financing, the contract will expire and the seller has the option of taking the property off of the market. Gallegos said that the sellers have been remarkably smart, patient, and cooperative. He said, “We couldn’t ask for a better group of sellers. They know exactly what they’re doing.”

Gallegos did point out that APMC has been working on one transaction in Mexico City, which they are currently closing escrow on with a European bank. It’s a five-star hotel and the deal is valued at more than $132 million, which represents the largest transaction ever in the company’s 18-year history. He asked, “How is it we can get that deal done in Mexico, but we can’t get a deal done in such a dominant financial country like the U.S.?”

When asked if he thought there was any chance that the transaction might go through, Gallegos replied, “I can’t give odds on the deal.”