La Valencia Hotel finds a new suitor

San Diego-based American Property Management Corp. (APMC), has agreed to purchase both the historic La Valencia Hotel in La Jolla and the Rancho Valencia Resort and Spa in Rancho Santa Fe for an as-yet-undisclosed dollar amount.

Built in 1926, the La Valencia Hotel was purchased in 1946 by real estate investor Willis Allen. The two properties are currently owned by Allen’s son-in-law Harry Collins and a Getty trust.

Michael Gallegos, president and CEO of APMC said “we now have 45 hotels in the United States and Mexico with over 13,330 rooms. Our portfolio is worth in excess of $2.2 billion. We’re the 12th largest hotel owner and the 5th largest hotel manager in the country with over 5,500 employees.”

Gallegos noted that he has been pursuing the property since before it went on the market. Due to a strict confidentiality agreement he was unable to disclose the purchase price, but stated that it is a big number. Gallegos said, “I think everyone would agree that the Pink Lady is not cheap. But you’re talking about an irreplaceable, iconic asset with an A++ location, magnificent views and a rich history. I can’t put a value on any of that, but I can assure you it will never be a bargain.”

One local real estate expert said the property is unlikely to turn a profit for APMC any time soon but that it is a “trophy” for the purchaser that will retain its value and can be held as an investment.

Robb MacMillan, an advisor for acquisitions to AMPC, said that this sale by The Collins Cos. is not timed because of any desperation to sell the property. MacMillan said,” We paid handsomely for the property. The selling price is very close to what some of the industry experts have said.” Recently published estimates have put the price of the La Valencia at $100 million and the Rancho Valencia at $40 million. It is likely that the estimate for the latter property is considerably on the low side.

Jeff Weinstein, editor and chief of Hotels Magazine, an international hospitality trade publication, points out that the luxury hotel industry is very vibrant even with the economic issues facing the country. Weinstein said, “There is not a lot of downturn in this market. I expect that the industry will remain in a pretty strong position.”

Jeff Lugosi, senior vice president with PKF Consulting said that the Southern California market is still very strong and points to a recent hotel conference in which the consensus among hoteliers was that rates should continue to rise at a rate of 3 to 5 percent throughout 2008.

Renovations are planned for the La Valencia, Gallegos said. “We want to give the Pink Lady some new dresses and undergarments. We want her to be pretty on the inside as well as the outside. Our goal is to prepare her for the next 60 years.”

He said that the challenge will be to upgrade the property while preserving the rich heritage and ambiance that the hotel is famous for. The company is currently studying the possibility of building a 3,500-square-foot spa at the location. The structure is the tallest wood-framed building in La Jolla and perhaps in all of San Diego.

Gary Stougaard of Prospect Street Hotel Partners in La Jolla has completed more than $2.5 billion worth of transactions in the hotel business within the last two years and believes that the property needs to be renovated and refreshed in order for the new owners to realize value in their investment. Of the deal, he said, “I think it will be good for the property and good for La Jolla.”

AMPC must come up with the money to complete the deal within the next 60-90 days.

Gallegos acknowledges that he faces a difficult challenge in finding a banking or lending partner during the current economic downturn and said “this is the most challenging lending market in 30 years. We still have our work cut out for us, but we believe we’re up to the challenge and we are confident of our eventual success.”

Gary Stouggard said that lenders have plenty of money but that the metrics upon which they would lend that money have changed. He said “all of the covenants and ratios are significantly more stringent than they were six months ago. The amount they are willing to lend as a percentage of the purchase price is much less now. As a result, there are significantly fewer deals being done.”

Jeff Lugosi believes that financing for big deals will no longer come from conduits out of Wall Steet, but instead will come from places such as commercial banks, regional banks and large insurance companies.

With 115 rooms at the La Valencia Hotel and 49 rooms at the Rancho Valencia, the two properties represent somewhat of a departure from the normal 300 plus-room hotels typically sought by APMC. Gallegos said that the company was built largely through successfully operating 3 and 4 star commercial hotels, but that within the last few years they have targeted properties in the upscale and luxury markets with branded and unbranded hotels. The company currently owns and operates three 5 star properties. Gallegos said, “It’s not a departure, it’s an evolution. We started out with two 2 star properties and we have progressively moved up the food chain.”

A resident of La Jolla for the past eight years, Gallegos said, “I truly understand and respect the heritage of the La Valencia and I believe the Collins family has entrusted me to preserve it and enhance it. And that is my mission.”