Hotels, especially California hotels, have been among thehardest-hit segments of the real estate industry in the economicdownturn. While the distress of several high profile hotels in thestate, including the W San Diego and the St. Regis Monarch Beach,has made national news, the depths of the distress in theCalifornia lodging industry goes well beyond these headliners.According to reports issued by Atlas Hospitality Group in April, atleast 406 hotels in California are either in default or have beenforeclosed on by the lender.

The improving national economy and the beginning of a rebound inlodging fundamentals has led some prognosticators to suggest thatthe lodging industry might lead the real estate recovery. Nationaloccupancy rates grew 5.9% in March, while revenue per availableroom recorded a 3.8% in- crease during the same month. In spite ofthese promising fundamentals, the outlook in California isunsettled.

California is expected to experience an increase in the numberof hotel defaults in the next two years. With a significant numberof lodging loans originated during the boom