IRVINE, CA-The number of defaulted and foreclosed hotels in California continued to rise in the second quarter, climbing by 18% between the first and second quarters and increasing by 132% since the second quarter of 2009, according to a new report from Irvine-based Atlas Hospitality Group. The survey shows that 478 California hotels are in default or have been foreclosed upon, but Atlas president Alan X. Reay tells GlobeSt.com that the company believes the true number of distressed California hotels is much higher, with "over 1,000 properties operating under some form of forbearance agreement."

Of the 478 properties in default or foreclosure, the number of hotels that have been foreclosed upon is 100, according to the Atlas survey, up from 79 in the first quarter. Reay says that although banks and special servicers are still practicing an "extend-and-pretend" approach to troubled properties, there are signs that both are turning to foreclosure more readily, especially special servicers, who are "being more forceful in taking back hotels," he says.

Although the pace at which lenders are filing notices of default appears to be on the rise, Reay notes that Atlas expects the default numbers to decline soon when Extended Stay emerges from bankruptcy because Extended Stay hotels account for about 20% of the properties on the Atlas default list. The recent bankruptcy filing of Florida-based Innkeepers USA will not likely have any effect on the default numbers in California, although Innkeepers has 15 hotels here, he says. Reay explains that the Innkeepers properties in California probably won't join the ranks of REO because the Florida-based company will likely emerge eventually from bankruptcy in much the same way as Extended Stay.

The total number of hotel rooms foreclosed on was at 7,560, up 255% from the same period in 2009. The largest hotel to be foreclosed on was the 512-room Holiday Inn in San Jose. Some 78% of the hotels foreclosed on were independent properties, down from 90% in the first quarter this year. Riverside County led in the number of foreclosed hotels with 11, 11% of the total. San Bernardino County followed with nine and Los Angeles County had eight.

The Atlas survey points out that much industry news recently has spotlighted the turnaround in occupancy and average daily rate, and "There is certainly a much more positive attitude in the minds of investors." However, "There is still a lot of pain in the market," the report states.

Reay notes that of the 100 California hotels that had been foreclosed on as of the second quarter, only 12 had been resold to new investors. He expects this to change as banks tire of owning hotels, "finding that they are not very easy assets to run." His long-term outlook is that, at current levels of sales and foreclosures, the distress in the state's hotel market would take about four to five years to work through.