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

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

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

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The total number of hotel rooms foreclosed on was at 7,560, up255% from the same period in 2009. The largest hotel to beforeclosed on was the 512-room Holiday Inn in San Jose. Some 78% ofthe hotels foreclosed on were independent properties, down from 90%in the first quarter this year. Riverside County led in the numberof foreclosed hotels with 11, 11% of the total. San BernardinoCounty followed with nine and Los Angeles County had eight.

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

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Reay notes that of the 100 California hotels that had beenforeclosed on as of the second quarter, only 12 had been resold tonew investors. He expects this to change as banks tire of owninghotels, "finding that they are not very easy assets to run." Hislong-term outlook is that, at current levels of sales andforeclosures, the distress in the state's hotel market would takeabout four to five years to work through.

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