Normalcy on Horizon for Avalon Hotel Owner

PORTLAND-Having regained full control of the Avalon Hotel & Spa and the adjacent Rivers Restaurant from his former partners and hired a new hotel operator, local developer Paul Brenneke is now working toward emerging from the Ch. 11 bankruptcy his ex-partners initiated. Brenneke is currently negotiating an extension of the first mortgage loan on the property, which is the main piece of a reorganization plan that Brenneke must file with the US Bankruptcy Court on August 1 in preparation for a September 27 confirmation hearing. Corus Bank, the primary lender, is owed $8.2 million including penalties. Dynamic Finance Corp., a secondary lender, is owned another $2.8 million, but Brenneke says his understanding is that Dynamic will follow Corus’ lead. “We’re working on a settlement with (Corus), which means we’ll hopefully have a consensual (reorganization) plan and it will be approved by the court,” says Brenneke. “The property is running great now, so once the (loan is renegotiated) all we’ll have to do is sit and wait for the hearing.”As part of a settlement with his former partners that was affirmed by the US Bankruptcy Court last week, Brenneke’s Avalon Hotel Developer LLC is now the 100% owner of Avalon Hotel Partners LLC, the entity that owns the hotel and restaurant. His former partners in AHP include an affiliated group of LPs whose general partners were Pacific Western Realty & Development, Pacific Mortgage and Investment Company. The former property manager, Waterford Hotels and Inns Inc., also had a small stake in the property. As part of the settlement, Brenneke’s former partners turned over their combined 77% ownership of the hotel and paid Brenneke close to $700,000 in exchange for no future liability.The partnership dispute got serious in January 2003 after Brenneke’s former partners voted to remove him as managing member of AHP. In June 2003, Chicago-based Corus initiated foreclosure proceedings against Avalon Hotel Partners, saying the partnership had failed to make several hundred thousand dollars in loan payments since July 2002. When his former partners missed the second mortgage payment, Brenneke, who was the guarantor on all debt associated with the property, told the investors he wanted out of the partnership, a move that was supposed to initiate an internal buy-sell provision in their partnership agreement. Brenneke had to take his partners to court to make it happen.In September 2003, Multnomah County Circuit Court upheld the provision and ordered that the property be put up for auction between Brenneke’s entity and his partners. Brenneke’s $10.6-million bid topped his former partners’ bid by $100,000. His former partners then trumped that Brenneke’s victory by taking the company into Ch. 11 bankruptcy hours before they were supposed to hand him the deed to the hotel and restaurant property, according to both parties’ description of events to GlobeSt.com. Brenneke was unsuccessful in having the bankruptcy dismissed a month later.Corus’ attorney Thomas Stilly confirmed for GlobeSt.com that this month will be spent seeing if the bank and Brenneke’s entity can agree on new loan terms. The defaulted loan was a three-year construction loan that carried an interest rate of LIBOR plus 375 basis points. Negotiating points could include the length of the loan extension, expected to be somewhere between three- and five years; whether it will include a period of interest-only payments and, if so, how long that period should be; whether the default interest should be tacked onto the $7.7 million in principal debt; and who should get the estimated $1.8 million from the sale of two unsold condominium units above the hotel.If Corus and Brenneke don’t come to agreement on terms, then instead of a consensual plan Brenneke would file a contested plan. At that point, it would be up to the judge to back Brenneke’s plan against the bank’s wishes, make his own changes to the loan terms and then approve it, or send the two parties back to the negotiating table with more direction. Regardless of the renegotiated Corus Bank loan Brenneke’s reorganization plan is expected to have the backing of the unsecured creditors (mostly service providers), as Brenneke says his plan will include an immediate cash payoff of their outstanding bills, which he says amount to about $200,000.