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Sunport Hotel in Legal Scuffle

By Richard Metcalf
Copyright © 2010 Albuquerque Journal Journal Staff Writer
          The 15-story, 276-room Albuquerque Grand Airport Hotel — soon-to-be Sheraton Albuquerque Airport Hotel — has gone into receivership as part of two ongoing and contested foreclosure proceedings against the Los Angeles-based owner and its former point man, New Mexico native Michael S. Gallegos.
        Court documents filed in the separate but related proceedings shed light on the recession's impact on the hotel industry.
        Revenue generated by the Grand Hotel in early 2009 was running at less than half the level projected a year earlier when the lender, Providence, R.I.-based Textron Financial Corp., approved a $23.2 million loan to owner APHM Sunport. The loan was to be used for a renovation of the 38-year-old hotel next to Albuquerque International Sunport.
        The hotel operation was close to breaking even on its financial balance sheet in March 2009 when another investor in APHM Sunport asked Gallegos to resign, according to court documents. About three weeks later, Textron stopped providing cash advances on the loan to APHM Sunport for the renovation. Then APHM Sunport stopped making payments on the loan.
        The result has been a pair of court battles.
        In the meantime, the hotel is being managed by a court-appointed receiver, Dallas-based Prism Hospitality, which has continued with the renovations. The hotel is expected to meet the standards of an upscale Sheraton and get the brand name within the next couple months.
        The fate of the hotel has significance to the city of Albuquerque, which owns the land on which the building sits. As a result, whoever owns the hotel must sign a ground lease with the city and pay rent. When the current ground lease was approved in late 2007, rental payments were estimated at $360,000 a year but are likely less than that now.
        The hotel industry in general went though 20 straight months of decline in 2008-09, but has shown signs of improvement through most of this year, according to the latest Hotel Industry Pulse Index by Hendersonville, Tenn.-based STR and e-forecasting.com. The top end of the hotel market, however, continues to struggle.
        Taking the Wyndham
        Gallegos and his company, American Property Management Corp., took control of what was then the Wyndham Hotel in early 2007 after its purchase by the investment group affiliated with American Property Hospitality Management of Los Angeles. From the start, the plan was to renovate the hotel.
        A native of Las Vegas, N.M., and a University of New Mexico graduate, Gallegos cofounded American Property Management in Albuquerque in 1990 and moved it to San Diego in 2000. The company owns the 16-story Doubletree Hotel in Downtown.
        Although its name is similar to Gallegos' company, American Property Hospitality Management is a totally different company that owns the Radisson Hotel and Water Park just northeast of the Carlisle and Interstate 40 interchange.
        Gallegos and Textron, through its local attorney, declined to comment on this story. Representatives of American Property Hospitality Management and the Grand Hotel management did not respond to requests for comment.
        Gallegos signed all the paperwork on behalf of APHM Sunport, including the guaranty of repayment, for the $23.2 million loan for renovations from Textron in July 2008. The hotel was collateral for the loan.
        When the foreclosure case went to court, a major legal point was APHM Sunport's failure to get approval of a final property improvement plan, or PIP, before the loan was finalized. An approved PIP would guarantee the renovations would lead to the hotel getting the Sheraton brand name.
        According to court documents filed by APHM Sunport, Gallegos was asked to resign for alleged mismanagement of the hotel renovation, which was running over budget. By early April 2009, Gallegos was no longer involved with what was by then the Grand Hotel, which has been a temporary name until it becomes a Sheraton.
        Textron was not notified that Gallegos was no longer involved in the hotel, which became another major legal point in the foreclosure case.
        In a court deposition filed in June of this year, Gallegos said he was asked to resign not for mismanagement, but as the scapegoat for the recession's effect on the hotel's bottom line.
        "The entire hotel industry was collapsing," he says in the deposition. "It was a domino effect. We were one of the dominoes."
        Other court documents say, when Textron was underwriting the loan in 2008, APHM Sunport projected the Grand Hotel would average between $700,000 and $880,000 a month in revenue in 2009. In reality, the hotel averaged $355,296 a month from January through May 2009.
        The real trouble began April 20, 2008, when APHM Sunport requested a $238,568 draw on its loan from Textron for the ongoing renovations. Textron didn't provide the money.
        In an apparent response, APHM Sunport didn't make its April payment on the loan and, on May 1, Textron sent its first letter demanding payment. More letters followed. APHM Sunport never made any more payments.
        Textron went after Gallegos first, filing a complaint based on his signing the guaranty of payment on July 9, 2009, in U.S. District Court in Rhode Island. Then Textron filed its complaint for nonpayment against APHM Sunport on July 14, 2009, in Bernalillo County District Court.
        The parallel court cases have followed similar paths. Lawyers for both Gallegos and APHM Sunport have argued that Textron was in breach of the original loan agreement when it failed to turn over the $238,568 draw.
        "A key issue in this litigation is whether Textron acted in good faith when it refused to fund APHM's April 20, 2009, draw request and soon thereafter declared APHM to be in default," says a recently filed document by APHM Sunport's lawyers in Bernalillo County District Court. "At the time, Textron was actively seeking to liquidate and sell off its commercial loan business."
        The argument didn't work, at least in Rhode Island.
        In the first important decision in either of the parallel cases, the federal judge in Textron's complaint against Gallegos issued a partial judgment against Gallegos in late July.
        The reasons were twofold: APHM Sunport failed to get final PIP approval before the original loan approval and then failed to notify Textron of Gallegos' departure. The two failures are legal "events of default" that predated Textron's failure to turn over the requested draw.
        As a result, according to the judge's ruling, APHM Sunport had no legitimate excuse to stop making its payments.

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