Mercury Forecloses on Marriott Hotels in Irvine and Tulsa

HUNTINGTON BEACH —  Mercury Savings & Loan, fighting for its financial life, said Wednesday it has initiated foreclosure on the Irvine Marriott and the Tulsa Marriott hotels in an attempt to recoup $60.7 million in overdue loans.

Officials of the Huntington Beach-based thrift said the foreclosure forced Mercury to report $32 million in writedowns for the last quarter of 1989, rendering it insolvent under recent federal law. Under accounting principles, a thrift must devalue loans on properties that go into foreclosure. Last year, Mercury sued Marriott Corp. to recover portions of unpaid loans.

The foreclosure will also result in the eventual sale of two hotels that are among the major inns serving their respective areas.

Mercury Chairman Leonard Shane said that he hopes to fully recover the unpaid loans by selling the two hotels. The proceeds would help to re-establish Mercury’s capital, which was well below regulatory requirements before the writedowns. The S&L; has not released its 1989 earnings. It lost $5.4 million in the first nine months last year.

Local hotel analysts said the Irvine Marriott’s foreclosure comes at a time when the sluggish Orange County hotel market, hurt by the glut in new hotel construction throughout the 1980s, is beginning to rebound.

Mercury’s action also takes on two major hotel players. Marriott built the hotels in Irvine and Tulsa, then sold them to limited partnerships in 1984.

The Irvine Marriott is owned by the Cigna Hotel Associates-I Limited Partnership, which includes a Cigna Corp. subsidiary. Cigna is a major health care provider and insurance firm.

The Tulsa Marriott is owned by the Chesapeake Hotel Limited Partnership, in which a Marriott affiliate is the general partner.

Bethesda, Md.-based Marriott said in a prepared statement that it regretted Mercury’s action. The company said it has long-term agreements to manage both properties and intends to continue operating the hotels.

The partnerships owe $85 million on the loans, $60.7 million of which is owed to Mercury, the S&L; said. Other lenders also participated in the loans, but Shane would not reveal their names.

The writedown leaves Mercury with a negative net worth--its liabilities exceed its assets--under all three stringent capital tests imposed by a federal law enacted in August to bail out the savings and loan industry. The negative net worth means the institution is insolvent, without any capital to act as a final reserve against future losses.

Last week, federal regulators imposed severe restrictions on the S&L;, prohibiting it from making any new loans or investments.

Shane, Mercury’s co-founder, met Wednesday with federal regulators in San Francisco to try to ease their order so the institution could resume making loans of up to $500,000 on single-family houses. He would not discuss the results of the meeting. Regulators also refused to comment on the meeting.

Industry analysts say it is unlikely that Mercury can recover from the latest blow to its financial condition. But regulators may not seize the S&L; any time soon because they have their hands full with more seriously troubled thrifts elsewhere, said Michael Abrahams, an analyst with Bateman Eichler Hill Richards in Los Angeles.

“The whole thing is a damn shame,” Abrahams said. “He (Shane) could have sold that institution for a lot of money two years ago and he didn’t. There were an awful lot of bids for well above what the stock is trading at now.”

Mercury’s stock closed Wednesday at 93.75 cents a share, up 6.25 cents a share from Tuesday’s close.

Mercury has sued Marriott Corp. in federal courts in Los Angeles and Tulsa over Marriott’s alleged failure to make up any part of the loan payments that the partnerships couldn’t pay from hotel operations. When the partnerships assumed the loans in 1984, Marriott backed them with guarantees to pay deficiencies.

The S&L; claims that the hotels became insolvent when Marriott stopped paying on its guarantees.

Marriott said it has fulfilled its guarantees completely, paying its limits of $4 million on the 336-room Tulsa hotel and $7.1 million in the 485-room Irvine property.

Shane’s son, William, a Mercury executive, said regulators have long known about problems with non-payment on the two hotel loans. The S&L; was the primary lender in both loans.

Mercury and its partners provided the financing for construction of the Irvine Marriott in 1982, and they made the permanent loan on the completed structure. From that relationship, the lenders agreed to finance and mortgage the Tulsa property, the younger Shane said.

Cigna owed $55 million on its loan--$46.75 million to Mercury--when it stopped making payments in October, Shane said. Chesapeake owed $31 million on its loan--$13.95 million to Mercury--when it halted payments last February. The S&L; sued Marriott on the Chesapeake loan last May while it tried to restructure the loan to avoid foreclosure. The S&L; sued the company again on the Cigna loan in November.

Mercury said that about two-thirds of the $32-million writedown was attributed to the loan defaults. The remaining amount was attributed to continuing accounting adjustments it has been taking throughout 1989 because of erroneous calculations made in the mid-1980s. The S&L; also has been hurt by commercial loans that have soured and by high operating costs.