November 7, 2008 - W Honolulu-Diamond Head Hotel

Foreclose on him, Danno - this hotel became famous when featured in the title scene of the TV series "Hawaii Five-O"

First Hawaiian Bank has filed a lawsuit to foreclose on the W Honolulu-Diamond Head Hotel owned by troubled Big Island developer Brian Anderson.

The bank filed the suit Oct. 27 in state Circuit Court after Anderson and his company, Anekona W LLC, defaulted on a $5 million loan issued in August 2004. The complaint also names Anderson's wife, Joan, and sons, Brad and Cord.

The embattled developer, who is embroiled in numerous lawsuits involving a failed attempt to redevelop the iconic Ilikai hotel, bought the upscale 50-room boutique property managed by Starwood Hotels & Resorts Worldwide Inc. in 2004.

Anderson said he didn't know anything about the latest foreclosure action. But in recent years, he repeatedly has failed to sell the property at 2885 Kalakaua Ave., which sits on leasehold and fee-simple land.

His attorney, Gary Dubin, couldn't be reached for comment yesterday. An attorney for First Hawaiian said the bank hoped to amicably resolve the suit.

Earlier this year, Anderson was slapped with a $72.6 million foreclosure on the Ilikai by New York-based iStar FM Loans LLC, in addition to a number of complaints filed by investors and condominium owners.

On Oct. 29, local hotel consultant Joseph Toy became the court-appointed receiver for the Ilikai property, another step in the foreclosure process.

"All it means if they appoint a commissioner is that they're getting serious about foreclosing," said local developer Peter Savio, who earlier put in a bid to purchase more than 200 units at the circa-1964 hotel. "It just means they'll get very realistic on pricing, (sales) terms and conditions. It will force everybody to look at it very clearly."

According to the latest suit, Anekona owes First Hawaiian $4.9 million, including a principal balance of nearly $4.8 million, more than $140,000 in accrued interest and a $12,000 extension fee.

The entire loan amount became immediately due and payable when the loan matured on Oct. 6.

Original story - StarBulletin.com

Condotel king hits downcycle

He's no Donald Trump. But local developer Brian Anderson, despite not being flamboyant or inclined toward publicity, has become a big figure in Hawai'i real estate development in the past several years.

The developer from the Big Island has, largely in low profile, been involved in more conversions of Hawai'i hotels to condominium-hotels than anyone else in the state this decade.

Referred to as "condotel" conversions, the business in which usually older hotels are bought, renovated and resold by the room to investors took off in the recent real estate boom as Anderson and a handful of other developers converted an estimated 4,000 Hawai'i hotel rooms to condotel units.

"For years to come, we'll see his stamp on the market," said Will Tanaka, a local hospitality industry consultant who worked with Anderson on three projects. "He's made his mark here."

But Hawai'i's condotel king — much like Trump in a former real estate market downturn — is under siege from lenders on four of his more recent projects, including the iconic Ilikai Hotel in Waikiki.

Local real estate industry insiders say Anderson largely was the victim of bad timing in property and credit markets, though they also say the developer made some inadvisable moves such as trying his hand at hotel management and taking on the mixed-use Ilikai with its association of longtime condo owners.

Depending on how his troubled projects wind up, Anderson could be the first major Hawai'i developer sacked by the recent turmoil in real estate and financial markets.

Of course, it remains to be seen whether Anderson can save his distressed properties or rebound later after the dust settles. Other developers — including local ones Herbert Horita and Peter Savio, as well as Trump, who is almost finished building the most luxurious condotel in Hawai'i — have recovered from financial ruin before.

Anderson declined to be interviewed for this story because of pending litigation involving the Ilikai, which a lender has threatened to partially shutter next week, the former W Honolulu-Diamond Head and two Kaua'i hotels.

Anderson, 55, is the youngest child of part-Hawaiian politician and businessman D.G. "Andy" Anderson, who spent 20 years in the state Legislature representing Windward O'ahu and lost two bids to become mayor and three bids for governor.

The elder Anderson's overarching career, however, has been business, including John Dominis Restaurant in Kaka'ako, Michel's at The Colony Surf in Waikiki, a camera shop, a toy business and at least a half-dozen commercial and residential real estate projects in Hawai'i and on the Mainland.

Waterfront plans

Andy Anderson, who didn't comment for this story, also twice made bids in the past 10 years to develop large portions of state land along the Kaka'ako waterfront. One plan included a high-rise with commercial and residential uses, and the other featured a Ferris wheel, carousel and miniature golf course surrounded by retail shops and restaurants. Both plans failed to win state approval.

The younger Anderson followed his father's career path in real estate after graduating from Punahou School in 1971 and earning a degree in business administration and economics from the University of Puget Sound in 1975.

After college, Anderson moved to the Big Island and worked in one of his father's businesses, Hawai'i Ranch & Farm Supply in Waimea, but quickly became a full-time real estate developer and investor.

According to a biography distributed by Anderson, he developed his first project, an 18,000-square-foot commercial center in Waimea.

In the 1980s, Anderson was involved in developing five residential projects collectively with close to 180 lots or homes largely on the Big Island.

Anderson also was involved in development of the retail complex Coconut Grove Marketplace in Kona initially anchored by Hard Rock Cafe and Outback Steak House.

In 2001, Anderson branched out into condotel conversion with the Royal Sea Cliff in Kona, a project that helped kick off the recent condotel boom.

Anderson negotiated to buy the 151-unit oceanfront hotel for $26 million, and partnered with local developer National Housing Corp. of Hawaii to complete the deal.

Kevin Showe of National Housing said his firm as majority investor ended up leading the project, which produced a handsome return for National Housing and Anderson.

"That was a good deal for both our families," Showe said. "He was a good partner."

Anderson and National Housing followed the Sea Cliff with a second condotel conversion joint venture, the 217-room Waikiki Terrace hotel overlooking Fort DeRussy in 2003.

Showe said the partnership took what it learned from the Sea Cliff and improved on it with the Terrace, which cost $30 million to acquire and renovate.

Units in the hotel renamed the Luana Waikiki sold out in a just 32 days, and Showe said the upgrades and new management by Outrigger Hotels & Resorts helped boost the average revenue per available room from about $45 a night to roughly three times that.

But other developers were also involved in what by then was a condotel conversion rush, and Showe said he began to see signs that future deals might spell trouble, especially as prices at which hotel owners would sell rose to levels that made it more difficult to provide condotel unit investors a good value.

"I think the values had reached an unsustainable level," Showe said. "It was a very speculative fever occurring."

Acquisition spree

Showe exited the business. But Anderson, with two good templates to continue pursuing conversions, bought six more hotels over the next three years doing business as Anekona Development Group.

Anekona's spree of acquisitions between 2004 and 2006 was concentrated in Waikiki and on Kaua'i:

• 200-room Islander on the Beach Hotel on Kaua'i renovated and resold as a condotel;
• 48-room Waikiki Royal hotel converted into a condotel now known as the Outrigger Regency on Beachwalk;
• 51-room W hotel in Waikiki that wasn't converted for condotel sale;
• 350-room Kauai Beach Resort hotel renovated and managed by Anekona under a Hilton franchise;
• 216-unit Aloha Beach Resort on Kaua'i maintained as a hotel;
• 703 rooms and commercial space in the Ilikai.

Tanaka, the hospitality industry consultant, figures Anderson has been involved in more than a quarter of all the recent condotel conversions in the state, or about 1,200 of 4,000 units.

Key players on Anekona's team included Anderson's twin sons, Brad and Cord, who graduated from Santa Clara University in 2003, and Peter Herndon, a veteran of Hilton Hotels and development firm Haseko Hawaii.

Showe said Anderson picked properties with outstanding locations and good potential for improving room rental rates. But the market for selling condotel units had weakened by late 2006 or early 2007 not long after Anderson's last purchase, the Ilikai in July 2006.

"Unfortunately, Brian got caught," he said. "It's kind of the nature of the game. It's inevitable because real estate is a cyclical business. It used to be location, location, location. Now it's timing, timing, timing."

As investor demand for condotel units waned, more restrictive mortgage lending further depressed the market, and then last year's downturn in tourism arrivals delivered a third disastrous blow.

Anderson now faces lender foreclosure lawsuits on four of his properties — the former W now known as The Lotus at Diamond Head, the Aloha Beach, Kauai Beach Resort and the Ilikai.

The Ilikai, Anderson's biggest and boldest deal, was unwittingly acquired on the verge of a market slump. The tower also was Anderson's most complex deal, and generated the most publicity — much of it negative — for the developer.

Pop-Culture icon

Local businessman Chinn Ho built the Ilikai in 1964 as part residential condo, part hotel. The property gained pop-culture icon status as part of the opening scenes of the long-running TV series "Hawaii Five-0" and earned a devoted following among many repeat visitors.

Anderson bought the Ilikai for about $220 million, which represented close to half of the $500 million in Anderson's real estate ventures over the past three decades.

The purchase involved 343 hotel rooms and commercial space in the roughly 1,000-unit main Y-shaped tower. Though the deal also included the Ilikai's connected Yacht Harbor Tower building with 360 hotel rooms, the main pool, ballrooms, a wedding chapel and retail space, Anderson simultaneously sold the Yacht Harbor piece to San Diego-based eRealty Cos.

Anderson's plan was to focus on the main tower and sell 343 hotel rooms as condotel units while spending $40 million to restore some luster to the Ilikai and make it an upscale hotel with higher room rates.

But quickly, many of the Ilikai's longtime condo owners were angered by changes Anderson made, such as restricting parking and storage as well as closing the main pool, a restaurant and other businesses in the Yacht Harbor building.

"There was no good relationship established with the (condo) owners," said Bob Humphreys, an attorney from Washington, D.C., who has stayed at the Ilikai since the 1960s and bought a condo unit there in 2004. "No good will or trust. Anderson was antagonistic from the beginning."

The adversarial relationships impeded Anderson's ability to win support from enough owners to renovate Ilikai common areas. Even after the renovation plan was increased to $60 million, it was voted down.

Besides stalled renovation plans, tourism arrivals began to decline last year and hurt hotel performance. Also, softening real estate values and the mortgage industry meltdown that cut off lending to many would-be condotel unit buyers added to what became a quadruple whammy for the Ilikai conversion.

Humphreys also said Anderson's parting ways with Marriott International's management of the Ilikai in favor of self-management hurt operations and bookings.

"It was like night and day," Humphreys said of the management change. "It's deteriorated pretty sadly. It looks like a ghost town here."

Occupancy at the hotel plunged from 85 percent to less than 25 percent in the past two years, according to attorneys representing close to 40 investors who bought Ilikai condotel units and later sued Anderson and a broker over alleged misrepresentations.

According to property records, Anderson still owns 203 of the 343 hotel units after selling about 140 units, including 43 to a time-share operator.

In August, Anderson's lender on the Ilikai, iStar Financial, sued to foreclose on its loan. Last month, iStar asked a judge to approve shutting down the Ilikai's hotel operations because of monthly losses of more than $300,000. A hearing on the motion is scheduled for Tuesday.

Anderson has previously said he will use "every legal means available" to keep the Ilikai open.

An auction of Anderson's 203 units and commercial areas he owns could take place within three months, according to court-appointed foreclosure commissioner Joseph Toy.

Experienced developers doubt that Anderson, whose hobbies include cattle roping, can retain ownership of the Ilikai and other properties in foreclosure, but it wouldn't surprise them if he made a comeback with future development deals.

Steve Sofos, a commercial real estate broker who was a classmate of Anderson's at Punahou and has loosely stayed in touch with the developer over nearly four decades, predicts Anderson will recover.

"Once his debacle gets over with the Ilikai, he's going to find another project, and do a great job," Sofos said. "Brian will come back. He'll have to lick his wounds, pick himself up off the ground and start over. He'll come out of it."

Big Isle's Brian Anderson has run headon into a perfect real estate storm

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