Telluride started the week after the Martin Luther King holiday with dour news: Two of the Telluride area’s leading lodges — the sparkling new Capella Telluride and the older but always successful Inn at Lost Creek – were expected to close. It was, according to some, the worst economic news Telluride had received since the Idarado Mine closed in 1978.
But the week was ending with brighter prospects. Citing an unidentified “highly placed source,” The Telluride Watch reported that the change will consist only of new management for the two properties and an extension of financing. The Daily Planet, another newspaper. said much the same thing, but it cited “whispers.”
And Bob Delves, mayor of Mountain Village —the municipality located adjacent to Telluride’s upper ski lifts — said on Friday that he believes the evidence points to continued operations. Early in the week, he said, other hotels were getting calls from the Capella and Inn at Lost Creek, to see about their ability to absorb their bookings in later months. Those calls ended later in the week along with rumors of continued bank financing for hotel operations.
“I haven’t heard the fat lady sing,” he said. Rather, he expects the Capella to remain in operation, but under a different brand, while the Inn at Lost Creek will continue operations under the existing name.
The Daily Planet quoted John Drake, from the Capella’s corporate office, who said that the hotel group was still talking with the lending bank about extension of credit.
Observers trace the problems to the basic business model for financing of the Capella Telluride, one that assumed continued high prices for resort real estate.
Ten years in the making, the Capella Telluride cost $200 million to build. Telluride and Mountain Village officials believed they needed a four- or five-start hotel such as those at Deer Valley, Aspen, and other high-end destination resorts had.
And, by all accounts, the Capella has disappointed nobody. “It’s a five-star building,” says Delves. Others compare the service levels to that of the Broadmoor, the well-known property in Colorado Springs.
“There aren’t enough stars in heaven to describe it,” said Seth Cagin, publisher of The Telluride Watch, just before the opening in early 2009.
The hotel was the first in North America to be operated under the Capella brand started by Horst Schulze, the long-time chief executive of the Ritz-Carlton chain.
But the hotel opened at the worst possible time. A condo-hotel, it was premised on the idea of selling individual condos that were then put into a rental pool. The Capella has 100 units, and either 47 or 60 – reports have varied – were intended for sale at prices of between $1,200 and $1,500 per square foot. That’s high by standards – and just about anywhere, for that matter.
None of the units sold, however, and the developer didn’t drop the prices. Without real estate income, Robert Levine, chief executive of RAL Companies, apparently was unable to service the construction debt. For collateral, Levine had posted the adjacent Inn at Los Creek, a successful property he had opened 12 years ago.
In October, foreclosure actions were launched for both properties and a third condominium property, called the 38th Building. Foreclosure itself, however, has not occurred.
In a column published on Wednesday, Watch publisher Cagin cautioned that the story was shifting so rapidly that speculation might quickly be outdated.
“The current stratagem, it appears, is to replace a five-star hotel operator with one that operates with maybe one or two fewer stars, thus reducing the hotel’s operating costs,” he went on to say. “It was, according to the receiver, the failure of the Capella operating as a Capella to cover even its operating costs that led to the announcement it would close in the first place. So it makes sense for the receiver to try to operate it more frugally. If that is what’s happening, it would represent a devaluation of the property, another step toward a sale whereby the investors and their lenders take a bath but the property itself becomes more viable.”
But taking a more up-beat view was George Harvey, the real estate broker. “This too shall pass,” he said. Telluride survived the foreclosure 17 years ago of the Peaks, another hotel then known as the Doral. “You and I don’t know who the owner will be, but they will have a great asset,” he said.
The primary lender had been Lehman Brothers, but after it went bankrupt at the start of the Great Recession, a Scandinavian bank called Swedbank took over the construction loan, investing another $6 million to finish construction plus reportedly another $5.9 million to keep the Capella operational. The total loan amount has been estimated at upward of $150 million.
But faced with an estimated $2 million shortfall this year, it apparently has had had enough – or so the reports early this week suggested.
The Watch seemed to be on firm ground in reporting the closing. “We’re in the process of notifying our arriving guests that we will be closed,” John Volponi, general manager of both properties, told The Watch. The newspaper cited a parallel statement by Jack Westergom, managing director of Manhattan Hospital Advisors. He cited a failure by the hotels to cover their monthly operating costs as the reason for shutting them down. “We’re at a point where we will shortly not have enough to pay employees.”
Levine, the developer, still owns the lodges. But he told The Watch he is unlikely to bid on them at the June 2 auction.
“Not under the current price structure,” he said. “The debt on the property is far greater than the property is worth.”
Taking measure of the broader story, Delves said he sees economic recovery occurring. “I can feel it just walking around here,” he said. “While some people want to paint this (the Capella troubles) as evidence of a failing resort economy, I’m not buying it.”
Allen Best writes and edits Mountain Town News and can be reached at allenbest.net
EDITOR’S NOTE: This post has been updated from the original.