Can’t say I didn’t see this one from happening. Yesterday Extended Stay Hotels filed for bankruptcy with debit of 7.6 billion – primarily all from their initial over-leveraged purchase from the Blackstone Group in 2007. (Check the related stories below for past posts on the issue)

Fortunately the hotels will be staying open and it will be business as usual for any employees and guests, the real losers of this are the banks who helped fund the transaction – and is a perfect example of how foolish banks were to lend money during the height of the market. The winner in this debacle – if you can believe it – is the person who spearheaded the transaction and runs Lightstone Group – David Lichtenstein.

Extended Stay Hotels was purchased by The Lightstone Group – a company I know pretty well since their headquarters is  located 30 minutes from where I live in Lakewood, NJ, in a highly leveraged purchase of $8 billion dollars in 2007. Lightstone ended up putting in a whole $200 million of their own cash into the deal – everything else was financed. While The Lightstone Group has plenty of real estate experience, they have absolutely no hotel operating experience, and it’s not as though they purchased one or two hotels – they purchased a national chain with over 600 individual properties.

Lichtenstein thought at the time by overhauling operations the transaction could work, and in theory its possible – but what they never considered is the economic downturn we’ve experienced, and since they were so over leveraged to start with – the majority of any income from the properties went right back into debt service.

It’s funny, the winner in all this is Lichtenstein himself – even when the deal was closed he only contributed $200 million dollars of his own funds – the majority of that was even borrowed, so he stands to lose very little money from his own pocket. The WSJ article linked to above states that the banks will not be going after his other assets, and some how – after all this is done, Lichtenstein & The Lightstone Group will continue to be managers of Extended Stay Hotels.

Talk about being a winner! I wish I was able to do transactions like this – purchase things for billions of dollars using very little of my own money, having to default on the purchase, and coming away unscathed. Occurrences like this are what initiates calls for action by congress so that the fleecing of banks – and ultimately the American public don’t occur again.

It’s unclear what repercussions this will have on Lightstones ownership of the firm though – will they continue to own any of it? Will the banks attempt to sell off portions of Extended Stay Hotels in order to get some return on their investment before having to write it off completely?

We’ll see what happens next, but its unfortunate that a fairly successful hotel chain and brand could be ruined because of the greedy banks and investors during the prime of the market.

andrew@alconic-inc.com