The owners of the historic Lodge on the Desert have reached a settlement with its main creditor to allow the troubled boutique hotel to emerge from Chapter 11 bankruptcy.
The agreement between Lodge Partners LLC and mortgage lender Palatine Tucson LLC, Lodge’s largest secured creditor, also calls for more than $1 million in improvements to the 103-room boutique hotel at 306 N. Alvernon Way.
The hacienda-style hotel has continued to operate, and all existing reservations for rooms, meetings and events will be honored, the hotel owners said.
In November, Lodge Partners filed for Chapter 11 bankruptcy protection for the second time since 2013, saying it had new investors with the capital needed to shore up operations and make improvements.
But Palatine, which acquired about $12 million in Lodge’s debt from main secured creditor Wells Fargo Bank for an undisclosed sum last year, moved to dismiss the case.
The investor group contended the new filing was an improper attempt to amend the hotel owner’s 2013 Chapter 11 case after the hotel owners defaulted on that plan.
The bankruptcy filing halted a foreclosure sale of the hotel property, but a judge ruled in December that a receiver appointed as part of the state foreclosure process would remain in place as Palatine’s dismissal motion was resolved.
Under terms of a settlement filed this week, the foreclosure sale will be canceled and the receiver will turn the property over to the owner’s management.
John Rutherford, who led the investor group helping the hotel reorganize — Lodge in Tucson LLC, is now is the hotel’s main owner as manager of Lodge Partners LLC. Jim Kerrigan remains general manager of the hotel.
“The successful reorganization of the Lodge enables us to strengthen our business, improve the property, honor our commitments to our customers and continue to grow,” Rutherford said in a prepared statement.
The agreement recognizes that Palatine has a $12.7 million secured claim on the hotel property.
Palatine has agreed to recast its debt claim as a five-year, $6.75 million loan to Lodge Partners at 6 percent annual interest, for payments totaling just over $9 million. That plan ends with a $7.2 million balloon payment in 2022, according to a term sheet filed with the court.
Among other things, the hotel owners also agreed to pay about $239,000 in delinquent property taxes and $180,000 in state and city sales taxes, put money in escrow for future operations and taxes and repay a $288,000 loan advance from Palatine over five years.
When the property-tax payments and the initial loan payment are made, Palatine will allow $180,000 from a construction-defect insurance settlement to be used to pay for repairs including paint, stucco and roofing work.
The deal, if consummated, also would cancel a judgment against former Lodge Partners owner Dan Donahoe, who had acquired the hotel in 1997 when it had 39 guest rooms and invested $15 million in a renovation project completed in 2009.
In listing its assets in bankruptcy filings, Lodge said the hotel property was worth about $4.1 million, with another $830,000 in personal property like furnishings.
Lodge Partners must now file an amended Chapter 11 reorganization plan, reflecting the settlement, by Tuesday. Under Chapter 11, a debtor is protected from collections or other legal actions while they work out a plan to repay creditors.
To help fund the hotel’s operations while the bankruptcy case is concluded, a bankruptcy judge approved a $100,000 loan from Lodge in Tucson on an interim basis.
