Commercial Real Estate Finance

Here at the Llenrock Blog, we’ve discussed just about every imaginable asset class and sub-class in commercial real estate. From mainstream assets like office and multifamily to more specialized property types like self-storage, senior living, and even wind farms and timberland–I’ve discussed every conceivable form of real estate at least once.

Or so I thought.

The other day, my boss said, Hey, you should do a post about this…, directing me to a New York Times article about Japanese “love hotels.” Yes, love hotels. There you have it: a new CRE asset for me to discuss. And before you ask: yes, these love hotels charge by the hour (or  3,000 yen for 90 minutes, which should be more than enough time).

I’ll try to keep this as SFW as possible.

We have similar establishments in America, too (I’ve been told). In general, though, love hotels (or “leisure hotels,” if you prefer) occupy a far more mainstream, socially accepted position in Japan’s hospitality sector than in the States’. Consider one central cultural difference between the U.S. and Japan: in the latter, it is not uncommon to find several generations of the same family living in the same household. U.S. families tend to be more dispersed.

With the lack of privacy that results from more limited personal space, love hotels have emerged as a way for consenting adults to get away for a couple hours and be alone. To play Scrabble or whatever.

This situation has turned love hotels into a $38 billion-a-year industry for Japan, providing steady and typically recession-resistant income for the owners and operators. However, the New York Times reports, a recent transaction has shown this obscure branch of real estate to be far more complicated than it seems:

…many American funds invested in distressed properties at the height of Japan’s economic woes without success.

One such group, CarVal Investors, sold its 10 leisure hotel properties, which it purchased before the global recession, at an enormous loss. But CarVal isn’t the only loser in this deal:

CarVal is now under fire from former employees and business partners in part because of the tough tactics of the new owner: an affiliate of a Japanese developer, the Kato Pleasure Group. Immediately after closing the sale on Thursday, the buyer dispatched groups of black-suited men to force out hotel workers and even hotel guests, barricading the entrances with wooden fences.

CarVal, an investment-focused subsidiary of multinational food and agriculture company Cargill, is certainly a legitimate, “on-the-books” kind of business. Its local buyer, the “Kato Pleasure Group,” seems a little less so.

The abrupt, thugs-in-black-suits transition of ownership is problematic enough (if Kato has ties to organized crime, as some allege, that is for the Japanese government to investigate). But another problem arises from the fact that CarVal’s local operators, Urban Resorts, is claiming breach of contract and fighting for millions in compensation.

The whole story is pretty convoluted–involving rogue employees, law enforcement, and a hotel developer with possible ties to the mob. Check out the New York Times article to find out more.

I have no idea if there’s a moral to this story, but it certainly highlights some of the complexities when it comes to opportunistic investments–not to mention opportunistic investments in a foreign culture. Maybe, if it had the chance to do it over again, CarVal wouldn’t have cut ties with its hotels’ operator the way it did. If CarVal had the chance to do this transaction over again, maybe it would have sold these properties to a less (allegedly) shady organization.

Either way, it’s sad to know this CRE deal has sullied the reputation of the pay-by-the-hour “love hotel” industry.

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