YOU MAY only know of the Clarion Liffey Valley hotel in Dublin as you fly by it on the road to Galway. It is a good example of the debt hotels are having to shoulder, at a time of lower room rates and sharply reduced values, far lower than the levels at which investors took a punt on this popular type of investment in the good times.

It would have been a good case study for last week’s report from Alan Ahearne, the NUI Galway economist and former adviser to finance minister Brian Lenihan. In a report commissioned by the Irish Hotels’ Federation, Ahearne said the country’s hoteliers owed banks €6.7 billion, or an average of €113,250 per room, and this had to be cut by at least €2.5 billion – or hotel profits had to double – if the industry was to have a sustainable future.

The 360-bedroom Clarion has quite a stack of debt sitting on it in various forms – about €60 million in total, or €166,666 a room.

Co Clare man Sean Lyne was the developer. He borrowed €20 million from AIB and raised another €30 million from about 40 investors to build it. Each invested an average of €450,000, also borrowed from their lenders.

The investment was attractive as it came with tax breaks; each investor could offset the rental income earned from their three bedrooms – which constituted a “suite” under the investment plan – over seven years. In year eight, Lyne would buy out the investors, who are mostly owners of small businesses.

Lyne also brought in a fellow developer, the ubiquitous Paddy Kelly, who had invested in a other hotels through similar structures. Kelly has debts of about €10 million owing to Dutch-owned ACC Bank on 15 suites. Hotelier Frankie Whelehan’s Choice Hotels still runs the hotel under the Clarion brand for Nama.

Investors were originally to be paid €18,000 a year in rent per suite, later rising to €22,000. The tax breaks started in 2004 and would end in 2011 for the first investors in.

The debt stack fell in March 2011 when the National Asset Management Agency put a receiver into the company behind the hotel over Lyne’s €20 million debt originally to AIB.

Now there is a fight over the remains of this dreamy boom-time project. Receiver Kieran Wallace of KPMG, one of Ireland’s busiest insolvency practitioners, was appointed for Nama. Another, accountant Martin Ferris, was installed as receiver for ACC to try to recoup Paddy Kelly’s debts, while a third, Simon Coyle, is representing the 40 investors.

The investors are furious because they feel they are being treated unfairly by Wallace. The State loans agency receives €900,000 a year in rent for its 120 bedrooms, which Wallace is managing for Nama, while the investors get €338,000 for their 240 rooms.

A further €389,000 goes to Wallace and Choice Hotels in fees and on franchise costs.

The investors accepted a proposal from a receiver to be paid €2,500 per suite in 2011 and €3,000 for 2012 but this money hasn’t been paid. This is because the receiver wants to lock investors in at the €338,000 a year so he can sell the hotel. Trying to find a buyer when the investors want a share of the upside would make it difficult to land a buyer.

Wallace is in a strong position. He can offer the deal to investors on a take-it-or-leave-it basis as he has control over the common areas of the hotel and can argue that the investors bought the suites at uneconomic levels.

The investors don’t mind being paid a lower amount but object to being locked-in on rent in perpetuity as this will wipe out the value of their suites, putting them in a sticky situation with their banks on the €30 million they owe.

Something of the old prisoner’s dilemma has developed with the situation. The investors have “lawyered-up”, recruiting law firm Lavelle Coleman, and are eyeing a fight with Wallace and his law firm, William Fry.

For the investors, the project reeks of caveat emptor and they are unlikely to get much sympathy for getting caught out in a deal that, like most property investments at the height of boom, has gone pear-shaped.

On the other hand, they have grounds to feel badly treated as Nama has the strongest position in the debt queue with control of the hotel’s operations and seems to be using this to extract the best deal for itself. Some investors are still within the tax life of their investments, which also weakens their hand.

But the root cause of this hotel’s problems is, as Ahearne found for the industry, that there are just not enough rooms at the inn to service such a level of debt. The Clarion Liffey Valley has the added complication that there are competing parties attempting to service their respective debts. Right now there seems little prospect of a compromise being reached.