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					                                                                          Reprinted from the Commercial Real Estate Monthly section, March 26th, 2007




BANKER & TRADESMAN
THE REAL ESTATE, BANKING AND COMMERCIAL WEEKLY FOR MASSACHUSETTS                                                            ESTABLISHED        1872



                        If You Build It, They Will Come:
                        How to Finance Hotel Construction
        By Kenneth E. MacKenzie                     mixed-use project, however, has necessarily        idea can save a treasured building from the
                                                    restricted the playing field to those relative-    wrecking ball. Don Holm of the National


                       W
                              hile the hotel        ly few companies capable of moving a mega-         Trust Community Investment Corp. provid-
                              industry is en-       project from conception through marketing          ed a case study involving the redevelopment
                              joying an ex-         and execution. Call to mind the likes of           of the Civil War-era Masonic Temple in
                       tended period of ro-         Forest City Enterprises, Streuver Brothers         Baltimore into 90,000 square feet of banquet
                       bust          economic       or Boston Properties, builders of whole            and conference space serving two adjacent
                       performance, there is        communities. To the extent the aforemen-           hotels, the Tremont Park Hotel and the
                       virtually no way to          tioned narrowing results in better-conceived       Tremont Plaza Hotel. The old Grand Lodge
                       make the numbers             and capitalized projects, the industry as a        had originally been slated for demolition in
                       work for traditional         whole and the cities and towns in which            favor of construction of a municipal parking
ground-up construction of any new full-             such projects are located will benefit. In         garage. The hotels’ owner and developer,
service hotel building. The costs of con-           addition, the self-governing influence of con-     William C. Smith & Co., working with
struction are simply too high. In its “Hospi-       struction costs on hotel supply has in large       NTCIC, put together a package of federal
tality Industry Top 10 Thoughts for 2007,”          part been responsible for sustaining the cur-      and state historic tax credits and new mar-
professional services firm Ernst &                         rent good times in the industry.            kets tax credit-enhanced financing allowing
Young identified construction costs                                                                    it to purchase the lodge and turn it into
as a key trend influencing decision-                        Reuse With Incentives                      something unique. A hotel, while clearly a
making in the industry. With increas-                          Take an old building with good          piece of real estate, also is an operating busi-
ing competition for labor and materi- Hotels, Restaurants bones that no longer serves any use-         ness that creates lots of jobs and it is there-
als from the world’s emerging               & Recreation    ful purpose as originally envisioned,      fore potentially eligible for development
economies, there would appear to be                         put it in a vibrant urban area, throw in   incentives not generally available to all real
no end in sight. Yet hotels are being built         some state and federal incentives for devel-       estate projects. The Tremont Grand project
nonetheless. What, then, are some of the ap-        opment, and pretty soon you have a recipe          team successfully leveraged historic preser-
proaches being used to get new hotel proj-          for a viable hotel project. A short walk           vation and economic development incen-
ects off of the drawing board and into the          around Boston’s financial district and its         tives to create well-paying service jobs tar-
ground?                                             periphery would take you past the Langham          geted at local residents and contribute sig-
   If the hotel alone does not work, develop-       Hotel (formerly the Federal Reserve                nificantly to the renaissance of Baltimore’s
ers may decide to make the hotel a focal            Building and a historic landmark), the             historic Charles Street area.
point of a larger project involving a mix of        Marriott at the Custom House (formerly a
uses. Depending upon the market in which            custom house and renowned Boston land-             Sell the Rooms, Keep the Hotel
the project is located, these uses could            mark), the Hilton on Broad Street (formerly           What if you could get the hotel guests to
include any combination of retail, office, res-     an office building), the Marriott Long Wharf       pay for the cost of building the hotel and
idential or recreational space. Greater densi-      (formerly a warehouse) and the Liberty (for-       then charge them a fee for managing it?
ty leads to more sensible numbers and,              merly the Charles Street Jail). Such adaptive      Sounds too good to be true, doesn’t it? It’s
hopefully, accretive synergies with the hotel       reuse projects are truly a win/win proposi-        not only true, but the practice has become
use and better overall land-use planning. The       tion. The community gets a new, revenue-           pervasive. The so-called “condo hotel” is no
increased complexity and duration of such a         generating building that puts an otherwise         longer merely the latest creative hotel
                                                    abandoned structure back on the property           financing idea, but rather is a fairly well-
KENNETH MACKENZIE (kmackenzie@goulston- tax rolls, and the developer gets tax breaks                   established model with compelling econom-
storrs.com), a director at the Boston law that render the project economically feasi-                  ics for the developer. In a condo hotel, all or
firm of Goulston & Storrs Hospitality and ble. Plus, the “cool” factor of these types of               a significant portion of the rooms are con-
Recreation group, advises clients on all as- projects is undeniable. “Cool” usually helps              dominium units that are sold to third-party
pects of resort and hotel development, fi- to fill hotel rooms and is more enduring than               buyers. The developer does not even break
nancing, construction, operation, acquisi- “trendy.”                                                   ground until he has significant and binding
tion and disposition.                                    Occasionally, a creative hotel financing                        Continued on Next Page
2                                                   B   A N K E R    &    T   R A D E S M A N                              MARCH       26,   2007




Continued from Previous Page                        poorly conceived projects. The draw of          like. The construction cost numbers for the
presale commitments. Once the building is           “free” money is a powerful thing. One cannot    brands are made to work in today’s environ-
up, the units sell out and the developer has        help but wonder when the good times in the      ment and the design elements of each are
drastically reduced, or perhaps even elimi-         hotel industry finally end if the condo hotel   calculated to fit the lifestyle of today’s trav-
nated, its equity commitment to the project.        will join the timeshare as something for a      eler. Lifestyles, however, can always change.
In effect, the developer has gotten a nearly        consumer to avoid. Timeshares are now           The buildings designed for a particular
free hotel. The unitbuyers get to put the           called fractionals. Perhaps the industry will   lifestyle can change, but not for free. Thus,
units into a rental program typically man-          be as creative with the condo hotel should      some thought should be given to whether a
aged by a major hotel brand. While an owner         the need arise. In the meanwhile, litigation    particular brand under consideration for a
is not using a unit, a hotel guest will be in it,   partners are filing their teeth.                specific application represents a long-term
the hotel operator will be collecting the                                                           solution for creation of an asset or a short-
income and maintaining the unit, for which          Select Service                                  term fix that will be due for overhaul before
it will charge a fee. For lawyers, the condo           You say a full-service hotel costs too       overhaul makes financial sense.
hotel structure involves a cornucopia of            much to build and you cannot take advan-           Tools do exist to make feasible what at first
complex legal issues, ranging from avoid-           tage of any of the traditional strategies?      blush would appear dead on arrival. Because
ance of characterization of unit sales as           Never fear, the major hotel flags are rolling   most analysts believe there are at least a few
sales of unregistered securities to drafting        out “select service” brands, such as Aloft,     more years of good times ahead for the hotel
proper controls in the governing documents          Indigo and Hyatt Place. The select service      industry, because the hotel asset class is gen-
to assure the hotel will conform to the brand       brands emphasize the quality of the guest’s     erally outperforming other real estate asset
standard. While there are many well-done            in-room experience, as opposed to requiring     classes, and because the fundamentals gov-
condo hotels out there (mostly in the ultra-        the full panoply of more expensive full-serv-   erning hotel performance have never been
luxury segment), there are a number of              ice hotel meeting areas, restaurants and the    stronger, the pressure to build continues. ■




                                          Reprinted with permission of Banker & Tradesman.
                 This document may constitute advertising under the rules of the Supreme Judicial Court of Massachusetts.

				
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