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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