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Tuesday, Mar 19, 2024
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LEAD—Hotel Financing Stacks Up Like A Fragile House of Cards



Major Lenders Retreat From Risky Luxury Projects

When Doug Manchester held a roundbreaking on St. Patrick’s Day for the 750-room Hyatt Regency expansion, most attending the event assumed construction would begin soon.

Manchester, whose Manchester Resorts built the San Diego Marriott Hotel and Marina, formerly called the Intercontinental Hotel, in the mid-1980s and the Hyatt Regency San Diego next door, gave local officials assurances he had the financing for the $150 million project. Both city and Port District officials anticipated the second tower just north of the Convention Center would open within two years. Today, the site for the new hotel stands vacant and has resumed its former use as an overflow parking lot for Seaport Village. Dick Gibbons, president of Manchester Resorts, said the original financing deal was rejected in late May when certain terms contained in the original deal were changed, making the arrangement too. “From our point of view, (the financing) got too expensive and opened up the door for alternatives, which we are actively pursuing right now,” Gibbons said.


Financing Hotels Becomes Difficult

No doubt about it: financing hotels, especially the larger, luxury projects like the Hyatt, is getting much harder these days, say developers and other industry sources.

“It’s a tough market for a hotel of any size,” said Robert Rauch, managing director for InterBank Brener Hospitality, a New York-based lender. Rauch, who wears another hat as a local industry analyst, said the lending environment for hotels changed radically about two years ago when large Wall Street investment banks and syndicators decided their returns weren’t worth the risk.

Previously, intermediary lenders such as banks would sell off the loans to much larger investment banks, real estate investment trusts, or REITs, and brokerage houses, which then syndicated the debt to other investors.

But in the 1990s, those entities found the risk/reward of hotel development not to their liking. Rather than investing in high-risk hotels, they turned their attention to more lucrative investment targets, mostly in the booming high-tech industry, Rauch said Today, developers of new hotel projects are being asked to put up at least 40 percent of the construction costs and to agree to much stiffer guarantees before a lender even considers a deal, say several developers. Jeremy Cohen, director of SD Malkin, a Connecticut-based commercial development company, wouldn’t reveal what his firm’s equity stake in the recently opened Hilton San Diego Gaslamp Quarter, except to say it was “a lot.”


Local Bank Finances $45M Hotel Project

The $45 million project, with 253 rooms, was financed by San Diego National Bank. Financing took about nine months to pull together, he said. While the financing was arranged about two years ago, Cohen said the lending environment hasn’t changed that dramatically. “It might have gotten slightly more difficult,” he said. “It’s available. It’s a question of equity and guarantees.” Gibbons said a limited number of lenders making such loans, the loan size, and the complexity of the deal have all combined to delay the financing.

“Because of the limited number of lenders, they can increase their asking price,” he said, referring to steeper interest rates and other guarantees to protect the investment.

Manchester isn’t simply seeking construction funding for the new hotel, but a loan that includes refinancing for the existing Hyatt hotel. The total amount is about $275 million, Gibbons said. The complexity of the deal is limiting the number of potential lenders. Some specialize in refinancings but don’t do construction lending and vice versa, he said.


Many Developers Turn To Public Sector

William Tuchscher, a developer who planned a luxury mixed-use hotel, condominium, office and retail project in Chula Vista, said the lending market on such projects is so tight many developers are turning to the public sector for help. Right now, getting financing for large-scale, commercial hotel projects is practically impossible without some creative mechanism that may include public participation, Tuchscher said. As part of the financing for a $115 million Crystal Bay hotel, Tuchscher asked the city of Chula Vista to put up about $21 million in bonds to make up part of the equity. The city apparently wasn’t interested, and Tuchscher’s exclusive negotiating agreement on the bayfront site expired in May, effectively putting the project on ice. The difficulty in obtaining hotel funding has nothing to do with a project’s viability or the project’s site, Tuchscher said. “The Hyatt is probably the most bankable hotel project in the nation,” he said. “This is San Diego, one of the fastest-growing hotel markets (along with Las Vegas and Orlando), with one of the best occupancy rates, an expanded Convention Center and now the ballpark. It’s definitely a bankable deal. It’s just a matter of time and getting the right players involved.” While nearly everyone calls the Hyatt expansion a slam-dunk, some question why the original financing deal was rejected and why Manchester subsequently petitioned the San Diego Unified Port District for financial assistance. “I don’t know what they had, but I, and everybody else who was at that groundbreaking, were quite shocked when they said they didn’t have the financing after all,” said Peter Hall, president of the Centre City Development Corp., the city’s Downtown redevelopment agency. In May, Manchester requested rental concessions from the Port District, the hotel’s landlord. When the port rejected Manchester’s request for what amounted to an interest-free loan of $1.4 million, Manchester canceled its financing deal with the American International Group, a New York insurance corporation. Gibbons points to concessions made by other public entities for large hotel projects, including Denver and Pittsburgh, and asks why the same cannot happen here. “It makes sense because it’s a win-win type of situation,” he said. “If the port can provide some type of concession, then once the hotel is up and running, everybody benefits.” Hall said Manchester’s claims the financing market has practically dried up isn’t true. Some hotels are finding the funding they need. For example, JMI Realty Inc. recently broke ground on the $50 million, 248-room Del Mar Marriott Hotel. More importantly, JMI is just about 30 days away from breaking ground on a 500-room Westin Hotel next to the Padres ballpark, Hall said. “This hotel (the Hyatt expansion) needs to get built, should be built, and everybody hopes he breaks ground on it soon,” he said. Hall, along with many others, is intensely interested in the Hyatt and every other hotel project for good reason. First, an expanded Convention Center that doubles the space of the existing center and will be completed in September of 2001 needs more rooms for additional trade show visitors.

Then there’s the ballpark project in the East Village. The city has designated the transient occupancy taxes , hotel taxes generated from Downtown rooms , as the source of money to repay tax-free bonds it plans to issue for its share of the $450 million ballpark.

At least a fourth of the planned debt service is supposed to come from a 1,200-room hotel at the Campbell Shipyard site. That project has yet to get a required environmental impact report approved by either the Port District or the California Coastal Commission, but the port has already lined up its developer. It’s Doug Manchester.

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