A broker seeking financing since January for a proposed 1,200-room, waterfront hotel adjacent to the San Diego Convention Center to carry the Hilton flag has reportedly narrowed the field to a handful of potential investors.
“There are maybe four or five different people they’re dealing with,” Karen Weymann, assistant real estate director for the San Diego Unified Port District, said, referring to Beverly Hills-based Secured Capital Inc., the broker. “But the reason it’s taking so long is that it’s a $335 million project and there are not a lot of projects that large in San Diego or anywhere else in the country. The larger the project, the greater the risk.”
The broker contacted more than 250 equity investors and pared its list down from roughly 60 that responded by signing confidentiality agreements and acquiring packaged information on the proposed Hilton San Diego Convention Center Hotel, Weymann said.
In today’s real estate market, financiers of projects like the proposed Hilton want to be able to recoup their investment within five to seven years, Weymann said.
“They’re looking for the value to be there after that period of time,” she added.
The Convention Center, which opened in 1989, nearly doubled in size to 2.6 million square feet in 2001. And tourism officials view the proposed Hilton as the missing component that will give Downtown San Diego the additional supply of hotel rooms needed to attract more large-scale conventions.
“We need it desperately,” said Fred Sainz, the vice president of public affairs for the San Diego Convention Center Corp., which is in charge of marketing the 2.6 million-square-foot waterfront facility.
Currently, the 1,625-room Manchester Grand Hyatt San Diego Hotel, the 1,362-room San Diego Marriott Hotel & Marina and the 511-room Omni San Diego Hotel are the main lodging facilities catering to convention goers.
The Port Commission granted the proposed project a coastal development permit in December 2004. The agency is covering the tab for a $35 million bayside environmental cleanup at the proposed hotel site, which formerly housed the Campbell Shipyard Co. between the Convention Center and the Tenth Avenue Marine Terminal.
The Port District also spent $26 million to build a parking garage that opened near the Convention Center in February with spaces for 1,950 cars, 800 of which would be used by the hotel. The entire site for the project, including the parking garage, is 12 acres, of which the 32-story hotel would occupy 2.5 acres.
A Union Hotel?
The Beverly Hills-based Hilton Hotel Corp. filed schematic drawings with the Port District in the summer of 2004. According to published reports, the proposed hotel was slated to negotiate labor union contracts for its employees and an opening date was originally projected for mid-2007.
However, Weymann said that at the earliest, construction would likely not start before January. “If the deal was put in place tomorrow, it would probably take five or six months to gear up and start construction and get all the loan documents done,” she said. Expectations are that it would take about 30 months to build, she added.
The Port Commission has agreed to give the Hilton Corp. a rent credit amounting to $46.5 million, which can be applied during the first 11 years of the hotel’s operation. After that, the port expects to receive about $6 million in rent annually. The hotel’s lease would extend for 66 years, she said.
However, Bob Rauch, a hotel consultant and co-owner of the Homewood Suites by Hilton San Diego/Del Mar, said he’s unsure whether the rent concession is enough to lure financing for the proposed project.
Large convention center hotels typically depend on upfront public financing because it’s difficult for them to keep up occupancy rates between major events that take up huge room blocks, he added.
But Port Commissioner Steve Cushman, head of Cush Automotive Group Inc., said he believes that “Hilton will come in with a balanced book of business because of its reputation and worldwide reservations service.
“It generally takes a large hotel time to stabilize (occupancy),” Cushman said. “But I think Hilton would stabilize quickly.”
Carl Winston, director of San Diego State University’s Hospitality and Tourism Management Program, said he thinks that if the hotel unionizes its employees, it “opens up potential clout” with investors because of the chance of luring a “great magnitude” of union meetings and conventions.
Most of San Diego’s hotels do not operate under contracts with organized labor. But in San Francisco, which is considered one of San Diego’s chief competitors for convention business, many hotels operate under these agreements.
“Because of the politics involved, unions want to stay at union hotels,” Winston said. “That would be a continuing piece of convention growth in San Diego.”
Cushman said the Hilton group’s exclusive option agreement with the Port Commission to build the hotel expires at the end of August and it’s undetermined whether it will be renewed.
“The board has not addressed that yet,” Cushman said.