San Diego Business Journal

After the grand opening of the trendy W San Diego in Downtown's Marina District, Jack vanHartesvelt, a principal in Kennedy Associates Real Estate Counsel, Inc., which partnered in the purchase, let it be known that he was in the market for another hotel in San Diego.

Now, nearly three years later, the W San Diego, the company's only hotel in San Diego, is for sale, and the well-heeled Seattle-based firm is nearing completion of a deal to buy the 421-room Hyatt Regency Islandia Hotel on Mission Bay for $62 million.

In partnership with CalPERS, the state's retirement system , reportedly the wealthiest in the country , Kennedy Associates formed KenCal LLC, which received unanimous approval from the San Diego City Council on Sept. 27 for an 18-year lease extension on the Hyatt Regency Islandia's 10 city-owned acres. With a 50-year lease in hand, vanHartesvelt said KenCal would be able to secure a loan of about $55 million to do the deal. After getting the necessary approvals and permits, he expects to be able to start renovating the property in the late spring or early summer.

Currently owned by Islandia Associates, the hotel was built in stages beginning in 1961. The Hyatt Corp., which has had the management contract since 1974, will be retained, and all of the hotel's approximately 300 full- and part-time employees will be asked to stay on, said Craig Benedetto, of Benedetto Communications, a spokesman for Kennedy Associates.

Although the W San Diego, which is owned primarily by a group of labor union pension funds, went on the block in relatively short order, vanHartesvelt said he expects KenCal will hold onto the Hyatt Regency Islandia indefinitely.

"I hope that once it's back at the top of the market that we will operate it forever," he said. "Our partner, CalPERS, has no mandate to have to sell at anytime, so we'd stay there as long as it makes sense."

More Money For City

In exchange for extending the Hyatt Regency Islandia's lease, the city will get a one-time payout of $1.2 million. Under the terms of its lease agreement, KenCal will pay varying percentages of room rentals, food and beverage sales and sales of goods from the lobby and gift shops , all of which are higher than that coming from the current owner.

KenCal has also agreed to make extensive building improvements. At a cost of $36 million, they include redesigning the hotel's two restaurants and transforming one large swimming pool into two to add a children's wading pool. Estimates are that the renovation construction will be completed in the summer of 2007, vanHartesvelt said.

Benedetto said because of escalating costs of building materials, the figure is likely to exceed that sum, however.

The Hyatt Regency Islandia, which has 25,000 square feet of meeting space, has traditionally focused on business travelers and meetings business. Needing repairs and improvement, the hotel has averaged an annual occupancy rate of about 71 percent , below par for the area , and charges about $150 a night for rooms.

By including families and leisure travelers among the client mix, vanHartesvelt said he expects to boost the hotel's occupancy into the high 80 percent range, on average, and to be able to increase room rates to an average of $200 nightly, once construction is completed.

The full scope of the project could include adding such amenities as a spa. But it would be premature to announce that, vanHartesvelt said, without getting approval from City Hall.

"I'm going to light that property up," he added. "You're going to be very surprised."

KenCal projects that the Hyatt Regency Islandia, once improvements are made, will generate an additional $30 million in hotel room tax revenue in the next 32 years. KenCal also anticipates paying more than $10 million in additional property taxes.

CalPERS will own 95 percent of the hotel, and Kennedy Associates will own 5 percent, vanHartesvelt said.

While he'd hoped the sale would have been finalized in July, he was relieved that the lease finally was extended, even though the firm lost out on an estimated $1.5 million to $2 million in profit that it could have generated during the peak summer tourism season.

In June, the City Council tabled the proposal, stating it didn't want to make a hasty decision, and ordered Kennedy Associates to trot out its proposal for review by some community groups.

When that happened, vanHartesvelt said he found himself "in uncharted territory."

"Instead of first asking whether we were financially able to do this deal and were we professionally able to do the things we said we'd do, the process became a policy debate about the city's master plan for its leases," vanHartesvelt said. "This (the Sept. 27 City Council meeting) was our ninth public hearing in which I found myself having to be an advocate of a city policy on land leases. And that's never happened in our real estate dealings before."

According to an outline on the proposed acquisition of the Hyatt Regency Islandia, Kennedy Associates owns more than $6 billion in real estate assets on behalf of its clients, which include eight luxury hotels across the country.
Asked whether he thought the public review process was worthwhile, vanHartesvelt said yes.

"It really made me feel great that people who supported (the lease extension) came to the council meeting and that the council ultimately supported it.

"The labor unions and the business community and even one of my competitors were there and they were all there fighting for me. But if you'd asked me that question two weeks ago, I don't know if I'd have been so sure."

VanHartesvelt was referring to Bill Evans, an executive of the San Diego-based Evans Hotel Group, whose holdings include the Bahia and Catamaran hotels on Mission Bay.

"It surprised me that Bill Evans was willing to speak out for me at the council meeting, and I appreciated it because he knows that I'm going to be coming after his business. But he said he doesn't fear competition."

Said Evans: "I wasn't trying to help a competitor. It wasn't about the Hyatt. It was about the development and improvement of Mission Bay based on the concept of having property leases that pay for it.

"Renewing leases in exchange for major property renovations is a precedent that shouldn't be thrown away. The city should be happy to have a good investment partner come in and help bring up the reputation of Mission Bay, and as the tide rises, so do all boats."

And, for the record, vanHartesvelt said he's looking for another San Diego hotel to buy.