Tourism

Downtown Hotel Hell 

Phoenix built one and they didn’t come

by Dave Devine

While Tucson leaders ponder the wisdom of building a Sheraton convention center hotel, Phoenix opened one in October 2008. But its occupancy rates have fallen significantly short of expectations.

In 2005 the consulting firm HVS International prepared a market study for the proposed Phoenix hotel. It predicted in the first nine months of operation there would be 60-percent occupancy, increasing to 63 percent the following year.

Reality was quite different. For 2009, according to a City of Phoenix financial report, the hotel had a 49.4-percent occupancy rate.

Phoenix’s finance director, Jeff Dewitt, says the underperforming hotel presents some financial challenges.

The city committed non-general fund taxes to cover any shortfall in operating proceeds to pay a portion of the hotel’s construction bonds. Despite that, earlier this year, Standard and Poors changed the rating on these bonds from stable to negative.

Dewitt says hotel revenues will cover 2010 construction debt service and believes they’ll be sufficient for 2011. After that, he admits, it’s questionable.

Stating he didn’t work on the Phoenix market study and can’t comment on it, Thomas Hazinski of HVS does say, “There’s one obvious fact—(the report) was completed before the financial crisis.”

Hazinski did help prepare a recent HVS analysis for the proposed $202 million Tucson convention center hotel. It anticipates an initial occupancy rate of 55 percent, rising to 67 percent within two years and then stabilizing at 69 percent.

These figures, Hazinski acknowledges, are based upon an economic recovery. “If that doesn’t happen,” he says, “in Tucson the projections won’t be met.”

Those projections are critical to local taxpayers because they might be on the line to pick up at least some of the construction costs of the hotel.

If the Tucson Sheraton doesn’t perform as anticipated, the shortfall in revenue to pay for construction bonds might have to be paid by severely budget-challenged City Hall. That is not a prospect Councilwoman Regina Romero endorses.

To avert that scenario, on July 13 she sent City Manager Mike Letcher a memorandum. It was also published as a guest editorial in the Arizona Daily Star.

In her memo, Romero writes that she favors the hotel project but calls for lowering the city’s risk by requiring greater financial participation from Sheraton and Garfield Traub, the firm managing construction. As of last week, Romero hadn’t received an official response to her suggestions.

Regardless, Romero believes Letcher has been clear in his public statements about the proposal.

“He won’t get the city into a situation,” Romero suggests, “where the city’s general fund is on the line.

“The hotel has to be able to support itself,” Romero continues. Additional financial assistance “needs to be pledged from others before it gets to the general fund. If that doesn’t happen, (the city manager) won’t recommend it and I can’t approve something that won’t be a success.”

Alan Willenbrock is skeptical of the Tucson hotel being as successful as the HVS study portrays. He recently stepped down from the Rio Nuevo Multipurpose Facilities District Board, the appointed body that, with the City Council, will decide the hotel’s fate.

Willenbrock calls the HVS study “very sloppy” and believes the information provided “is not consistent with the evidence.”

Pointing out that the HVS report shows an average length of stay for Tucson convention goers twice as long as that in Phoenix and several other cities, Willenbrock contends the explanations given for this discrepancy haven’t been satisfactory.

“I’m not for or against the hotel,” Willenbrock continues, “but I am against misleading taxpayers toward expectations not likely to be realized. I can create a strong case why the hotel is likely to be less successful than the consultants say.”

If that happens, Willenbrock thinks paying for the hotel’s construction bonds “will likely require significant (city) general fund subsidies.”

Heywood Sanders, a professor at the University of Texas-San Antonio and a frequent critic of the convention industry, spoke to the City Council in July. He believes the message Tucson leaders should take from the less-than-anticipated Phoenix hotel occupancy rate is simple.

“Projections,” Sanders says of convention center hotel studies, “often aren’t realized.”

Another assumption made in the Phoenix HVS analysis, Sanders stresses, is that the recent enormous expansion of that city’s convention facilities would bring many more customers to downtown hotels. That, he says, hasn’t happened.

Addressing a major contention of Tucson hotel proponents—that the facility is needed to spur downtown revitalization—Sanders observes, “It’s much the same argument made in every city in the country. … The problem is, the more places that do it, the more competition there is. The result is what happened in Phoenix. You don’t see much increase in business.”

David Pittman works for the Arizona Builders Alliance, an organization representing about 150 construction companies. He cites job creation and economic stimulus as two reasons he supports building the hotel.

Since the height of the building boom in 2006, Pittman points out, Pima County has lost almost 14,000 construction jobs, or about one-half its former total.

“There are a lot of good things about the hotel project,” Pittman emphasizes. “I think the city needs the downtown hotel. We have a lot of things going for us and we want to bring people downtown.”

Then Pittman returns to his original theme: “It will put a lot of people back to work who need jobs,” he says of the hotel proposal. “Let’s look on the bright side.”

By Joe Higgins and Chris DeSimone, Inside Tucson Business
Published on Friday, August 13th, 2010

Read a newspaper, turn on the TV news or listen to the radio and you start hearing the same buzz words over and over from local power brokers and politicians. They’ve been using them so long, you can’t help but notice they don’t add up.

At the suggestion of listeners to our radio show, we’ve put together our Wake Up, Tucson dictionary of definitions to these common buzzwords and phrases.

• Transparency or accountability.
Implied meaning: As stewards of taxpayers’ hard-earned dollars, governments constantly strive to expose insider or backroom deals and honestly report the financial impacts of decisions.   Print this storyEmail this storyPost a CommentShareThis
 
Real meaning: We will do fancy multimedia presentations with beautiful photos of things like folklorico dancers, but never actually show you anything important. We hire consultants to justify decisions we already know we are going to make. Pima County government has an additional meaning: If you are a county employee and your name appears in the news media, clean out your desk.

• The half-cent additional city sales tax is for cops and fire.
Implied meaning: The tax on the Nov. 2 ballot will go to funding necessary basic city services.

Real meaning: We will throw the money at fire and cops; meanwhile we’ll continue using city money to subsidize $5 yoga classes and Sun Tran services. If the new tax were really for cops and fire, why would Councilwoman Regina Romero have told Sun Tran’s striking Teamsters to “wait until the new sales tax is passed” when the city has more money in the kitty.

• Public-private partnership.
Implied meaning: A symbiotic relationship between a government and private businesses that will bear mutually beneficial economic fruit.

Real meaning: The business model is so bad that no private business would dream of sinking its own money into it. (Think downtown Tucson convention hotel.)

• Think outside the box.
Implied meaning: We are a cutting-edge organization constantly looking outside the norms of the typical boring way of thinking.

Real meaning: We can’t come up with an original thought and besides, any idea that does come up never gets implemented so we have to say something like this to make it look like we might actually do something some day.

• Blue ribbon panel.
Implied meaning: We have gathered the area’s brightest stakeholders to solicit ideas, debate them and present the resulting solutions in a clear, concise manner.

Real meaning: The place where good ideas go to die.

• Regionalism.
Implied meaning: A broad-based and inclusive partnership of municipalities working together to achieve a common goal by realizing the economies of scale and complimenting each of the other’s strengths and weaknesses.

Real meaning: A super government put into place by Pima County with the City of Tucson supposedly an equal. The goal is that once total control of water and wastewater is complete, the “region” can start to be turned back to the way it was in the 1940s. Meanwhile, the battle rages on the outskirts where the real region’s last hopes for progress lie in the the municipalities of Marana, Oro Valley and Sahuarita. (Bring up the “Star Wars” theme music.)

• Small business day (as proclaimed by the Tucson city council leading up to the November 2009 election).
Implied meaning:  The attitude of the city and it’s bureaucratic red tape is improving so much, it’s a snap to open a business in Tucson. Things are “shovel-ready” and ready to go.

Real meaning: The city needs revenue so it has come up with a bunch of new fees to nickel-and-dime you when you try to open a small business. As an example, how about the city’s new $5,000 non-refundable application fee for temporary revocable easement review? In Oro Valley,a full Development Review Board review is $350.

• It’s for the children.
Implied meaning: The increased taxes and fees government is proposing on businesses will go to programs that will benefit the most vulnerable members of our society.

Real meaning: The extra money will go to politicians’ pet projects to increase reliance on government by the most vulnerable in our society, thus helping to reassure politicians’ re-election.

There are others we can’t fit in this column, such as “the four-mile $160 million modern streetcar will spur development;” “we have to build a downtown convention center hotel to save the annual gem shows;” “the $200 million spent so far by Rio Nuevo on downtown redevelopment sets the stage for private investment;” “spending $46 million on a $31 million downtown underpass is a great deal;” “I support copper mining but I’m concerned about how much water Rosemont Copper will use;” “the orange griffen and Scott Avenue is the heartbeat of downtown Tucson;” and “Huntsville, Ala., has nothing on Tucson.”

There are more buzzwords out there and we’d like to hear them. Send us your suggestions at the e-mail address below.

Consider it an educational as well as fun exercise. This stuff would be funny if it weren’t so painfully true.

Contact Joe Higgins and Chris DeSimone at wakeuptucson@gmail.com. They host “Wake Up Tucson,” 6-8 a.m. weekdays on The Voice KVOI 1030-AM. Their blog is at www.TucsonChoices.com.

Does this make any sense what so ever to any of you?

By Alan Willenbrock, special for Inside Tucson Business
Published on Friday, August 6th, 2010

As a member and treasurer of the board of the Rio Nuevo Multipurpose Facilities District, I have reviewed numerous documents related to the proposed downtown convention center hotel project and other similar projects. My research suggests that we may be overpaying by at least 40 percent compared to other hotels. This is my personal opinion and not the board’s opinion.

Here are some of the percentage differences I’ve found. Versus what’s happened elsewhere, the Tucson hotel proposal is:

39 percent more expensive than the downtown Phoenix Sheraton hotel.

 
127 percent more expensive than average per-room costs calculated by the city’s consultants HVS Convention, Sports and Entertainment.

110 percent more expensive than a comparable hotel built in Peoria, Ill.

170 percent more expensive than a Four Points Sheraton in College Park, Ga., near Atlanta’s Hartsfield-Jackson International Airport.

101 percent more expensive than a hotel tower in Portland, Ore.

17 percent more expensive than both the hotel tower and conference in Portland, Ore.

The details:

The proposed Sheraton Tucson Convention Center hotel has these preliminary guaranteed maximum prices:

$319,485 cost per key (This is an industry term that is essentially the total amount spent in all areas of the hotel divided by the total number of rooms in the hotel.)

$27,900 per room for furniture, fixtures and equipment (FF&E).

$12,206 per room for operational supplies and equipment.

Let’s compare those estimates to the others:

• Phoenix Convention Center Sheraton hotel. This is a good comparison because it’s the same hotel brand built in the same state.

$230,000 cost per key.

$20,000 cost per room for FF&E.

$8,800 per room for OSE.

The Tucson hotel is 39 percent more expensive by all three measures.

• HVS, the same consultants the City of Tucson is using, did a valuation survey in 2008 and 2009 of full-service hotels and came up with:

$140,700 median cost per key when land costs were excluded.

$19,000 median cost per room for FF&E.

Most convention center headquarters hotels include meeting space, so you need to add on these costs. But you also must figure that some of the work from HVS has been less than precise. This survey was designed to report what has happened and relies less on assumptions so it provides useful information.

• Peoria’s civic center hotel cost:

$151,800 per key, which was $132,000 in actual costs plus a 15 percent profit to the developer.

$19,000 per room for FF&E.

• The Four Points Sheraton in Georgia cost:

$118,430 per key.

While this is a Sheraton hotel, the Four Points brand is not entirely comparable but still, you have to ask why it cost less than half of what Tucson’s Sheraton is estimated to cost.

• Westin Portland at the Convention Center cost:

$158,641 cost per key.

$18,184 per room for FF&E.

$10,861 per room for OSE.

The Westin is part of the Starwood group, the same as Sheraton. The developer is Garfield Traub, same as Tucson’s developer. But it is a bit difficult to determine its comparability and cost because the Portland project has two major components that might properly be combined in all or part.

Many suggest that Rio Nuevo is where it is partly because no one has ever asked tough questions. I am here to ask some of these critical questions before we spend another $200 million.

Why is the Tucson Sheraton hotel 39 percent more expensive than the Phoenix Sheraton?

Why did Portland terminate its project in 2009 as not financially feasible despite the fact that it was at least 17 percent less expensive than Tucson’s hotel?

Why should Tucson pay twice what HVS’ survey says is the median cost per room?

Alan F. Willenbrock, CFA, is a director and treasurer of the Rio Nuevo Multipurpose Facilities District board. Send comments to editor@azbiz.com

Copyright © 2010 Inside Tucson Business

 Enjoy!

Digging back into the Rio Nuevo minutes to find the beginnings of the HVS report and what do we find? A strange cast of characters indeed. Who stands to make money on the tax payer owned hotel? Garfield Traub as developer, HVS as feasibility study firm and Piper Jaffory as bond seller.

Here’s the chain of events:

1. Under Mike Hein an RFQ is put out to find a developer of a hotel adjacent to the convention center. The RFQ called for a non-publicly funded project. Five developers submitted proposals included  Humberto Lopez the owner of the Hotel Arizona and Alan Norville the owner of the land directly west of the convention center. The five ideas were scrapped and parts of each of them were put together to come up with the plan we have now.

2. Garfield Traub was the chosen developer and the deal switched to a fully publicly funded project. Steve Moffet from Garfield Traub was the local guy behind the effort.

3. In order to sell the project to bond holders and politico’s a hotel feasibility study was suggested by……wait for it……wait for it…… Steve Moffet of Garfield Traub. (The guy that hired Brent Davis, Fred Ronstadt and Michale Guyman to lobby the city, and the guy that was recently covered by O’Dell back peddling from the HVS feasibility number - HERE ) What firm did he recommend to add credibility to the hotel plan? Wait for it ….. wait for it…… HVS. From the Rio Nuevo board minutes:

Rio Nuevo Multipurpose Facilities District Board

Meeting Minutes for September 15, 2009

4. Hotel and Convention Center due diligence

(a) Consider (and, if appropriate, Approve) solicitation for proposal to prepare a targeted report analyzing and estimating the economic contribution of the convention center expansion and new hotel
(b) Consider (and, if appropriate, Approve) preparation of an update by HVS of its hotel market and feasibility analysis to reflect current market conditions.

Steve Moffett from the hotel team discussed the two reports:

He started with discussing the HVS hotel market and feasibility analysis. In order to sell bonds, the bond underwriters need an updated market study for the hotel and convention center expansion. The purpose of the study is to access the market demand, to estimate the average daily rate for the use of the hotel for a period of 10 years; to estimate the occupancy that will be generated by this hotel; and to take into consideration current convention center business and the expanded convention center, the number of rooms and the amount of meeting space they are programming into the hotel. These are all the things that the Hotel Team is putting into place right now in designing the hotel. The study will take the rate and occupancy projected for the 10 years and generates a complete 10 year proforma and cash flow projections for this hotel starting from the day it
opens through the 10 years.

HVS is an internationally recognized firm. All of the bond underwriters in the country are very comfortable with their work. They have one of the largest data bases in the world for hotels and convention centers. At the end of the process of gathering the information from the likely users of the convention center and hotel, they will develop a very comprehensive report that will access the market demand and competition. The report will discuss their assumptions for the revenues, expenses, and rates of occupancy.

This report must be from an independent, third party firm that is recognized for providing these studies. It compares their proforma with Starwood’s proforma, and if there are any differences they will reconcile both to come to an agreement. There has already been negotiation with HVS. The first thing they will provide is a PowerPoint summary, then they will provide an expanded report for the bond underwriters to use. If approved today, the timeline will be approximately 4-5 weeks, with a preliminary report in about 3 weeks. HVS already has their data base for Tucson and Arizona, and this
information is based on current market data that is gathered just before bonding.

Steve Moffett, then discussed the Economic Impact Analysis.

This is the most important thing that a City, County, State, or District can look at for a publicly owned hotel. This report estimates the total economic impact to the City of Tucson, to Pima County, and for the entire region. It covers all aspects of possible income, ie, the employment it generates, taxes at all levels, (payroll taxes, income taxes, sales taxes). It also takes into account all spending that takes place when a convention comes to the hotel. This study starts with the HVS report.

Inacurate data, overly optimistic feasibility studies, rushing a decision through because of the Gem Show or Raytheon, canceling joint meetings due to the cost, superseding the contractual authority of the State instituted Rio Nuevo board, mortgaging the convention center to build a new entrance to no where, skipping the $40 million investment in our 1970’s convention center in exchange for building a $190 million hotel that requires the convention center to be successful, over 2300 more hotel rooms coming on line in a community that does a so so job of promoting tourism.  Does anyone else see the absolute insanity in all this?

Rob O’Dell Arizona Daily Star | Posted: Monday, July 12, 2010 12:00 am | Comments
The market study predicting success for a new downtown convention hotel is so filled with errors that the future of the $190 million hotel is in question, said members of the Tucson City Council and the Rio Nuevo Board.

The HVS Convention, Sports and Entertainment study - the critical document on which all projections for the hotel’s viability are based - has obvious mathematical and factual errors and inconsistencies, Heywood Sanders, a professor of public administration at the University of Texas-San Antonio, said in a breakfast presentation Thursday at Old Pueblo Grille. The presentation followed an appearance before the City Council, arranged by Councilman Steve Kozachik.

Mistakes or inconsistencies noted by Sanders:

• In the body of the report - analyzing the prospects for the hotel - the numbers of people attending conventions and trade shows, as well as the total attendance of the Tucson Convention Center in 2007 and 2008, are dramatically overstated when compared with the actual supporting data attached at the end of the report. For example, the number of conventioneers in 2008 is 17 times as large in the analysis as in the appendix. And total attendance is 108 percent more in 2007 and 112 percent more in 2008.

• The report says that the gem show was not held at the Tucson Convention Center in 2008. It was.

• Errors in basic arithmetic are made, including in a passage in which five trade shows and five conventions add up to 12 shows.

• An assumption is made that Convention Center attendees who stayed at the hotel would stay for 2.4 days, while an HVS report for the city of Phoenix’s convention hotel assumed convention guests would stay for only 1.2 nights.

Tom Hazinski, HVS’ managing director, said, “Sanders has a history of incomplete use of numbers and distortions, which is why he has no credibility in the industry.”

Hazinski said he relied on the TCC for his data, and said there is a discrepancy in the number of events because the larger figure includes arena events and internal meetings.

The report is critical to plans to the build the hotel because all of the other studies of the hotel accept the HVS numbers uncritically, including the study of the hotel’s economic impact and the capital plan that would be used to sell the project to the bond market.

“The HVS study is the foundation for everything else,” said Rio Nuevo Board member Alan Willenbrock, who attended the breakfast meeting.

All the projections on how full the hotel will be, how much money it will bring in and how much tax revenue it will generate come from the HVS study, Willenbrock said. The Rio Nuevo Board could get in legal trouble if it sell bonds based on a report that’s questionable.

“You really have to question the validity of what’s in there,” Willenbrock said of the report. “I don’t see how you can come to any other conclusion.”

Stephen Moffett, president for hospitality at Garfield Traub, the hotel’s developer, also expressed concerns about the discrepancies.

“It does raise questions about the validity of the study,” Moffett told the crowd at the breakfast meeting. “I’m concerned about the mistakes in the numbers.”

He also said, “It’s not my job to review the HVS report.” He said Hazinski should come to Tucson and explain his numbers.

Moffett later backed off from his comments and said he didn’t think the errors compromised the report or made it inaccurate.

Kozachik, who has been critical of the hotel and Moffett, seized on Moffett’s original comments, saying Moffett finally was expressing the same sentiments that Kozachik has been voicing for months.

“It’s nice to have him on board and singing the same tune,” Kozachik said, adding that usually his comments leave Moffett “out cussing in the parking lot” rather than agreeing with him.

Kozachik said the city and Rio Nuevo need to rewrite the script of the hotel plans, “especially if the developer doesn’t believe his own study. How can you possibly come to us and sell us on his concept if he doesn’t believe the cornerstone of his own data?”

The HVS report showed the new downtown convention hotel would make money because it would have 69 percent room occupancy at $163 a night.

The HVS study included assumptions that most or all of the projects from the 2000 Rio Nuevo master plan will need to be completed, along with the modern streetcar and a Convention Center expansion, for the hotel to meet the 69 percent occupancy rate.

HVS later amended that to say only “progress” needs to be made downtown to meet those projections.

Willenbrock said he was most concerned about the assumption that those staying at the Convention Center would linger twice as long as those in Phoenix. “Conspiracy theorists will say they picked that number to produce an end result,” Willenbrock said.

Mayor Bob Walkup said he wasn’t concerned about the numbers in the report.

The city needs to be prudent and ensure the math is right and everyone understands the numbers, Walkup said. “This is part of the normal process of due diligence,” he said.

Contact reporter Rob O’Dell at 573-4346 or rodell@azstarnet.com

Tucson is about to embark on a public financing agreement to build a 500 plus room hotel adjoining the Tucson Convention Center. Is it a smart move for a city with our track record in financing and getting projects completed on time and on budget to embark on a risky hotel? The room construction cost is projected as $318,000 per room.

Taking an aggressive 10% CAP rate (maybe 2007 values), even with the projections set forth in the hotel feasibility study, the value of this hotel on the open market is $100 million. The projected cost to build the hotel…..$168 million.  Good enough for government work.

By Sean P. Smith

Last night, Sunstone Hotel Investors (SHO) announced that the company would turn over its W San Diego hotel property to its lenders, as opposed to making its June 1st debt service payment on the property’s mortgage. This move speaks volumes about the deterioration of the hotel operating environment in recent months, and in turn, the value of hotel properties.

Sunstone, a hotel REIT, acquired the W hotel in San Diego in 2006 for $96 million, or roughly $370,000 per room. At the time, the purchase price equated to a multiple of 12x projected 2006 EBITDA.

In conjunction with the purchase, the company closed on a $65 million first mortgage, bearing an interest rate of 6.14%.

The local hotel operating environment has weakened to the point that the company has decided to simply hand over the keys to the lender, as opposed to making another debt service payment, as management now believe that the property is worth “meaningfully below” the principal amount of the debt.

While there have been many hotel defaults in recent months, this is a high-profile transaction, involving a publicly held hotel REIT and a premium hotel brand. The W hotel brand is owned by Starwood Hotels & Resorts (HOT), which also manages the W San Diego property. There are currently only 29 W hotels worldwide, although the company has an additional 22 W hotels in its pipeline.

As the hotel operating environment remains weak, we expect that more hotel owners will come to the conclusion that they would be better off walking away from properties that are now worth less than their outstanding debt balances. This would in turn put additional pressure on hotel values, just as a residential foreclosure or short sale negatively impacts all the houses in the vicinity.

From Zack’s.com

Despite the continuing deterioration in operating fundamentals, hotel stocks have rallied in recent months, including Marriott, Starwood, Intercontinental Hotels Group (IHG - Snapshot Report) and Wyndham Worldwide (WYN - Analyst Report). We believe that these moves have been overdone, and are unwarranted. The sector has a history of false starts, as investors prematurely bid up shares in hopes of a quick recovery in the group. We expect that this will again be the case in this situation, and believe that hotel stocks are due for a correction.

We project that the current steps being taken by hotel companies to lower room rates in an effort to fill rooms will have long-lasting negative repercussions. In the short-term, the reductions to room rates are unlikely to be offset by occupancy gains, thus resulting in lower overall profitability.

More importantly, however, is our belief that the reductions in ADR will result in depressed room rates even after the economy stabilizes and begins to improve. This may in turn extend the downturn in the lodging industry.

From San Francisco Business Times:

Millennium Partners is in default on its two-year $90 million loan for the 277-room Four Seasons Hotel San Francisco, according to the developer.

The luxury condo and hotel developer and operator has purposefully stopped making debt payments as a strategy to jump start renegotiating the debt with the special server, LNR Property Corp. The Four Seasons is the second luxury hotel to default on its debt payments in recent weeks. The owners of the 393-room Renaissance Stanford Court Hotel in Nob Hill, funds controlled by JER Partners, defaulted on a $89 million loan, according to lender Barclays Capital.

……. “To see the caliber of hotel like Renaissance Stanford Court and the Four Seasons going into default in the early stages of this downturn is not a good sign,” said Reay. “It means this is going to be deep, it’s going to be long, and this is going to effect everybody.”

In the last 60 days 213 hotel owners have defaulted on their loans in California, a 184 percent jump over the previous 60 days, Reay said. Reay predicted that the vast majority of hotels that were financed with loans that tapped the commercial mortgage-backed securities market between 2005 and 2007 will end up in default, a number that could top 2,000 in California alone.

“We’re in a deep recession and hotels are suffering the most of any real estate class right now,” said Reay.

A report by Atlas Hospitality estimates that room revenues in California are down 21.5 percent in 2009 and that values are 50 to 80 percent lower than they were at the market’s peak from 2005 to 2007.

From Bloomberg - 2009

Sept. 24, 2009 (Bloomberg) — Luxury hotel owners risk defaulting on their debt as the recession cuts occupancies and the credit crunch constrains refinancing.

Loans secured by more than 1,500 hotels with a total outstanding balance of $24.5 billion may be in danger of default, according to Realpoint LLC, a credit rating company that tracks commercial mortgage-backed securities. Some of the biggest loans, put on the company’s watch list because of late payments, decreasing occupancies or cash flow, were made to luxury properties where rooms can cost more than $850 a night.

“All segments are showing signs of distress but the luxury segment carries much higher loan balances and is more clearly affected,” Frank Innaurato, managing director of CMBS analytical services at Horsham, Pennsylvania-based Realpoint, said in a telephone interview.

 

San Francisco - A $90 million loan secured by the Four Seasons San Francisco, a 277-room, five-star property, is 90 days delinquent and foreclosure proceedings have begun, according to Realpoint. A notice of default has been filed, according to Bloomberg data.

The borrower was Millennium Partners LLC, a real estate firm founded in 1990 by Christopher Jeffries. The company controls 1,860 residential units, more than 2,000 hotel rooms and 1 million square feet (93,000 square meters) of office space, Realpoint said.

Nicola Blazier, a spokeswoman for Four Seasons San Francisco, didn’t respond to e-mails and phone calls for comment. Millennium principal Jeffries didn’t return a call.

The Dream Hotel, a 220-room hotel on West 55th Street in New York City that features 300-thread count Egyptian bed linens and iPods, is collateral for a $100 million loan taken by Surrey Hotel Associates LLC that’s at risk of default, Realpoint said.

Occupancy Decline

Phoenix - A $190 million loan secured by the 640-room Arizona Grand Resort is 90 days delinquent, according to Realpoint. If the loan is liquidated it may lead to a $111.9 million loss, the credit rating company said.

The property’s occupancy rate fell to 64 percent as of December 2008 from 70 percent a year earlier, Realpoint said. The borrower was Pointe South Mountain Resort LLC, a Grossman Company Properties affiliate. Pamela Kerner, a spokeswoman for Phoenix-based Grossman, declined to comment.

Realpoint also is monitoring a $1 billion loan taken by CNL Hotels and Resorts, a company acquired by a Morgan Stanley real estate fund. The loan is secured by five properties with 14 golf courses, including the Arizona Biltmore in Phoenix and the Grand Wailea Resort Hotel & Spa in Maui, Hawaii.

.

Westin Aruba

The Westin Aruba Resort & Spa, managed by Starwood Hotels & Resorts Worldwide Inc., was foreclosed on in May, according to Realpoint. The property is controlled by Wachovia Corp., the ratings company said.

The property’s occupancy rate dropped to 41 percent in May from an average of 63 percent in 2008, the report said. Servicers are used when a loan is in or near default and needs to be reviewed or modified, according to Innaurato.

The Westin Aruba has been hurt by competition from a 450- room luxury resort built next door, Realpoint said.

Another property on Realpoint’s watch list is the Four Seasons New York, where a standard room with a king-sized bed starts at $855 a night. The hotel is among four used as collateral for a $344.6 million loan, Realpoint said.

The properties’ occupancy rate fell to 57 percent in the 12 months through June. At the end of 2007 and 2008 it was 73 percent and 69 percent, respectively, Realpoint said.

‘Moderate’ Risk

New York - Four Seasons New York’s net cash flow “is well below historical trends,” the credit rating company said, without being more specific. While the property’s revenue per available room and net cash flow have jumped since bottoming in 2003, the hotel “is more recently showing signs of New York’s weakening economy,” Realpoint said.

The property is owned by Ty Warner Hotels & Resorts.

“We consider this loan a moderate default risk based on declining performance along with the lower expectations on the lodging-resort industry given the current economic conditions,” Realpoint said in its report. “Our analysis of the collateral suggests that the combined value of the assets are below the current loan amount.”

Donna Snopek, chief financial officer of Ty Warner Hotels, said in an e-mail that the loan “is performing well.”

‘No Impact’

“Moreover, the properties in the pool are all performing at the top of their respective markets,” Snopek said. “We are fully committed to our loan and can assure you that there is no impact to the current high standard of services at this property.”

Los Angeles - Lowe Enterprises Inc. of Los Angeles, the operator and developer of a 582-room resort on the Pacific Coast, said in August it’s trying to restructure a mezzanine loan after defaulting two months after the hotel opened.

The Terranea Resort in Rancho Palos Verdes, California, a $480 million property, opened June 12 with a golf course, three pools and eight restaurants. Lowe is among a group of investors in the property and is in negotiations about restructuring the loan, spokeswoman Jann Diehl said.

To contact the reporter on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

Last Updated: September 24, 2009 18:29 EDT

From Rueters:

Resorts International is latest hotel default-Fitch

Thu Sep 3, 2009 12:51pm EDT

Sponsors on the Resort International loan are Colony Investors VI, Colony Investors VII and RIH Coinvestment Partners, Fitch said. The loan is collateral for the JPM 2007-FL1 commercial mortgage-backed security.

NEW YORK, Sept 3 (Reuters) - Borrowers have defaulted on a $227.9 million loan for three Resorts International hotel-casinos in New Jersey and Mississippi, according to Fitch Ratings, in one of the largest transactions hit by the real estate crisis.

“Properties directly tied to consumer spending such as hotels are the first to exhibit signs of performance declines,” Adam Fox, a senior director at Fitch, said in the statement.

The loan on properties in Atlantic City, New Jersey, and Tunica, Mississippi, was transferred on July 23 to a servicer specializing in troubled loans after the borrower failed to make a payment, Fitch said in a statement. The borrower said cash flow had declined significantly, Fitch said.

Hotels have been among the hardest hit sectors as the recession cuts down on travel and the credit crisis choked off credit on commercial properties, especially those laden with debt made under easy conditions. Since May, Extended Stay Hotels filed for bankruptcy protection and Red Roof Inns Inc. defaulted on $361 million in loans.

From the Wall Street Journal -

By KRIS HUDSON

For the past two years, Phoenix has wrestled with the fallout from the most severe housing bust in decades. Now comes the hotel bust.

Since January, when the luxury W Scottsdale Hotel & Residences received a notice of foreclosure related to a $73 million construction loan just a few months after it opened its doors, the list of troubled hotel properties in Phoenix has continued to grow.

In March, German lender Eurohypo AG sued the developer of Phoenix’s 293-room InterContinental Montelucia Hotel, alleging default on a $180 million construction loan. In April, the 640-room Arizona Grand Resort, formerly known as the Pointe South Mountain Resort, became delinquent on its $190 million securitized mortgage. Two weeks ago, Kabuto Arizona Properties LLC, owner of the 331-room Wigwam Golf Resort & Spa, filed for Chapter 11 bankruptcy protection to thwart Citigroup Inc.’s efforts to foreclose on the resort.

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Anton Troianovski/The Wall Street Journal

The W Scottsdale Hotel & Residences got a notice of foreclosure tied to a construction loan just a few months after it opened last fall.

In all, at least six major Phoenix-area hotels, five of them resorts, have gone delinquent on their loans or sought bankruptcy protection since last fall. Two of those had opened in recent months, and two others had recently completed renovations. All told, the six encompass nearly 1,900 rooms, or roughly 3% of the area’s total of roughly 58,000 rooms.

“Phoenix suffers from the dual challenges of overbuilding and shrinking demand due to the national drop-off in corporate conferences,” said David Loeb, a hotel-industry analyst with Robert W. Baird & Co. “All of this means that Phoenix’s hotel market has experienced one of the steepest downturns among the big markets.”

Of all the commercial-property types, hotels arguably have fared the worst in this recession as travelers cut back, companies curtail conferences, and hotels slash rates to haggle for the business that remains.

Nationwide, occupancy at hotels in the top 25 U.S. markets was 62.8% in April, down nearly eight percentage points from a year earlier, according to Smith Travel Research. Revenue per available room, a key measure of the industry’s sales, fell more than 22% in the same span.

The problems are more pronounced in Phoenix, where construction activity was more robust than for the nation as a whole because of plentiful land and relatively low construction costs.

The area is now experiencing a bigger decline in vacation and conference travel than most other places, in part because it is a “fly-to” resort area beyond easy driving distance from larger metropolitan areas.

Hotel occupancy in Phoenix was 58% in April, and revenue per available room declined 28% from April 2008 to April 2009, according to Smith Travel Research. Phoenix’s occupancy for the first four months of this year was the lowest the market has reported in the first third of any year since Smith Travel began tracking the figures in 1987.

Meanwhile, Phoenix has added 4,196 rooms since 2006, ranking it as the 10th-fastest-growing U.S. market by number of rooms added. Another 15,748 rooms are in planning and development, representing a potential 26% expansion of Phoenix’s existing inventory, according to Lodging Econometrics.

The problems have ignited battles between borrowers and lenders. Among the most contentious is the fight between the owners of the W Scottsdale, Los Angeles-based Triyar Cos. and German lender HSH Nordbank AG. Triyar, a closely held real-estate company, owns 40 properties in several states, including malls, office buildings and apartment complexes.

In December 2005, Triyar, which is controlled by brothers Steven and Shahrod Yari, took out a $73 million construction loan from Nordbank to build Phoenix’s first W hotel. They planned a trendy hotel fitting Starwood Hotels & Resorts Worldwide Inc.’s profile for the brand: a luxury hotel complemented by contemporary restaurants, spas and nightclubs.

To the W’s 224 rooms and 18 penthouse residences, the Yaris added a Bliss spa and Sushi Roku, a popular eatery in Los Angeles and Las Vegas. The hotel’s exterior features white brick and, on its top floors, floor-to-ceiling windows. 

But construction of the W dragged on longer than planned, resulting in the hotel opening a year late last fall. A bevy of lawsuits ensued.

General contractor Hunt Construction Group Inc. in October sued the project’s architect, engineers, interior designer and others, alleging they delivered work that was “incomplete, uncoordinated and contained multiple errors and omissions.” Triyar sued Hunt in November, accusing Hunt of failing to complete the hotel on time and on budget.

In February, Nordbank, the lender, sued the Yaris, alleging they failed to make payments on the now-$82 million construction loan, which came due in December. Nordbank also claims, despite the loan’s requirements that Triyar sell at least nine condos at the W by last June, that no sales had occurred by the time the bank filed its lawsuit.

Triyar responded by suing Nordbank in March, arguing that Nordbank didn’t meet its funding commitments even as Triyar ponied up more capital for the project.

Steven and Shahrod Yari didn’t respond to messages seeking comment. Michael Mahoney, chief executive of Triyar’s hotel division, said the parties in the lawsuits “are in negotiations to resolve the issues.”

A Nordbank representative didn’t return messages seeking comment. Hunt’s attorney didn’t return calls seeking comment.

Write to Kris Hudson at kris.hudson@wsj.com

Why Tucson’s elected officials put business on the back burner
WAKE UP TUCSON: Time to restore balance
By Joe Higgins, Inside Tucson Business, or Chris DeSimone, Inside Tucson Business
Published on Saturday, February 13, 2010

We have many callers to our “Wake Up Tucson” radio show who ask the same question: Why are business owners treated like second-class citizens in Tucson and Pima County? One big reason is that the environmental lobby and the neighborhood associations have done an end-run around the business community.

It’s time for the business community to meet the competition for your local elected officals’ interest. They are kicking your butt.

Environmental lobby 
 
The environmental lobby is extremely successful in our region. There are dozens of groups loosely assembled but they come together like a laser light focus to achieve their goal. Their mission is to stop humans from encroaching on habitat and slow or stop growth from coming to the Sonoran Desert.

Their techniques are multi-pronged and in most cases, very effective. Some of the tools of their trade include:

• The Endangered Species Act, which uses the federal court system to block growth.

• The Sonoran Desert Conservation Plan, adopted in the late 1990s that laid the path for future growth, land use planning  and wildlife corridors.

• Political influence exerted on county elected officials and bureaucrats. Taxpayers have spent over $200 million buying ranches around the county. Uber-environmentalists sit on the Pima County Bond Committee, for gosh sake. With only 16 percent of the land in Pima County in private hands and 10 percent already built, the idea of affordable housing that matches our region’s wages will soon be gone.

• Federal rules regarding dust control, navigable water ways, 404 bridge crossing permits, and U.S. Army Corps of Engineer studies.

• The joint water–wastewater study, which has been in planning for 20 months, is the latest battleground. The blue ribbon panel (Blue Ribbon Panels: Where good ideas go to die…) is looking to merge Tucson Water and Pima County Wastewater Management. In the Phase II report, we see lots of talk about sustainability and stopping growth but little discussion on diversifying our industries. The county has been using its wastewater authority to control growth for years. Give those bureaucrats Tucson Water and things will look even worse.

NIMBY associations

If the goal of the environmental lobby is to stop sprawl and preserve the desert, then city folk need to allow for denser populations, vertical growth, tear down and rebuilds, and infill of vacant lots. When a business man or woman tries to venture into the Tucson city limits to open, develop or grow a business, they run into an entirely new set of problems:

• A land use code that has such restrictive parking, set backs, landscape requirements and now rainwater harvesting, that less and less of their property is actually usable.

• A system that allows one or two rogue neighbors to wield tremendous political influence. A small minority faction can delay your business opening until you’re out of money or completely discouraged to the point that you wonder why you chose Tucson in the first place.

• City council members and offices that realize taking care of neighborhoods above all else has been the path to getting re-elected. When elected officials’ actions are constantly in deference to what these vocal minorities want, the message to city staff is pretty clear: Take care of the neighbors and put the business owner on the back burner.

 The business community is trapped between enviros in the county and neighborhood associations in the city. What are we to do as a group? As we’ve said before, the electeds need to fear us at election time — 97 percent of all electeds want one thing in life: to be re-elected. They know the dysfunctional business community does little to help them or their opponents get elected.  They will continue to govern in favor of the groups that they perceive will get them votes.

Environmental groups and NIMBY neighborhood associations are united and passionate about their issues. Who speaks on behalf of the Tucson business community with passion and on a consistent basis?

Each month, we ask that question during our many presentations to business groups. We haven’t received an answer yet.

Contact Joe Higgins at joe@joehigginsinc.com or Chris DeSimone at provenpartners@comcast.net. They’re the hosts of “Wake Up Tucson,” which airs 6-8 a.m. weekdays on The Voice KVOI 1030-AM. Check out their blog at www.TucsonChoices.com.

Copyright © 2010 Inside Tucson Business

Utah is hovering at just over 4% unemployment. It seems the economic crisis skipped over their state and landed in Nevada, Arizona and California. How did they do it? Here’s a hint; it took leadership and years of planning. Utah leaders embarked on a multi year project, Envision Utah. The Southern Arizona Leadership Council brought in organizers of the Envision Utah program about a year ago. A crowd of about 500 heard how Utah navigated through the wide variety of interests to come out with a comprehensive plan that would set their state on the path to prosperity for the next generations.

A project mirrored after “The Envision Utah” is well underway here in Tucson. The local effort, coined “Imagine Greater Tucson”, is  lead by local land use attorney Keri Silvyan. I was in the audience and impressed with the concepts and the plan Utah embarked on. What Utah did, and what Silvyn is mirroring locally, is Utah leaders called together a large number of stake holders from varied backgrounds to build relationships and discuss their common future. T

The Envision Utah process put business, politicos and community activists together, discussed each groups particular needs and then used computer models to show what would happen over 20 years if certain paths were taken by the community.  For example, if the community wants more open space then the land values would increase, dense population and infill would have to occur and mass public transportation would be required. If the community wanted more growth related industries (housing and sprawl) then the cost of supporting the infrastructure and finding water would have a cost to the entire community.

What’s important is that if Arizona as a state or Pima County as a region starts moving towards a Utah model, their must be voices from all sides being heard and respected. In southern Arizona the environmental voice is organized and focused and the business voice is unorganized and somewhat scattered.

What Happens If That Happens?

Environmentalists ability to influence our community is well documented. We are right in the middle of one of the largest movements in our history to combine water and waste water delivery. In the desert, the people that control water have the power. A large part of the comprehensive water plan included riparian re-establishment of the Santa Cruz. The plan calls for a whopping 25% of reclaimed waste water being sent to the Santa Cruz for creating a river that hasn’t flowed in a generation. The committee that has worked on the process for the past 20 months isn’t exactly ‘fair and balanced’. The business community had one seat on the board and isn’t happy with the results. This debate is the classic growth, no growth debate Tucson has been waging for 60 years.  The no growthers are winning and that might not be that bad.

From this weekends Arizona Republic:

Faced with high population growth in the 1990s, Utah civic leaders became concerned about how to accommodate so many new residents without disrupting the state’s high quality of life.

Traditionally, elected officials would have taken the lead to manage growth. But residents of the libertarian-leaning state resisted that kind of top-down control.

So reformers in Utah instead started from the bottom up, building a grass-roots movement that led to the voluntary adoption of measures that observers say improved the state’s economy and helped it weather the current recession.

Compare that approach to Arizona’s, where reform organizers have so far limited public involvement to surveys and a few public forums.

To align the visions of elected leaders with the people they serve, Arizona may have to become more like Utah.

 

The Utah model

 

Although managing growth, not government reform, was the Utah initiative’s goal, the process did lead to change in how elected leaders work. In fact, the approach has become a model for problem-solving throughout the U.S. and even in some foreign countries.

Envision Utah was created in 1997, and together with state government, it developed tools to help communities plan. It educated the public on how to accommodate growth through higher-density zoning, the expanded use of mass transit and other strategies.

That education led residents to support proposals they might have once rejected.

The key to reform efforts that work, organizers said, is a bottom-up approach that makes citizens champions of the process. The core of Envision Utah’s model is to ask residents to reflect on their values and hopes for the future and then translate their thinking into action through interactive workshops. In its early days, Envision Utah would hold 50 public meetings for each step of the process.

Large-scale public participation is a catalyst for action, participants say. Tom Jensen, an architect from Logan, Utah, says political candidates in his region now compete with one another over who better supports the vision developed by residents for the Cache Valley.

“This has a greater chance to be implemented because it’s a grass-roots vision,” said Jensen, who also has an office in Tempe. “It gives political leaders cover.”

One example: Grass-roots support led elected officials in nine different communities around the Great Salt Lake to adopt a plan limiting development on the lakeshore.

While focused on growth issues, Envision Utah also has used its model of public engagement to create disaster-preparedness plans for the state and address issues related to higher education.

“We think that this is a process that can be used to address a number of issues in a community,” said Alan Matheson, a Tempe native and attorney who now serves as Envision Utah’s executive director.

Jeff Edwards, president and CEO of the Economic Development Corporation of Utah, said the state’s reputation for collaboration has helped officials lure businesses.

“Envision Utah has been a great tool for us in communicating to companies that this is a community that works together,” Edwards said. “We kind of take it for granted. They say, ‘Trust us, this is not the way it happens in other states.’ ”

While no group can take sole credit for a state’s economy, lately Utah has had plenty for Arizonans to envy. The state’s unemployment rate is 6.7 percent, compared with 9.1 percent in Arizona.

The key to success, Matheson said, is not only involving the public from the beginning but also keeping it involved until the end. Persistence, he said, also is critical.

“We’ve all seen examples of good plans that sit on the shelf,” Matheson said. “But nothing happens in the public realm without public support. The way you get public support is by giving people ownership in that plan.”

 

Arizona’s effort

 

In Arizona, would-be reformers have made some efforts to involve the public.

The Arizona We Want, an initiative of the Center for the Future of Arizona, aims to take the results of the October Gallup poll and translate Arizonans’ goals into concrete steps to achieve them. The extensive poll of 3,606 Arizonans was designed to produce “actionable insights” into residents’ thinking. Using questions tested in dozens of other communities, Gallup found Arizonans are highly engaged in civic life compared with residents in other states.

Despite that engagement, polls regularly find dissatisfaction with elected leaders.

“The endgame is still the endgame: to get citizens and leaders working on the same things, to start pulling together on the things that we need to do,” said Pat Beaty, director of the initiative and a senior fellow at the Center for the Future of Arizona, the group led by former ASU President Coor.

Beaty said the institute needs to move beyond abstract goals to engage citizens about issues affecting their communities.

“You can talk about the Arizona we want,” Beaty said. “But it has to become embedded in the Flagstaff we want, the Yuma we want, the school we want.”

Coor has toured the state for the past three months, meeting with elected officials and civic leaders and soliciting their ideas and support. And the center plans to send questionnaires to candidates for elected office so citizens can see where they stand on those topics.

O’Connor House Project participants have taken their ideas for reform straight to the Legislature. A spinoff group, Government for Arizona’s 2nd Century, is working with lawmakers to support bills that will ask voters to create a lieutenant governor’s position, eliminate term limits and end taxpayer funding of candidates.

To date, the group’s efforts at public involvement have been limited to an invitation-only town-hall meeting for business and civic leaders. The approach has raised questions about how the group will develop the support necessary to succeed.

The bills cleared the Senate Judiciary Committee and are scheduled to be heard in the Rules Committee this week.

Michael Bidwill, president of the Arizona Cardinals and chairman of the government-reform effort, said the time is ripe for change. “We have a unique chance to improve the way our government works,” he said. “When you look at any public-opinion poll, a lot of people are looking for government to work better.”

Organizers acknowledge reform in Arizona has had a spotty history. Many efforts lose steam before any real change is accomplished. Still, the state’s current crisis has brought a rare opportunity for real change.

“I see this groundswell starting to build,” said Sue Clark-Johnson, executive director of the Morrison Institute of Public Policy at Arizona State University and the former chairman and CEO of The Arizona Republic. “In the decades I’ve lived here, I have seldom seen such a compassion and a caring and a concern for the future of this state.”

But concern alone won’t be enough to reform state government.

“You can’t just do a vision and walk away,” said Brenda Scheer, dean of the University of Utah’s College of Architecture and Planning and an Envision Utah board member. “People have to own it, and they have to be champions of it.”