Taxpayers could get more for less money with new beachfront projects

DAYTONA BEACH — Bringing big hotel and retail developments to the beachfront used to take a big taxpayer investment.

And that money was supposed to accomplish big goals: revive the beachside, attract tourists with more money to burn and draw conventions to the Ocean Center.

Those goals are still there today — as big as ever — but one thing has gotten smaller: the amount of taxpayer money hotel developers are asking for.

“(Hotel developers) are able to come in and make their numbers work without having to talk about 10, 20 or 30 million in public subsidies,” said Daytona Beach Deputy City Manager Paul McKitrick.

From the mid-1980s through the early 2000s, the city and county dished out more than $35 million in community redevelopment money — $50 million-plus in inflation-adjusted dollars — to help build and expand what is now the Hilton Daytona Beach Oceanfront Resort and the Ocean Walk retail, time-share and condo-hotel complex.

Fast-forward to today, and the purse strings are tighter, with the city offering less — many millions less — to the beachfront’s two newest proposed developments, the Hard Rock Hotel and the 300-500-room convention hotel-and-condo complex backed by Russian investors, though local and national observers note the companies could seek more help as construction gets under way.

1980s: ‘BLIGHT WAS RAMPANT’

So, what changed over the past quarter century?

“It was a different time (in the 1980s), both with respect to the economy and the beachside,” said attorney Rob Merrell, who represents the Protogroup, a Russian company that is building the $150 million two-tower complex on the beachfront where State Road A1A meets Oakridge Boulevard. “It was truly a war zone (on the beachside), and the blight was rampant.”

In the mid-1980s, when the city OK’d the first of the roughly $15 million that would go toward the Daytona Beach Marriott — now the Hilton — the beachside was seedy, its hotels were dated and the Boardwalk was a magnet for unsavory characters.

“It was in every way a blighted area,” McKitrick said, adding that the city then was more willing than it is now to build with public funds in the absence of private investment.

Despite the city shelling out for the Marriott — which went into bankruptcy in 1994 and was rebranded as an Adam’s Mark — and the county spending $39 million to build the Ocean Center, the beachside fell into a similar situation in the late-1990s.

Again, the city dipped into community redevelopment area (CRA) funds — this time to the tune of about $19 million — to help build the Ocean Walk Shoppes and its accompanying time-share and condo-hotel complex.

The city later refinanced the bonds used to pay for the Hilton and Ocean Walk projects, taking on $37.7 million in debt initially, to be paid back by 2031.

TODAY: MARKET RIPE FOR GROWTH

Today, the Hard Rock developers and Protogroup — for now, at least — are only looking for a fraction of that, enough to improve the surrounding infrastructure and landscaping to support the developments.

Though the city is still eager to attract another convention hotel — in part to complement the Ocean Center, which completed an $82 million renovation in 2009 — and it still wants to revitalize the beachside, McKitrick said it’s looking to spend less in CRA funds.

“Hopefully, everybody is more realistic about what the role of tax money should be,” said City Commissioner Pam Woods. “We should always remember that it is the market that should drive what happens.”

And thanks to market changes, building on the beachfront makes sense today even with less government support, said Henry Wolfond, chairman and CEO of Bayshore Capital Inc., the Toronto company that is developing the 250-room Hard Rock Hotel south of Sun Splash Park on State Road A1A.

“The opportunity to acquire property at fair prices in the past few years contributes to the viability of moving forward with less incentive from local governments than in the days when Hilton and Ocean Walk were built,” Wolfond said.

A state tourism industry that has recently been on the rebound and the existence of the old taxpayer-funded developments — the Ocean Center, Ocean Walk and Hilton — don’t hurt, either, he said.

FUNDS GO TO PUBLIC UPGRADES

Rather than asking for money to help build portions of the Hard Rock hotel, condominium and restaurant complex itself, Bayshore is negotiating with city officials to get help upgrading infrastructure so it can support the new facility, said attorney Glenn Storch, who represents the company locally.

Storch wouldn’t disclose how much the company is seeking, but said it would be substantially less than the amount that went to the Hilton and Ocean Walk.

“If not for these incentives, (the Hard Rock) would not be built,” he said.

Similarly, the city so far has only offered to reimburse Protogroup’s impact fees and separately reimburse the company up to $450,000 with CRA money to fix up the Oakridge Boulevard beach approach, which the firm’s hotel-and-condominium complex will straddle, with improvements like lights, landscaping and signage.

DeLand attorney Mark Watts, who represents Protogroup, estimates the company will save about $1 million from the fee reimbursements.

“These are public improvements,” said Reed Berger, the city’s redevelopment director. “We’re not building someone’s building for them.”

More than simple economic changes are keeping a lid on taxpayer aid to the new hotels, at least for now. The projects themselves are different from the Hilton and Ocean Walk and, consequently, aren’t eligible for as much help, city officials and developer representatives say.

The Protogroup project and the Hard Rock will be built in community redevelopment areas, special taxing districts created by the county to revitalize neighborhoods it deems blighted.

And while the Hard Rock will be built entirely in the South Atlantic CRA, only the southernmost building of the two-tower Protogroup development will stand in the Main Street redevelopment area, which was created in 1982 and is the county’s oldest CRA.

Consequently, that limits the amount of CRA money that can go to the Protogroup project, Berger said.

Additionally, unlike the Hilton and Ocean Walk developers, Protogroup didn’t seek help for the complex’s interior, Watts said.

The company doesn’t need help for the kind of common areas — including banquet rooms, passageways and lobbies — to which state law allows CRA money to go, he said.

Watts added the Protogroup is still in talks with the city, county and the Florida Department of Transportation, which maintains A1A, about making additional upgrades to the neighborhood — including resurfacing Oakridge Boulevard from the beach approach to the Halifax River bridge. That could mean more public money going to the Protogroup, Watts said, but the funds would be spent off-site, not on the resort itself.

‘IT’S ALL SUPPLY AND DEMAND’

Ultimately, the city would like to get the beachside improved to a point where fewer incentives would have to be used to attract new development, McKitrick said.

But things are currently going in the wrong direction, and CRA-funded projects have done nothing to help, said local radio talk show host and former Volusia County Councilman Big John, who served on the council when the Marriott, Hilton and Ocean Walk incentives were approved by Daytona Beach.

“It’s getting worser and worser,” Big John said, adding that factors other than developer-friendly economic conditions have led the city to tighten the CRA spending for the new developments.

“No. 1, Daytona Beach doesn’t have enough to give anymore,” Big John continued. “No. 2, they don’t think they can get support. They got tapped out by the (Hilton and Ocean Walk developments).”

Regardless of why it’s happening, the apparent shift away from public incentives in Daytona Beach is bucking a national trend, said Bob Sonnenblick, chair of Los Angeles-based real estate development firm Sonnenblick Development.

“Incentives from municipalities are increasing, not decreasing,” Sonnenblick said. “It’s almost the best and easiest way to get a hotel started. It’s a simple mathematical exercise for the city: either keep the site vacant or work a deal with the developer.”
Indeed, the Sioux City, Iowa, City Council approved financing $22 million and closing a downtown street to help develop a Hard Rock Hotel & Casino.

“I think there’s pressure on the cities that if you don’t deal with the developer, they’ll just go to the next city and see if it will do those incentives for them,” he added. “They are getting many incentives today because normal financing isn’t easy.”

A study drafted last year by Orlando research firm Fishkind & Associates for the CEO Business Alliance, the county’s private economic development group, suggested the city and county offer tax-funded guarantees on financing for a new $130 million, 500-room convention hotel on the beachfront. Neither the city nor the county acted on the report’s recommendations.

And Sonnenblick said he isn’t sure Protogroup and Bayshore won’t ask for more than they seek initially.

“There is a difference between talk and action,” he said. “Right now, they’re saying, ‘Oh, we can make it work with a small subsidy.’ But, in 75 percent of the cases, the developer comes back and (asks for more).”

However, industry watcher Daniel Lesser, president and CEO of LW Hospitality Advisors in New York City, offered a counter view, saying there is no discernable national trend in how much public assistance hotel developers seek.

“At the end of the day, incentives are a deal-specific matter,” Lesser said. “It’s all supply and demand and the balance of negotiating power between municipality and developer.”

Non-Core Real Estate Opportunities Summit | June 12th, 2013 – New York

Press release: New York Thursday May 30, 2013
iGlobal Forum Conferences has added Los Angeles-based real estate developer Robert Sonnenblick to its upcoming Real Estate Opportunities Summit on June 12th in New York City. The conference will be held at the Helmsley Park Lane Hotel.

Mr.Sonnenblick will be the panel moderator for the Distressed Opportunities Fund panel
at 1:30pm.

1:30 pm
CAPITALIZING ON DISTRESSED OPPORTUNITIES & EXAMINING FUNDS SET UP TO PURSUE ALTERNATIVE INVESTMENTS

• How investing opportunistically can generate the returns demanded by LPs
• Examining the structure and organization of opportunistic and value-added real estate funds
• Do opportunistic funds have the right objectives from an alignment of interest perspective?
• Financing and structuring considerations for hotels and restaurants – how are deals evolving?

About The Conference:

iGlobal Forum is pleased to announce the Non-Core Real Estate Opportunities Summit, which will take place on June 12th in New York. The real estate sector is becoming increasingly crowded, leading to a shortage of stock and yield compression. Non-core sectors are expected to outperform, driven by robust occupational demand and a significant yield premium to traditional real estate sectors. iGlobal Forum’s Non-Core Real Estate Opportunities Summit will explore a range of alternative real estate investment opportunities. You will gain an in-depth understanding of the opportunities that lie in non-core property areas, and how to profit by bringing them into your portfolio.

KEY TOPICS THAT WILL BE COVERED:

• Mitigating the Risks of Investing in Non-Core Real Estate Assets
• Widening your Remit to Secondary & Tertiary Cities
• Sourcing Debt Financing for Special Situations Investments
• Renovation, Repositioning & Development of Alternative Asset Classes, to Generate High Risk-Adjusted Returns
• Capitalizing on Distressed Opportunities – Examining Funds Set up to Pursue Alternative Investments
• Sourcing Equity Investment for Non-Core Real Estate Deals
• Unlocking Suppressed Value through Re-Capitalizations & Re-Equitizations
• The Investment Case for Non-Core Real Estate Sectors

NETWORK WITH LEADING:

• Real estate asset managers
• Family offices
• Pension funds
• Annuity funds
• Endowments
• Private equity firms
• Investment banks
• Distressed debt firms
• Investment consultants
• Owners & Developers

New directions in dual-branded hotels

GLOBAL REPORT—Dual-branded hotels—two or more properties under the same roof or adjacent to each other and under the same management—isn’t a new phenomenon, but the concept has expanded in recent years. Innovations include splitting an existing hotel into two brands and building dual-branded properties with flags from different brand families. One examples of the former is a MainStay Suites in Port St. Lucie, Florida, that was reconfigured to include a Sleep Inn.

The latter concept—dual-branded hotels with different brand family flag includes a development at the Sacramento, California, airport that will have a full-service Marriott Hotel and a limited-service Hyatt Place; and a Clarion Hotel in Beachwood, Ohio, that will soon undergo a renovation to convert one wing of the hotel into a 120-room Hotel Indigo, an InterContinental Hotels Group brand.

Also, in Nuremberg, Germany, Foremost Hospitality broke ground on a side-byside Hampton by Hilton and a Holiday Inn Express.

Creating two from one

The MainStay Suites in Port St. Lucie was a perfect candidate to become a dual-branded hotel, said Mark Daley, president and CEO of The Generation Companies, owner of the hotel.

“The Port St. Lucie market is on I-95 and there are a lot of seniors who come down there in the winter, and while MainStay has a wonderful appeal to extended-stay travelers, it’s not as well known as Sleep Inn, especially for people just pulling off the interstate needing a short-term place to stay,” Daley said. “We felt the Sleep Inn name has a lot more brand-name recognition for that customer and also for the senior crowd.”

The decision to split the hotel was a function of serendipity. During Choice’s annual convention in 2012, the company introduced a new prototype building as a combination Sleep Inn and MainStay Suites. And, by coincidence, the Port St. Lucie MainStay was originally developed (Generation bought the property five years ago) with some rooms not having full kitchens as required by MainStay.

“The hotel was built using the Sleep Inn plans for one set of the rooms and the MainStay plans for the other rooms,” said Mike Varner, head of domestic brand management for Sleep Inn. “They had the (dual-brand) concept but they only had the MainStay Suites flag. When the (new prototype) was introduced, they were very intrigued with combining the two flags in the one property.”

Choice created a product improvement plan for the property that required the guestrooms follow the new prototype and that the public spaces reflect Sleep Inn’s Design to Dream design package, Varner said. Daley said the renovation and conversion took about 90 days to complete. He declined say how much the project cost.

“We upgraded the lobby and breakfast area with the current Sleep Inn design scheme, so common areas are tilted more heavily toward Sleep Inn,” Daley said. “And given that the Sleep Inn breakfast is a little more robust than MainStay’s, we agreed with Choice that we would operate the breakfast to Sleep Inn standards.”

Generation Companies owns or operates 27 hotels, all pure extended-stay hotels except the Port St. Lucie property. Daley said he views this project as “opportunistic based on the profile of this particular market. But we have other properties (for which) we would consider this type of thing.”

Varner, too, views this as a unique opportunity for Choice, but he doesn’t rule sanctioning similar projects.

“We would listen to just about anything because that’s part of our DNA,” he said. “At the same time, Sleep Inn has a very specific direction and MainStay is predominately a new-construction brand. It must make sense for the developer, the consumer and it’s got to make sense for the brand in the long run. If we can get that win-win-win, it’s something we can be supportive of.”

Mixing brand families

If one strong brand family can generate a lot of business for a hotel, then two families can do even better.

That’s the philosophy Robert Sonnenblick took as he started development of a dual-hotel project at the Sacramento International Airport.

Sonnenblick, who is president of Los Angeles-basedSonnenblick Development, is completing designs for a proposed 1 January groundbreaking on the project outside of baggage claim at the new $1-billion Sacramento airport terminal that opened in October 2011.

Sonnenblicksaid his company won the rights to develop the hotels, but the airport wanted two separate hotels: one full service and one limited service.

“Marriott came to us when we first won the (request for proposal) and said they wanted to do both the full-service and the limited-service, but the more the county and I thought about it we decided it would be in our best interest to have two separate reservations systems on the hotels,” he said. “I look at the 10 million customers that Marriott has and the six million customers that Hyatt has, I want both of those reservations systems marketing the Sacramento airport and my hotels.”

He said the full-service Marriott will have 200 rooms and substantial meeting space, while the 135-room Hyatt Place will have about 3,000 square feet of meeting space. Sonnenblickis currently seeking a third-party management company to operate both properties.

“My task is to find a management company that is approved by Marriott for full service and also approved by Hyatt for limited service. We’ve narrowed that down to three companies, and we are negotiating with them right now,” he said.

The project is being privately financed, with a 99-year ground lease from the airport authority. Sonnenblick said separate commercial banks are providing debt for each side of the hotel, and a pension fund is an equity partner in the deal.

While the Sacramento project is Sonnenblick’sfirst dual-branded hotel, “I’m working on a second one right now that is a beachfront resort. It’s different in that we’re putting two major full-service hotels next to each other sharing the beachfront and sharing a golf course, but each is branded separately,” he said.

Panel: Capital sources abundant

Story Highlights

• There’s an abundance of capital sources in the hotel industry, said Andrew Coleman of Walker & Dunlop.
• The easiest deals to get done are for stabilized assets, Coleman said.
• A select-service hotel is twice as easy to finance as a full-service property, said Bob Sonnenblick of Sonnenblick Development

 

WASHINGTON, D.C. – Panelists speaking during last month’s Bisnow Lodging Investment Summit painted a rosy picture of the hotel lending environment. Capital sources were described as “abundant,” CMBS was said to be back at nearly full steam and financing in general was called “attractive” during several different sess1ons.

“There’s an abundance of capital back in the market- conduit lenders, life insurance lenders, banks, specialty lenders, you name it,” said Andrew Coleman, senior VP at Walker & Dunlop, during a panel titled “Hotel deals are getting done.”

The above sources are actively financing properties in primary markets, but many of the institutional, life insurance lenders are more hesitant in secondary and tertiary locations, he said.

The easiest deals to get done are for stabilized assets, Coleman added.

Fueling the recovery in hotel debt financing is the higher yields available at the asset level, said Warren de Haan, chief originations officer and managing director at Starwood Property Trust.

Life companies have huge allocations and their costs of funds are low, and banks are at all-time lows for percentage of loans to deposits. At the same time, there’s a huge demand for fixed -income product, “so naturally people are going to chase mortgage product,” he said.

More than a year ago, conduit lenders were offering 65% LTV with 12 debt yield at 4.25% cost of funds, de Haan said. Today, those costs of funds are slightly lower. Coleman said he’s also seen a reemergence of local and regional banks that are willing to listen to a good story. “12 months ago nobody wanted to hear a story… They’re now listening to those stories.”

Speaking during a “Hotel development roundtable,” Bob Sonnenblick, chairman of Sonnenblick Development, offered the following rule of thumb for construction loans: 50% of cost on a non-recourse basis, Libor slightly more than 1 and ton of equity is required in every deal.

Select service sizzling Sonnenblick also said it is twice as easy to finance a select-service hotel as it is a full-service property.

New Center, Old City Hall, What Now? Part. 2

Editor’s Note: Part one of this story ran on May 3. This is part two of two.

The city is currently considering three options for re-use of the old city hall site – two hotels and one mixed use.

City Council heard the proposals April 23 during a very well attended afternoon study session about how to re-use 3300 Newport Blvd. Proposals for hotels came from RD Olson Development and Sonnenblick Development, while a mixed-use proposal came from The Shopoff Group.

Artist renderings of the projects proposed from (top to bottom) RD Olson Development, Sonnenblick Development, The Shopoff Group.

“The right decision is extremely important to the Lido Village area and the city,” said Denys Oberman, a peninsula resident.

The city has a responsibility to choose the project “best suited for the community,” she added.

Community response at the meeting was largely in favor of a hotel, with many speaking during public comment, including Lido Isle Community Association spokesman, Hugh Helm, who mentioned a resident poll the association conducted, with 98 percent answering in favor of a hotel.

The re-use of the old city hall site is the first step needed to revitalize Lido Village, he added.

“I’d like to see the project move along as quickly as possible, but in a diligent way,” Oberman said.

The staff is currently reviewing the three proposals with their consultants, said Kim Brandt, community development director, and hopes to make a recommendation to council by June.

“Once we conclude our review, we will present our findings to the City Council in a staff report that will of course be made available to the public. We are hoping to get back to council in June,” Brandt wrote in an email.

Oberman questioned the transparency with the city and asked for the economic assumptions and benefits sections of the proposals to be made public. It’s great that the city is reviewing them, she continued, but the public should be able to do the same.

“A portion of that will be made public,” Brandt said, possibly as early as today. Other parts of the proposal will remain confidential, she added.

“There are a lot of experienced and educated people in the community… with raised eyebrows,” Oberman said. “The community, quite honestly, has some questions.”

Ideally, Oberman said, she would like the community to be able to fully review the proposals and give feedback to each and the council.

Brandt did not know the timeline of when city staff will finish evaluating the proposals and be ready to present, but said it would be in a “timely fashion.”

Once the selected portions are made public, residents can review them and contact their city councilman or city staff to voice their opinion. There will also be public comment during the council meeting when staff presents their findings. Staff reports are typically made available the Thursday before the meeting.

Oberman, along with others locals, strongly favor the hotel option, she said later. Both of the hotel proposals have elements of attractiveness and potential concerns, she added.

Bob Olson’s project is a 130-room boutique hotel called the Lido House Hotel. The estimated total project cost is $43 million, Olson said.

The facility would include a restaurant, spa, fitness center, bay to beach park, ballroom and meeting room, rooftop lounge and viewing deck.

The project from Robert Sonnenblick is also a hotel consisting of 20 town homes, 12 villas and many guest rooms. The cost range for the proposal is approximately $70 million, Sonnenblick said.

The Sonnenblick property would include public courtyards, plazas and promenades, two restaurants, rooftop bar, lounge and event area, health spa, several water features, outdoor event areas, meeting space, and 210 below grade parking spaces.

The mixed-use proposal comes from William Shopoff and includes 99 luxury apartment homes and 15,000 square feet of upscale retail space. The estimated project cost will be approximately $60 million, Shopoff said.

The commercial area would include restaurants, community meeting room, pedestrian walkways, water features, a parking garage, and a town square and public plaza.

The city may seriously consider an apartment complex because the money is guaranteed, but they may also want to take advantage of the revenue a hotel could bring in through TOT taxes, speculated Edward Cook III, longtime Lido resident and co-president of McCarthy Cook & Co., a real estate investment and development firm.

A few of the key issues behind the proposals include projected revenue for the city, revitalizing the struggling surrounding retail, how it fits in with the community, financing of the project, if it makes economic sense, parking, and the use of the two landmark ficus trees.

All three said their project makes economic sense.

Shopoff maintains that his mixed-use proposal offers the lowest risk for the city.

It’s lower risk because their proposal is 100 percent equity and zero debt, Shopoff explained. They have committed capital, he added.

“In today’s market, we can all get financing,” he said. “Our lack of needing financing for anything makes it much more likely that when we get through the process with city council and the California Coastal Commission we can go (immediately) and build a project.”

“Those issues can’’t be overlooked,” he added.

As far as financing goes, Sonnenblick feels confident his current connections are more than willing to go forward with this project if chosen.

He has the unofficial backing of two Los Angeles based banks for the construction loan and pension fund partner for equity, they are just waiting until Sonnenblick is chosen to finalize, he said.

Sonnenblick is also waiting until their project is chosen to include Auberge at the meeting or available for commenting.

Olson is also confident in his company’s ability to finance their project.

“Our project makes economic sense,” Olson said. “If it doesn’t make sense nobody is going to step up and finance it.”

The economic plan for his project is feasible, he said, because they know their costs and expect a certain amount of return for their investors.

“We are in the market every day pricing hotels and building hotels,” he said. “We know what the costs are.”

“It’s our business, and we know our business very well,” he added.

Bruce Baltin, senior vice president of PKF Consulting, is working on the Olson project. Before teaming up with Olson, Baltin worked as a consultant for the market study for the city.

The market study, which Baltin emphasized was independent from any developer, found that it is a good opportunity for a hotel, he explained.

The economic power of a hotel is very good, Baltin said, because 100 percent of the TOT taxes go directly to the city.

Guests on vacation tend to spend more on a daily basis, they eat out every night, they shop at local stores.

Olson has a good track record, a fitting project for the market and a solid proposal, Baltin said.

“That’s why investors will finance it,” he said.

How much each project will need varies and one difference that plays a major role in cost is parking.

The $43 million cost estimate for the Olson project is lower because they don’t have the parking demands the other proposals have, explained Olson, whose project includes expanded public parking on 32nd Street to 150 spaces.

“We aren’t forced to do underground parking and take on all the excessive risk that comes with building a parking structure into the water table,” he continued.

The risk, he continued, from issues regarding the environment, risky construction, and state regulations.

Comments from residents have also expressed concern that underground parking at the old city hall site is risky.

No so, countered Sonnenblick, whose project involves this type of parking with 210 spaces and removes public parking on 32nd Street. His company and their general contractor, C.W. Driver (who also built the new civic center in Newport Beach), are very comfortable with their ability to build one level of below-grade parking on this site, he wrote in an email.

“It is not risky, they are very competent builders, and it will not negatively impact below ground water flow,” he continued. “It is, however, very expensive.”

Environmental impacts can be “easily avoided with proper engineering,” he added.

“Parking is critical for a hotel’s success and it’s critical for the surrounding neighborhood,” Sonnenblick said.

There needs to be more of a focus on parking, he added.

‘(The Olson hotel team members) are tremendously mistaken on their plan with parking,” he continued.

Neither hotel proposal seemed to have efficient or adequate parking, countered Shopoff, whose project includes 325 spaces from an expanded area on 32nd and a parking structure.

‘“On a site like that,” he said, “parking is premium.”

Another premium feature are the special landmark ficus trees.

The ficus trees will be preserved with both the Olson and the Shopoff projects, they will be moved to different spot with Sonnenblick’s proposal.

Olson noted that he thought the trees were too fragile to be moved, but Sonnenblick felt by transplanting them to a more a more public place makes the hotel design more efficient.

The potential timelines for each project are similar, about one to two years after breaking ground, which could be as soon as next spring.

Cook recommended looking at the track record of each proposal, consider if their other projects are outside the area or if they have local experience, and their financial capability.

It’s an interesting and exciting opportunity, Sonnenblick said.

The city is fortunate to have three quality proposals to sort through, Shopoff added.

It’s a big responsibility, Olson said, and the community is depending on the city.

“The area definitely needs revitalization,” Baltin said, “and getting the right project there could certainly do that.”