Developers selling hotels upon completion

Aug 03, 07 | 1:57 am
In New York's booming hotel market, it pays to build and then get out of the way.

With about 10,000 rooms in the pipeline, watch for more "forward sales," in which a developer builds the hotel, and another entity -- either a hotel operating company or investment group -- commits to buying the finished product.

Jeffrey Davis, an executive vice president in the hotels division of Jones Lang LaSalle, said the number of forward sales is growing because developers -- some of whom have no experience as hoteliers and may fear owning a specialized piece of real estate -- recognize the potential profit in hotels.

"Developers who don't necessarily know anything about hotels are seeing this as a good time in the market to develop the highest and best use out of their land," Davis said.

Some name-brand hotel chains operating in New York now use developers who build the hotel with established investment groups financing the construction or buying the completed building. Once a project is finished, operators such as Marriott and Hilton run them.

This sort of division of labor has increased in New York City in recent years, primarily thanks to Sam Chang, the most prolific hotel builder in the city.

For example, Chang, CEO of McSam Hotel, is selling his hotel at 20 Maiden Lane under an agreement reached last year. It will be a Wyndham Garden with 110 rooms opening in 2008.

However, Chang himself has started to buck the trend he created.

"Ever since the end of last year, we have been changing our strategy," Chang said. "We've stopped selling any of our hotels. Right now, we are a keeper [of hotels]."

But more forward sales overall are likely because hotel operating companies from around the country and world are itching to get into the New York City market and willing to pay, or find a hotel investment group to pay, exorbitant prices to purchase hotels from a developer, he said.

For instance, Marriott International Inc. and Ian Schrager recently announced they will be opening as many as 100 boutique hotels in cities around the country, including New York, many of which will be conversions or renovations.

"Given the fact that it's very hard to find deals in New York today, it's a very easy way for hotel operating companies to get a flag in Manhattan and not have to go through the brain damage of site selection and development," said Davis. He is assisting several companies in underwriting deals involving forward sales, typically of limited-service hotels, in the city and other markets in the country. Details were not yet available as the sales had not been completed.

"If the operator wants to have a presence in New York really badly, they will generally put up the money to do it," he continued. "But what we see more often is the operators partnering with the capital sources out there."

Most hotel operators recognized as national brands by consumers began shedding their hotel real estate as far back as the 1980s, including Hilton Hotels, to focus on operations, hotels brokers said. Some -- such as InterContinental Hotels Group and Starwood Hotels and Resorts Worldwide -- have been doing so more recently.

That left the field wide open for other investors to step in and purchase the hotels. Sources of investment capital these days are less often public funds and real estate investment trusts, though Hersha Hospitality Trust is prevalent in the city, Davis said. More often they are private-equity funds, opportunity funds or pension funds.

"Private-equity money has been the single-largest owner or acquirer of lodging real estate assets," said Amit Kapoor, a research analyst who covers the international gaming and lodging industries for Gabelli & Co., based in Rye, N.Y.

"As an example, not including [their recent purchase of] Hilton Hotels, over the last 15 years, Blackstone's real estate funds have acquired over 1,400 hotels with approximately 200,000 rooms, and reflecting a value of approximately $28 billion," he said. That includes such hotels in New York as the Saratoga and the London NYC.

In New York City, John Lam, the chairman and CEO of the Lam Group and a former partner of Chang's (they developed about 10 hotels together), has also profited by selling a handful of the 20 hotels he has built or has under development. Unlike Chang, though, Lam has a hotel management division in his firm, but he said he has no intention of turning his back on potential hotel buyers.

Source: The Real Deal