The hotel in question is the now $52.5 million, 200-room hotel and conference center proposed for the middle of downtown Greensboro. The 53-page consultant’s report, ordered by Andy Scott, the city’s assistant city manager for economic development, was completed over the weekend by HVS, one of the nation’s leading experts in assessing hospitality markets. The report evaluated the latest feasibility study filed a week ago by the hotel proponents.
Scott received the report Tuesday, but did not share it with council members that day because of confusion surrounding whether council had recommended three projects for bond financing — including the hotel — on Dec. 15 without knowing it. That appears to have been the case.
Yet Scott, who says he would distribute the report to council members this week, adds that the conclusions still could play a role in determining whether an underwriter or bond-rating agency will take the project seriously. Final decisions regarding bond worthiness won’t be made until May, he says.
The Business Journal, which obtained a copy of the report, shared it on Wednesday with
Randall Kaplan, one of the lead partners in the hotel project and co-owner of Elm Street Center, which would become the luxury hotel’s conference center. His response upon reviewing HVS’s conclusions?
“It causes me concern because they (HVS) are the experts in evaluating the marketplace,” says Kaplan, whose partners hired HVS to do their own downtown hotel feasibility study in early 2008. “We’re not idiots. We do not want to do this deal unless it is financially viable.”
Kaplan says he remains very excited about the project’s potential, its location and what it can do for downtown Greensboro. But he stressed that many hurdles must be cleared before the project qualifies for low-interest bond funds made possible through the federal stimulus act (see related story, page 2). The new HVS study, he concedes, represents yet another hurdle.
“At the moment,” he says, “the big unknowns are: Where do we settle in on reasonable occupancy rates and what will be the actual costs of new construction of the hotel.”
The numbers
The answers to both questions are a bit of a moving target. But before we discuss the findings in the HVS study (which confirm and go beyond the conclusions reached in this space last week), let’s do some project numbers.Kaplan told City Council on Tuesday that the entire project represents a $52.5 million investment, with $12.5 million of that representing the estimated value of Elm Street Center and all the land it sits on between Elm and Davie Streets. New construction is loosely estimated at $40 million. Of that, $26 million would come from the low-interest, stimulus-related bonds. Kaplan cannot say yet where the remaining $14 million would come from (if they need that much), but some portion could come from New Market Tax Credits, bank financing and/or cash put in by the development partnership.
Kaplan confirms that Bridget Chisholm, who heads the Urban Hotel Group, would claim a developer’s fee of about 5 percent, or roughly $2 million, but he says that she has agreed to take only a “small portion of that amount out at closing” and leave the rest in the project as equity.
He also says that his investors’ group, made up of about 10 Greensboro businesspeople, may take out about $1 million in cash at closing in compensation for selling the office building attached to Elm Street Center so that it can become part of the project.
But whether the project ever gets to that level of financial detail will likely come down to whether the hotel proponents can produce evidence to credibly offset the conclusions of the new HVS report.
Kaplan confirmed that HVS was making its judgments against a $25,000 feasibility study he ordered in February 2008 — long before the real estate market meltdown. The 2008 report, he says, was altered slightly to reflect current market conditions when it was given to Andy Scott last week.
To that end, the hotel developers projected average nightly room rates of $155 in 2012, rising to $180 in 2016. Comparing the proposed hotel to the new Doubletree on High Point Road, the downtown Marriott, the O. Henry and the Proximity, HVS found that the projected room rates were slightly high, but only by about $12 per night.
However, HVS said it was highly unlikely the hotel developers would achieve the projected annual occupancy rates of 64 percent in 2012 rising to 67 percent in 2016. HVS said the new hotel could expect occupancy of just 38 percent in 2012, rising to 48 percent in 2016 — far less than it would need to cover bond payments, to say nothing of providing a return to project investors.
“It is typical for a new luxury hotel operating in a depressed market to take four to five years to reach a stabilized level of operation,” HVS writes.
The consultant offered a variety of reasons for its much lower occupancy projections:
• The economy has caused group and meeting business to fall sharply, especially for luxury and upscale hotels; full recovery is seen as years off.
• Between 2003 and 2009, only in April and October (furniture market time) has hotel occupancy in Greensboro topped 70 percent. In the last three years, HVS notes, Greensboro has added hundreds of hotel rooms while demand has increased only incrementally.
• “The addition to downtown Greensboro of a proposed 200-room luxury hotel is not considered significant enough to induce additional demand into the market,” the report reads, adding that the city has an ample supply of luxury rooms. “It is more likely that the proposed hotel will cannibalize existing demand away from the other hotels in the market, which will make it far more difficult for these hotels to recover from the current recession.”
Not giving up
Kaplan knows the HVS evaluation of his group’s feasibility study doesn’t look good. But he’s not giving up. He says his group will likely pay for an updated study that drills down more deeply than the HVS evaluation does. He says that several factors could set the project in a more favorable light.For example, he says, the Elm Street project will have restaurant and retail space, which will contribute to the revenue stream and has not yet been figured in. He says the potential impact of the International Civil Rights Center & Museum across the street has not been considered. He says low-interest financing and low construction costs should lower overall project costs, thus providing a financial boost.
And despite what critics and other studies say, Kaplan believes the new hotel will grab market share from the downtown Marriott, the O. Henry, the Proximity and even hotels in the airport area.
But even with those firm beliefs, he says: “If after we go through another round of studies, the projections for occupancy are still at around 40 percent, it won’t get done. We won’t build it because it won’t get funded.”
There are other variables as well, he says. Parking is crucial; the project could be undermined if the city does not agree build an $8 million parking deck adjacent to the hotel on Davie Street. Also, a national chain — like a Wyndham or a Westin — must also agree to back the hotel. Without an upscale national brand and all the resources it would bring, Kaplan says his partners aren’t interested in going forward.
Yet even with all those hurdles, the proposed luxury hotel project remains in the race at the end of this long and confusing week. The finish line, though, appears much farther off.
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