Developer's hotel building

plans dealt a dose of

reality
Posted: June 24, 2002

By Garland Pollard | Monday, June 24, 2002

When Chicago developer Gary Beller announced in
September that he would add a second tower to
the Richmond Marriott as part of his plan to
redevelop the Sixth Street area downtown, many
thought the deal sounded too good to be true. Not
only would Beller, Richmond's anointed downtown
master developer, add the 219-room tower to the
400-room Marriott without cost to the city, but he
would build it in conjunction with a new full-service
hotel in the vacant Miller & Rhoads department
store building on Broad Street.City officials deemed
the new hotel rooms critical to Richmond's $160
million investment in the convention center.
Without the additional capacity, the city would not
be able to attract the big, revenue-generating
conventions it covets. But nine months later,
Beller's plans have changed dramatically. It
remains unclear if the market will support the
planned hotel rooms, and some question whether
Beller will be able to obtain financing for the
project. First, it has become less certain that the
second Marriott tower will be built - plans now
dictate that a second Marriott tower is contingent
on the success of the Miller & Rhoads hotel. In
addition, Beller would not build the second tower
until the proposed Miller & Rhoads hotel meets a
year's worth of revenue goals. In bankruptcy court
filings submitted May 30, the Marriott's new
prospective owner, The Procaccianti Group LLC of
Cranston, R.I., commits "best efforts" to build the
second tower. Procaccianti Group, a Rhode Island
hotel operator that owns the Sheraton Richmond
West, bought the $10.4 million first mortgage on
the downtown Marriott in a bankruptcy auction
earlier this year. The deadline for creditors to vote
on Procaccianti's reorganization plan is July 5. A
hearing is set for July 10.Reached at his Cranston
office, Procaccianti declined comment on the
purchase until after the hearings.The proposal
stipulates that Procaccianti, city management and
the Richmond Redevelopment and Housing
Authority work together on financing the second
tower. The three parties "intend to work together to
obtain financing and the necessary permits for the
construction of a 209 or more guest room tower on
the hotel," according to court filings. The city,
however, insists that the language does not mean
that it will back a second tower atop the bankrupt
Marriott. "Oh no!" said Edwin Gaskin, the city's
deputy director of economic development when
asked about the meaning of the language. "That's
not likely."Instead, the city wants "commercial
lending" for the tower."We want market conditions
to prevail," he said. "The last thing the city wants
this group to do is to build a tower and go belly
up."Councilman Joe Brooks also said that his
understanding of the agreement does not mean the
city will help fund the tower. "I don't interpret it
that way," he said.The fuzzy language is significant
in its symbolism. The second tower is deemed
necessary to create the number of rooms to make
the $160 million convention center successful.
Downtown boosters have said that the number of
downtown hotel rooms is insufficient to attract the
large conventions. Originally, the city's plans called
for building the new hotel rooms to coincide with
opening the convention center. But that approach
appears to be changing. While city officials would
rather have the second tower sooner rather than
later, Economic Development Director John
Woodward said that the second tower would be
built only if market conditions dictate. While the
city wanted to make sure something happens at
the Marriott, officials say the second tower will only
work if there is "economic logic" behind it."We
don't want to jump the gun," he said.Councilman
William Pantele concurred. He said that while
officials would like to have the second tower to help
the convention center, making sure that the market
will support the hotel is the sensible route. Pantele
said that a "build it and they will come" mentality,
so prevalent in the public sector, rarely works with
private markets.That said, Pantele said the city still
needs the rooms."If we don't get them, [the
convention center] won't succeed," he said.Second
tower or not, Procaccianti is already making plans
to take over the operation of the Marriott, which
filed for bankruptcy last December. He recently
hired a new general manager and is putting the
finishing touches on his reorganization plan.
Meanwhile, some real estate investors are
beginning to question whether Beller can secure
financing for the Miller & Rhoads hotel, owing to the
state of the hotel market both in Richmond and
nationally.One inside real estate observer
wondered why the city's developer of choice wasn't
able to win the bid for the hotel."So if he didn't buy
it, why didn't he buy it?" the observer
said.Procaccianti was able to purchase the Marriott
at a discount. Observers say the hotel's true cost
came in at around $20 million, including planned
renovations, which would mean that the Marriott
was purchased for about $50,000 a room.
Meanwhile, Beller's Miller & Rhoads hotel, with a
$30 million development cost and 216 rooms, will
cost far more at $130,000 a room. It is also a riskier
investment because it isn't operating yet, and
doesn't even carry the coveted Marriott name."You
mean to tell me he couldn't be the high bidder for
[the Marriott]?" said the observer. "I don't get
it."Beller, reached at his Chicago office, said that
the hotel is feasible, and he will have the funding to
open it."The market will support it," he said.He said
that the hotel, including retail development on the
first floor, will cost $30 million. Beller insists that
financing for such a project is available in today's
market - the hard question is how much equity will
be required."We have always been planning on
financing the hotel, and providing the required
equity, which requirement will vary depending on
market conditions at the time of the underwriting
as well as the quality of the project," Beller
said.Beller said has repeatedly said he isn't seeking
city-backed funds to develop and build the hotel.
But the Chicago developer has been working with
the city on the details of the Community
Development Authority that will issue bonds to fund
the removal of Sixth Street Marketplace and
improvement of parking decks in the area, which
officials expect to cost about $80 million. The
authority is separate from the city and can issue
debt on its own, independent of city revenue.If City
Council votes for the authority, Beller's group
anticipates construction will begin in 2003."Once
the [authority] is complete, everything will fall into
place," he said.Jack Berry, executive director of
Richmond Renaissance, said he's confident Beller
will be able to obtain financing for the Miller &
Rhoads hotel."He has a very substantial equity
investor," Berry said.When the plan was announced
in September, the hotel market was in the
doldrums, partly because of the effects of the Sept.
11 terrorist attacks and the recession.Nationally,
the hotel industry continues to struggle, with full-
service convention hotels suffering the most.
According to Smith Travel Research, which
compiles statistics on rooms, average room rates in
March fell 5.1 percent. In addition, Revpar, or
revenue per available room, a standard measure of
occupancy and average room rates, decreased 10.5
percent from the same time in 2001. According to
the San Francisco hotel-consulting firm PKF
Consulting, 2001 saw the worst decline in hotel
profits since 1938. Hardest hit were convention
hotels, where revenues fell an average of 12.9
percent and profits fell 24.3 percent in 2001.
Because of this, large convention-oriented hotels
across the country have been unable to find private
financing, including projects led by major
developers in Denver and Boston. Locally, and just
across Grace Street from Miller & Rhoads, the
partially opened Hotel John Marshall is only partly
renovated, unable to attract investors to complete
the work. Meanwhile, the Marriott continues to
suffer. During some months this spring, the hotel
had about a 58.6 percent occupancy rate, which is
a decrease from 70 percent last year. The hotel had
an abysmal 42 percent occupancy rate in the
spring, the last time statistics were made public.
Typically, the industry considers 75 percent to 80
percent occupancy a healthy market. Because of
the poor lodging climate, Beller has indicated to
Richmond Renaissance that he personally will bring
more to the table if his lenders demand it."He has
indicated to us that they will be able to put up more
equity," Berry said. "The fact that they are still
confident is a good sign."