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Hospitality Lawyer on hotel mixed-use development projects in China, India, Mexico, the Caribbean, Guam — What the experts say now.

Author of www.HotelLawBlog.com
6 December 2006
Hospitality Lawyer: In my last posting on www.HotelLawBlog.com, I described “what is fanning the condo hotel wild fire in Latin America, the Caribbean, Europe, China, India and the Middle East.” But condo hotels are only a small segment of the hotel-enhanced mixed-use projects being developed at an rapid pace on the international scene.

The hospitality experts that joined me for JMBM’s “Outlook 2007, Hospitality Roundtable” had plenty to say about the hot international markets, and I am delighted to share their insights with the readers of www.HotelLawBlog.com. You should also see a up-to-the-minute news item related to this in the blog “Hospitality Lawyer — Barry Sternlict and Starwood bet on . . . China!


My expert crystal ball gazers participating in this dialogue are:

* Peter Connolly, President and CEO, Palladian Development
* Tom Corcoran, Chairman of the Board, FelCor Lodging Trust Inc.
* Alex Gilbert, Director, JER Partners
* Robert Stern, Managing Director, Perry Real Estate Partners
* Jonathan Roth, Principal, Canyon Capital Realty Advisors, LLC
* Kenji Yui, Leveraged Finance, Aozora Bank, Ltd.

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Jim Butler: Many of our clients are developing properties outside of the U.S. What is going on in the international markets?

Robert Stern: We at Perry are now equity and debt providers throughout the U.S., Europe, Mexico, Central America and the Caribbean. South America and parts of Asia are likely soon to follow. We are big proponents of accessible destinations with good airlift and infrastructure. What’s happening in the Mayan Riviera in Mexico, where we are investors, is phenomenal and we think it will continue. Baja Mexico is in its infancy and development will continue to push north from Los Cabos and south from San Diego. Costa Rica’s offerings will flesh out. Argentina and Brazil are increasingly interesting. Europe is ripe for an expansion of U.S. and international brands, in places like Barcelona, Prague and Budapest. China and India are fascinating, though our platform is not there yet.

Tom Corcoran: When you talk about hot markets, you’d have to say, China, China, China… and India. But investors need to get comfortable with the political situation, which is still risky in both countries, as you pointed out in one of your recent postings on your HotelLawBlog.com, Jim.

Kenji Yui: We see lots of development of new city hotels in China and India. There are lots of development projects, but limited lenders, so the opportunities are attractive there. The challenges remain the same: legal systems, enforceability, land title systems, and so forth.

Robert Stern: Not to mention issues with currency and the associated tax structuring, return leakage and hedging, access to reliable contractors, untrained or insufficient local labor, divergent business mores and practices, difficulty finding appropriate local partners, and challenging regulatory environments. But as you point out, Kenji, there is less competition in terms of capital because of these challenges, yet potentially compelling risk-adjusted returns are there. For opportunistic investors like us at Perry, we really need markets to exhibit some imperfections and inefficiencies in order to see the way to opportunity and profit. We do this very carefully though, looking for macro themes but committing capital in a very micro focused way — meaning we look at macro trends, as it’s tough to swim up-stream, but we are definitely “micro investors.” Still, this kind of investment isn’t for the faint of heart.

Jim Butler: Are there other hot markets on the international scene?

Kenji Yui: Guam is already a hot market. We also see lots of development of new luxury resorts in Dubai, the Indian Ocean and throughout the Caribbean. You will begin to see some new market entrants from Japan where some real estate investors are beginning to look for assets outside of the country. They are anticipating the future change in regulation for the J-REIT (Japanese Real Estate Investment Trust), enabling investors to sell overseas real estate assets to the J-REIT.

Peter Connolly: I also believe that the relaxation of foreign investment rules in Asian countries like South Korea — combined with the continuation of the current instability of the Korean peninsula — should increase interest in U.S. real estate investment from that region as well. In 2007, I think we will also see that relatively inexpensive dollars — coupled with high real estate values in Western Europe — will increase the amount of capital from that region chasing what are perceived to be inexpensive U.S. real estate purchase opportunities. As a result, cap rates in hospitality, particularly in its current position as the “stable star” of domestic realty, should remain at very aggressive levels in an expanded universe of well-heeled purchasers.

Hotel-Enhanced Mixed-Use

Jim Butler: The projects our team is involved with internationally are hotel-enhanced mixed-use properties, including other elements in addition to hotel rooms. What is your take on hotel mixed-use development?

Robert Stern: Notwithstanding the fact that many hospitality deals today require a “for-sale” component to make them financially viable, consumer demands are driving the hospitality industry’s evolution. Many of the projects we are participating in incorporate some mixture of traditional hotel rooms, condo hotel or serviced apartments, fractional ownership, pure condos and luxury villas.

Alex Gilbert: I would go even further. JER has not considered any new hotel development that does not include a significant mixed-use component. We recently committed $50 million to a 1.2 million square foot development of an open-air regional retail destination encompassing both big box and lifestyle components.

Peter Connolly: Mixed-use has always been part of the business in one form or another. But as an industry, we are now taking a more thoughtful approach to combining the various constituent parts so that they create a consistency of community. For example, our Chicago project — the Mandarin Oriental Tower — the renewed interest demonstrated by wealthy individuals in living the hotel lifestyle has influenced our choices on the size and design of the project’s spa, the choice of restaurateurs for the non-hotel dining outlets, the quality and practicality of potential retail uses, and so on. The goal is to piece together the right elements to create a community of activities in which each element has a positive impact on the value of every other element.

Jonathan Roth: I think most new development will be in the form of hotel mixed-use. Mixed-use properties make sense from an end-user standpoint and they represent a way to allocate risk and accordingly, are easier to capitalize. There are now stables of buyers for each of the retail and hotel components of mixed-use products. That said, by definition mixed-use projects are much more difficult to develop because of their size, complexity and cost. As a result, the number of developers that can take on such a project will be limited — which is probably a good thing.

Jim Butler: I believe that hotels are gaining recognition as the “ultimate amenity” for mixed-use projects. All the brainpower that many of us here put into condo hotels over the past few years, has contributed greatly to the pool of knowledge that has made hotel-enhanced mixed-use projects viable. I think we should feel good about that as we move forward to apply our knowledge to international markets and exciting new product hybrids.

Peter Connolly: I agree, particularly when you remember it was just a year ago that we were declaiming the hospitality element of a mixed-use project as the evil necessary to enhance the value of the residential components. By the end of 2006, clearly the hospitality component’s status as an element of the project value has been elevated.

Jim Butler: How does the “lifestyle” product fit into our dialogue about hotel-enhanced mixed-use properties?

Robert Stern: The lifestyle operators are innovators that provide an “experience” and value for the money. People want to experience a sense of belonging, but also be surrounded by attributes and experiences important to them individually. So, it seems to me that this is a segment that is not going away, as long as what is offered is unique. The challenge is to figure out how to create scale and critical mass without losing the essence of the brand.

Kenji Yui: There are excellent lifestyle resorts being created in Asia such as Amanresorts and Banyan Tree Resorts. We also see some new entrants such as Bulgari and Armani, born in Europe. These pioneers really do a nice job in the lifestyle category. But when we hear some hotels and resorts saying “lifestyle,” what we experience is “déjà vu.” The difference may be the history
of the brand, which is difficult to create in the short term.

Jim Butler: Brands — now there’s a topic worth discussing.

. . . And discuss it, we did, but that is a subject for another posting that I look forward to sharing with you soon.

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Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $50 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.

Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of 50 seasoned professionals with more than $50 billion of hotel transactional experience, involving more than 1,000 properties located around the globe.

Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.

Jim is frequently quoted as an expert on hotel issues by national and industry publications such as The New York Times, The Wall Street Journal, Los Angeles Times, Forbes, BusinessWeek, and Hotel Business. A frequent author and speaker, Jim’s books, articles and many expert panel presentations cover topics reflecting his practice, including hotel and hotel-mixed use investment and development, negotiating, re-negotiating or terminating hotel management agreements, acquisition and sale of hospitality properties, hotel finance, complex joint venture and entity structure matters, workouts, as well as many operating and strategic issues.

Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm’s Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at jbutler@jmbm.com or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.