04 June 2010
Hotel lawyers with insights on how some development deals are still getting done: Public-Private Financing for Hotel Developments
To view presentations made by the experts, see the easy download links.
Hotel lawyer Catherine Holmes, one of our public-private hotel financing specialists in JMBM’s Global Hospitality Group® has represented cities and other governmental entities in several public-private partnership hotel development and convention center hotel deals, such as the recent transactions with the City of Dallas and the Redevelopment Agency of the City of Riverside.
Cathy recently moderated a panel on the topic of public-private financing for hotel development in Los Angeles with some of the top experts in the field. Here is a summary of what they told us.
Opportunities for Public – Private Financing of Hotel Developments
by Catherine De Bono Holmes
We were fortunate to have three leading experts in the field of public-private hotel financing share their experience with us recently on a panel in Los Angeles: Mark Tobin, President of HREC Development Resources, Ray Garfield, principal and founder of Garfield Traub Development, and William (“Bill”) Corrado, Director of the Public Financing Department of Citigroup. Mark, Ray and Bill provided a wealth of information for hotel developers, governmental entities and educational institutions about the feasibility and economics of building a hotel using a variety of public and private financing. I am pleased to share with you their insights from the panel discussion, below.
HREC Development Resources
Mark focuses his practice on advising municipalities and other governmental entities on the development of publicly-owned or publicly-financed hotels and related developments. He has acted as an advisor on more than $3 billion in municipally sponsored hotel projects financed with project revenue, tax-exempt bonds. Mark is working with 12 to 15 cities currently considering a hotel development through some form of public-private development partnership.
Many cities seeking a hotel development begin the process thinking that they can sell the land to a private developer without any further involvement in the process. However, especially in today’s financial environment, cities have to be more actively involved in the financing process because it is very difficult for private developers to obtain all of the financing required to build new hotels. This could include the use of recovery zone bonds, development bonds, credit support from pledge of future revenues, tax increment financing, or direct lending to the hotel developer.
In some cases, especially large convention center hotels, once the city compares the costs, risks and rewards of providing financing or credit support to a private developer versus city direct ownership of the hotel, public ownership of the hotel is the better economic option for the city.
Helping cities analyze their options and run the numbers on each alternative structure is often a lengthy process, and one that is subject to political risks as well as financial risks. It takes patience and persistence to successfully complete a hotel development using public-private partnership financing.
See below to view or download the presentation given by Mark Tobin at Meet the Money® 2010.
Hotel Development Issues for Municipalities Evaluating Hotel Projects
Garfield Traub Developments LLC
Ray Garfield and his company, Garfield Traub Developments, specialize in turn-key development of hotels, conference centers and entertainment venues for municipalities, airports, college campuses and hospitals. These developments can bring hundreds of thousands of people into the communities in which they are located to spend money and generate sales tax, without burdening schools or other public resources.
Ray points out that the number one factor for group meeting planners in selecting a location for a conference is the number of suitable hotel rooms nearby the meeting facility. So, if a city is in the convention center business, it has to be in the hotel business in one form or another.
Ray noted that with loan underwriting much more conservative today than it has been in the past, there is a significant gap between the equity that private developers are willing to invest and the debt that private developers are able to raise to develop a new hotel. Public-private financing is often the only way to fill the gap – without it, a hotel development will very difficult to build in today’s financial environment.
Ray has developed some innovative ideas for piecing together a variety of sources of financing for his projects. For example, Garfield Traub recently completed a $67 million, 303 room, independent hotel in Lubbock, Texas across from Texas Tech University, using a combination of two-thirds private funds and one third public funds. In collaboration with the University’s Restaurant-Hotel-Institutional Management school at Texas Tech, Garfield Traub designed a classroom in the city’s conference facility, and raised $11 million in grants to the city to help with the financing for the facility. The city also sold $11.4 million in bonds for the project. The combination of grants and bonds helped to fill the gap between the total cost of the project and the private equity and first mortgage loan.
See below to view or download Ray’s presentation at Meet the Money® 2010, where he shared with some of the information he provides to cities considering hotel development.
Top Factors in Choosing an Event Location
Director of Public Finance Department
Bill Corrado has helped cities around the country raise financing for large convention center hotels and sports arena projects.
Bill notes that cities can access tax-exempt bond financing for projects that are entirely owned by a public entity. Typically, cities will need to pledge tax revenues or their general credit support to backstop hotel revenue bonds, even if hotel projections show that the hotel should be revenue self-sufficient.
Private owners can access tax-exempt capital using empowerment zone bonds, liberty bonds, go-zone bonds, and recovery zone facility bonds.
Bill’s job is to sell the bonds to private investors. To do that, he has to be able to show that the value of the property and the projected debt service coverage from hotel revenues will be sufficient to support the repayment of the bonds, and that a city is willing to provide further credit support if the revenues are not sufficient.
The larger convention center hotels are generally branded, because they need the marketing power of a brand to attract large group business. Convention center hotel projects have been Starwoods, Hiltons, Hyatts, Omnis and Marriotts. Bond investors look for a solid operator that can drive revenue to the hotel to support repayment of the bonds. The key to selling a tax-exempt deal to an investor is knowing the operator can support the marketing and operation necessary for a large hotel project.
We are grateful to our panelists for providing us this insightful view into opportunities available now for public-private financing of hotel projects throughout the United States.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $60 billion of hotel transactions and more than 100 hotel mixed-used deals in the last 5 years alone. Who’s your hotel lawyer?
Catherine DeBono Holmes is a partner in JMBM’s Corporate Department and a senior member of JMBM’s Global Hospitality Group®. Cathy represents owners, operators and lenders in hotel development, financing and acquisition transactions. She currently represents Formosa International Hotels in the recently announced acquisition of the Regent brand hotels with operations in Asia, Europe, the Middle East and the Caribbean. She has also represented cities and other governmental entities, including recently the City of Dallas and the Redevelopment Agency of the City of Riverside, in publicly owned and public-private partnership hotel developments such as convention center hotels and redevelopment projects. With her background in securities and corporate law, Cathy also assists hotel owners, lenders and investors with complex entity structuring, as well as public and private offerings of debt and equity securities. She has represented owners and operators in hotel and resort developments, including condo-hotels and residences, throughout the U.S., Central America, Europe, the Middle East and Asia. Cathy has also represented numerous hotel owners in the selection of hotel operators and negotiation of hotel management and franchise agreements with all of the major hotel brand operators. To access Cathy’s articles on www.HotelLawBlog.com, click on the topics “Condo Hotels” or “Green Hotels.” For more information, please contact Cathy Holmes at 310.201.3553 or firstname.lastname@example.org.
Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at email@example.com or 310.201.3526.
Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.
JMBM’s troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE “JMBM SAVE® program”.)
Whether it is a troubled investment or new transaction, JMBM’s Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.