144 King St. (Approved) – San Francisco – 94103 – 15/20
The San Francisco hotel market is one of the top in the country, with the intensity and swiftness of its rebound surprising even experts. The comeback has been fueled both by an improved economy and a robust tourist industry, but that hasn’t meant it’s easy to finance major new hotels.
While the market for hotel financing has opened up compared to years past, not everyone wanting to renovate or build a hotel in the Bay Area is finding it easy to get construction financing.
Alan Reay, president of Irvine-based Atlas Hospitality Group, says financing is “definitely available, especially in markets like San Francisco.” At the same time, he warns “that it’s not just any project that can be built.”
It would seem like a good time to build or renovate properties. The Moscone Convention Center is in the midst of an estimated $500 million expansion to allow San Francisco to remain competitive in attracting and retaining large conventions. Occupancy and room rates are up. In 2012, the city’s average daily rate climbed 10.8 percent to $171.72 compared to 2011, according to the California Hotel & Lodging Association. Occupancy climbed 1.7 percent to 80.4 percent while RevPAR (revenue per available room) surged 12.8 percent to $137.99.
Despite the rosy numbers, convincing lenders of the demand for new rooms is a tough sell. Michael Stanton, owner of Stanton Architecture, points to the Hampton Inn under construction at 942 Mission St. as an example of a project that was challenging to get funded. Ultimately, financing opened up last year and the 15-story, 174-room limited-service hotel is expected to be completed by summer 2014. Stanton, the project architect, said lender requirements for new construction development can still be “very conservative.”
“Hospitality is a very strong market in most desirable communities, but new construction is still lagging,” he noted. Developers of the Hampton Inn had difficulty securing financing before ultimately locking in enough cash with primary lender East West Bank to move forward three months ago, he said.
Meanwhile, Kor Group principal Alex Samek said he and his partner found it difficult to get financing to renovate the historic Renoir Hotel on 45 McAllister St.
“If you’ve got a stabilized asset that is performing well in San Francisco, a lot more doors are open to you,” he said. “But anything that requires repositioning or that is underperforming, or involves construction, is much more difficult”
Samek and fellow principal Brian De Lowe had to get creative. They turned to the EB5 program that lets foreign investors invest $500,000 in an entity that creates 10 jobs in the U.S. in exchange for a green card. The pair spent about six to nine months trying to determine the best partners.
After purchasing the hotel in February 2012, Kor Group launched a fund in China six months later. About 60 days after that, they had managed to raise $40 million from 80 Chinese investors. The money has gone toward a recapitalization of the property and will fund renovations.
They expect to be done by 2014. The 100-year-old structure will still have 135 rooms. But after modernizing all the mechanical, electrical and plumbing in the building and updating it seismically, Kor Group plans to redesign all the rooms and common areas.
While the EB5 route worked for Kor, Samek admitted it wasn’t easy. “I think the program is certainly becoming more common, but I still don’t see it as a mainstream way of raising money,” he said.
There are a few other hotels in the pipeline in San Francisco, including the approved 250 4th St., a 220-room hotel designed by Axis Architecture, and the proposed hotel expected to be part of Strada Investment Group’s planned mixed-use project in Mission Bay. Also, approved. A 134-room hotel is also planned for 144 King St., also designe designed by Stanton, developed by O’Keeffe Development and Construction.