News for the Hospitality Executive
|By Thomas A. Corfman, Chicago Tribune
Knight Ridder/Tribune Business News
Oct. 29, 2003 - A high-powered, Arizona-based owner of luxury hotels has signed a contract to acquire the Drake, one of Chicago's most prominent hotels.
The sale to Pivotal Group Inc., whose $1.5 billion portfolio includes the Century Plaza Hotel in Los Angeles, is still in the early stages. The deal would value the historic 537-room hotel at roughly $80 million, sources said.
If the deal goes through, it could be another sign of a revival in the Chicago hotel investment market, which has been dormant while hotels recover from the prolonged downturn in travel as a result of the 2001 terrorist attacks, the weak economy and the U.S.-led invasion of Iraq.
On Monday, Starwood Hotels & Resorts Worldwide Inc. launched a bid to buy the partnership that owns the Westin Michigan Avenue in a deal that would value the 751-room hotel at $116 million, including assumed debt. And German lender Eurohypo AG has agreed to provide a $58 million loan on the 343-room Four Seasons Chicago, part of the 900 North Michigan Ave. mixed-use development, according to Commercial Mortgage Alert, a real estate finance newsletter.
The deals come as the downtown hotel market shows signs of regaining strength. The occupancy rate climbed to 69.4 percent during the first eight months of 2003, compared to 64.8 percent during the same period last year, according to statistics compiled by Smith Travel Research.
A full-year occupancy rate of about 72 percent for the downtown market is considered by some experts to be a break-even point.
Average daily room rates have risen slightly this year, to $151 a night.
Nonetheless, the market for hotel financing is "precarious, at best," said hotel consultant Brian Flanagan, president of Chicago-based Property Valuation Advisors Inc.
"The larger the deal, the number of players willing to lend on hotels decreases dramatically," he said. "And they look at all sides, not only the hotel and the market, but the operator and the underlying credit of the sponsor."
Coral Gables, Fla.-based Hilton International put the 14-story Drake up for sale earlier this year, hiring investment bank Eastdil Realty Co. LLC.
Howard Friedman, president of the Americas for Hilton International, confirmed that the prominent Magnificent Mile property was under contract to Pivotal.
He declined further comment, except to say that his company, a unit of Hilton Hotels Group PLC, based outside of London, would likely retain management of the Drake. Hilton Group is separate from Beverly Hills, Calif.-based Hilton Hotels Corp., which has the domestic rights to the famous hotel name.
A Pivotal Group spokeswoman declined to comment.
The Drake, 140 E. Walton St., which has nearly completed a $40 million renovation, would complement Pivotal's hotel portfolio, which already includes the Ritz-Carlton in Phoenix, the St. Regis Hotel in Los Angeles and the Red Mountain Spa in Utah.
Technically, Pivotal would be acquiring Hilton's rights under a ground lease, which reduces the price because the deal does not include the land. The ground is owned by a partnership controlled by the Brashears family, longtime real estate investors in the Chicago area.
The ground lease expires in 2039, but under certain circumstances could be extended 20 years. That aspect complicates the deal, lowering the Drake's price compared to hotels that include the land.
But the reduced price would also help Pivotal, or another buyer, make an economical entrance into the Chicago market.
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