Jan. 19, 2004 - Struggling with an aging property and glitzier competition, the 36-year-old Sonesta Beach Resort on Key Biscayne will be torn down and replaced with a hotel charging five-star rates, owner Sonesta International Hotels announced Tuesday.

The $300 million development project will be financed by advanced sales of the rooms as condo-hotel units, a strategy fueling much of the expansion of South Florida's hotel stock. Miami-based developer Fortune International will contribute $60 million to join Sonesta in building the hotel, slated to open in 2008 after two years of construction.

The 294-room oceanfront Sonesta has lost money since the 2001 terrorist attacks battered South Florida's tourism industry, just as a new crop of luxury hotels opened in the Miami area and peeled away the Sonesta's big-spending guests.

With a new Ritz-Carlton three minutes away and a Four Seasons across the Rickenbacker Causeway on Brickell Avenue, Sonesta decided it couldn't compete without the spacious rooms and modern amenities that come with building a hotel from scratch, company Chairman Roger Sonnabend said.

"The Ritz is clearly superior to us. Their rooms are larger, their bathrooms are new," he said of the 402-room Ritz-Carlton that opened less than a mile away in 2001. "In 1969, we were tops. But a hotel of this age can't compete with the Ritz, the Four Seasons."

The hotel will stay open until its demolition slated for the second half of 2006. The venture promises to add another contender to Miami-Dade County's increasingly crowded collection of ultra-luxury hotels, a category created in 2000 when the Mandarin Oriental opened on Miami's Brickell Key.

And it comes as other aging South Florida icons to vacations past are being gutted or demolished in pursuit of more affluent hotel guests.

Fort Lauderdale's Yankee Clipper of Where the Boys Are fame is pursuing a $35 million to $50 million facelift, and wrecking balls are supposed to be bashing in part of the former Americana Hotel (now the Sheraton Bal Harbour) as part of a major upgrade. Downtown Miami's Dupont Plaza hotel is in rubble to make way for a planned luxury hotel and condominium tower, and a Holiday Inn at 22 Street in Miami Beach will be demolished to make way for a swanky W resort.

The Sonesta Beach Resort underwent significant renovations after Hurricane Andrew battered Key Biscayne in 1992, forcing the hotel to close for 13 months. But the property still seemed dated at the start of the decade, and Sonesta spent $11 million on renovations in 2000 for a new spa, bathroom upgrades and lobby improvements.

"We've spent a great deal of money on this hotel in the last few years and always intended to keep the hotel in outstanding condition to be able to compete effectively with other hotels," Sonnabend said.

Prime oceanfront in a lush and exclusive island setting wasn't enough to overcome a declining economy and the rise of rate discounts brought by online travel agencies like hotels.com and Orbitz, he said.

The publicly traded company has posted losses each year since 2001 in the midst of an industrywide downturn. Though 2003 saw Sonesta's Key Biscayne resort post $26 million in revenue, Sonnabend said it lost money every year since 2001.

"After 9/11, it became a very serious situation," he said.

Sonesta used its Key Biscayne property to secure a $30 million loan in 2000 to fund new hotel ventures, including ones in Coconut Grove and Sunny Isles Beach. The Boston-based company negotiated a new loan structure in 2003 to delay interest payments, at a time when Sonnabend said its Key Biscayne and Cambridge, Mass., hotel were struggling with anemic rates and occupancy levels.

Sonesta will not contribute cash in the Key Biscayne condo-hotel venture, only the 11-acre site at 350 Ocean Dr.

Fortune will pay $30 million upfront and assume responsibility for the Key Biscayne hotel's $30 million mortgage, Sonnabend said. He said selling the planned 350 condo-hotel units will generate more than $650 million in revenue. The project should cost about $300 million to develop, he said, not counting the value of Sonesta's land.

Fortune and Sonesta will be equal partners in the real estate venture, while Sonesta will own a 70 percent stake in the new hotel, he said. Fortune will own the other 30 percent.

As recently as last month, Sonnabend said, Sonesta had planned a much more modest venture: a condominium complex on top of where some tennis courts now stand. But that plan was abandoned in talks with Fortune over the condo-hotel option.

"I said, 'You have the best land in Miami,' " said Fortune President Edgardo Defortuna. " 'You have the opportunity to a do lot more than a few dozen condos on the tennis courts.' "

Zoning law would allow a 15-story building to replace the current seven-story structure, Defortuna said. Sonesta and Fortune have not drawn up plans for the new hotel, and Key Biscayne would need to approve the new design, he said.

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