|By Kathy Bergen and Susan Diesenhouse,
Chicago TribuneMcClatchy-Tribune Business News
Aug. 29, 2006 - The historic Drake Hotel, which has proven to be a tricky property to sell because of its age and unusual ownership arrangement, is expected to be purchased next month by a group that includes one of Chicago's wealthiest real estate investors, in yet another sign of strength in the downtown hotel market.
The 86-year-old Italian Renaissance-style dowager on North Michigan Avenue is expected to be bought by a group that includes real estate magnate Neil G. Bluhm, whose interests include the Ritz-Carlton Chicago and the Four Seasons Chicago.
Terms of the deal have not been disclosed, but one observer who tracks deals said Monday that the price is expected to be a modest $55 million. This works out to $102,420 per room, less than half what some other prime downtown hotels have commanded this year, according to Mike Sullivan, managing director of HVS Capital Corp.
The low price tag is linked to the complicated ownership arrangement and to the age of the property, observers said.
"If anything, the sale itself shows activity in Chicago is strong," said Will Marks, managing director at JMP Securities. "Your market has dramatically improved over last year's levels."
There have been 20 hotel sales in the Chicago market this year, worth $742.8 million, compared with 42 worth $1.2 billion in all of last year, according to Lodging Econometrics of Portsmouth, N.H.
"More and more money is chasing investments, particularly in urban centers," said Bruce Ford, senior vice president of Lodging Econometrics. "Chicago is on pace to fall in line with last year, with higher selling prices per room on average."
The rising prices reflect a rebounding market. Downtown occupancy averaged 72.1 percent this year through July, compared with 68.1 percent in the year-ago period, while the average room rate rose to $169.62 from $149.77, according to Smith Travel Research. And the Drake's performance is believed to have exceeded the average.
The group purchasing the Drake includes Chicago-based Walton Street Capital LLC, where Bluhm is a principal, as well as Chicago-based Lodging Capital Partners and New York-based Westbrook Partners LLC.
The hotel is being purchased from Beverly Hills, Calif.-based Hilton Hotels Corp., which will continue to manage it.
A partnership controlled by the Brashears family, longtime real estate investors, owns the land beneath the hotel and leases it to the hotel owner. The current lease expires in 2039 but could be extended 20 years. At the end of the lease the building reverts to the landowner.
"Whenever you're dealing with the Drake, you're always dealing with a stickier situation because there's another ownership entity on the land," said Brian D. Flanagan, president of Property Valuation Advisors in Chicago. "And the land lease is relatively expensive on that hotel."
The hotel came close to being sold for an estimated $80 million in the fall of 2003 but that deal fell through.
This is the second hotel purchase for this group, which last November paid $86.5 million for the 311-room Le Meridien, since rebranded as Conrad Chicago. After only 10 months of ownership it has agreed to sell that property to DiamondRock Hospitality Co. of Bethesda, Md., for $117.5 million.
"We're looking at [the Drake] as a longer-term play," said Steven Kisielica, co-founder of Lodging Capital Partners, which was formed in April 2005.
Plans for the Drake have not been finalized, "but we intend to continue its excellence," he said. "There possibly will be physical upgrades."
The historic hotel, which has played host to kings, queens, diplomats and entertainers and which flagged a bit in the 1990s, has been spruced up in recent years, with nearly $60 million in improvements.
But to bring the Drake back into the highest echelons, where it resided for many years, will be a challenge.
"To reposition it at a higher niche would be quite a bit of money," said Flanagan.
Copyright (c) 2006, Chicago Tribune
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