In an era where building new hotels is challenging, acquiring
land next to an existing property provides opportunity to get creative with expansion,
sweeten valuations.
Procaccianti Companies’ April 11 acquisition of the 71-key
Newport Beach Hotel & Suites in Middleton, Rhode Island, included an
additional land parcel that will allow for future development, a critical
factor in the deal. In February Honolulu-based Trinity Real Estate Investments,
along with Credit Suisse Asset Management, acquired for a reported $835 million
Hollywood, Florida’s iconic, 1,000-room oceanfront hotel, The Diplomat Beach
Resort, along with an adjacent parcel that just last week was sold to BH Group
and Related Group for condominium development. DiamondRock Hospitality Co. in early
August acquired for $33 million the 117-room Chico Hot Springs Resort in
Paradise Valley, Montana, and near Yellowstone National Park, as
well as a 595-acre adjacent ranch parcel for future expansion of the resort or
residential lot sales.
There have been an increasing number of deals where buyers
have acquired adjacent parcels, either as part of hotel acquisition or
subsequently to improve growth opportunities and property values.
In fact, with the higher cost of debt making potential deals
harder to pencil today and new development often even harder to finance, acquiring
an adjacent parcel as part of a bigger acquisition has helped many developers
sweeten the value of the properties and push deals over the finish line.
“In an environment where it’s just hard to get everything to
line up, I think that those types of little things definitely help make a
difference and can push a deal over the goal line,” said Procaccianti Companies
Chief Investment Officer Rob Leven.
It’s a big exercise to build from the ground up. If you have something existing that you can expand, it's quicker and a less-risky payback.
John Hamilton
Pyramid Global Hospitality has also been a buyer of adjacent
parcels with EVP Acquisitions and Business Development John Hamilton stating
they are considering this option more often because building new is not real
viable right now. “I think those dynamics are going force people to look inward
to their own their existing assets to consider how they can expand,” he said. “It’s
a big exercise to build from the ground up. If you have something existing that
you can expand, it's quicker and a less-risky payback.”
Hamilton said their process includes doing a financial
analysis and determining the revenue potential of the parcel. “The beauty of it
is there’s no added fixed costs,” he said. “You don’t need another general
manager and you have a lot of the infrastructures in place. So, the flow
through is much higher on any incremental real estate use.”
The one caveat made by multiple sources interviewed for this
story is to be very careful about acquiring parcels that need to be rezoned.
It’s not for the faint of heart, and it takes specialized expertise and a lot of
patience.
Hamilton adds not to underestimate the effort it takes to
realistically price and evaluate these parcels. “There’s risk. But if you
already have the site, and it’s adjacent, it’s worth the risk to explore it,”
he said. “My caution is if you’re not a developer, don’t underestimate the lift
of getting something done [with the parcel].”
John Hamilton, Pyramid Global Hospitality
Leven suggests trying to acquire the adjacent parcel at the
same time the main asset is acquired, and preferably from the same seller. “I
would also say not to be afraid. Don’t get so hung up on paying 10% more than
the market because it adds a lot of incremental value to your existing property”
Leven said. “Focus on your own economics.”
Myriad opportunities
Pyramid’s Hamilton pointed to their success at the Boston
Harbor Hotel, where they took an alley space between the hotel and the office
building next door and converted it to a bar. “Everybody getting on the ferries
to go home walk right through it. It’s wide enough, so we put the Alley Bar out
there,” he said. “This summer, the place is popping.”
They did the same with a patio out the back door of the same
hotel. It’s actually a public right-of-way with a lot of traffic where Pyramid is
able to float a barge in the harbor and have bands four days a week. “It’s valuable
real estate that we found a way to generate activity.”
Pyramid is also looking at the glamping craze and has added
it at their Turtle Bay Resort property on Oahu's North Shore in Hawaii. At its
Margaritaville property on Lake Conroe in Houston, it had excess land
where it is creating tiny home and villas.
“It’s become more and more evident that there’s value in
outdoor hospitality – it’s a huge growth area since the pandemic,” Hamilton
said. “It’s not just glamping, which is a term I really don’t like, because a
lot of times it’s tiny homes or villas, structures that stand alone where you
can have a fire pit and an outdoor experience as part of it.”
When it comes to the trendy glamping option, New York
City-based Standard International CEO Amber Asher warns the model can be a
tricky business and if not located close to an adjoining hotel can be labor
intensive and be problematic from an infrastructure perspective. “If you have bad
weather, you really can’t manage it the same way you can in a building,” she
remarked. “We have so much outdoor space in our buildings, but the minute it
rains numbers are affected. But we can also move our people inside.”
Don’t get so hung up on paying 10% more than the market because it adds a lot of incremental value to your existing property, Focus on your own economics.
Rob Leven
Hamilton also cited RV parks as another emerging opportunity
Pyramid is looking at. He said the zoning is already in place, and the idea is
to roll in semi-permanent tiny homes to upgrade the traditional camping
experience. He said they are just starting an initiative with a group that
raised quite a bit of capital for the concept. “We think it’s going to be very
successful and there are thousands of campgrounds out there… You can acquire
them at a pretty low basis and then redevelop.”
More broadly, Hamilton said Pyramid is looking at acquisitions
of assets that have excess land parcels that are, perhaps, parking lots that
could be redeveloped as another hotel or a residential project. “There’s a
couple of acquisitions where we were placing value on that excess land,” he
said.
At Procaccianti Companies, Leven said the adjacent piece of
land at its newly acquired Newport Beach property was acquired at a
reasonable incremental price and even helped justify the deal. It currently has
some shuttered cabins that can be redeveloped a number of ways, including townhomes,
additional hotel guest rooms or an outdoor swimming pool complex that would be a
great fit for the location and perhaps the most effective execution, Leven said.
“We’re pursuing it now because we have a bank lender that we
have a relationship with and can work with to develop something,” Leven added.
Pyramid also has the luxury of having a full in-house
development team to help make the final decision.
The same team can help Pyramid decided what to do with a
piece of land adjacent to its recently acquired and rebranded Greyfinch Chatham
Inn in Massachusetts, another parcel that helped push the deal over the finish
line, according to Leven. It has similar expansion capabilities at a property
on Block Island in Rhode Island, which could lean toward a glamping component
or something else experiential.
Looking at the Trinity deal to sell off the parcel that came
with its acquisition of The Diplomat, Trinity Investment President and CEO Sean Hehir clearly stated they are
not developers, nor long term holders with time to go through any serious
development process. So, they saw the adjacent parcel it acquired as a
value-add to better capitalize the deal and buy down their basis.
Trinity is considering building a beach club at the Diplomat
and sell memberships to the new condo owners, but that is simply an exercise in
how to optimize revenue and build value.
Similarly at its 1,000-room-plus JW Marriott Desert Ridge in
Scottsdale, Arizona, and its Ritz-Carlton Las Colinas in Dallas, Trinity is starting
to look at their excess land and talking to potential developers to see how it
can better capitalize on the space.
“We are starting to spend a lot of time looking at our
portfolio and looking at besides just pure hotel asset management or project
management, what other collateral do we have that we should be better utilizing,”
Hehir said.