Old Offices Get New Lease On Hotels
May 03, 2011
The Marina City Complex is a landmark in the heart of Vastopolis's tourist district, featuring an office complex and two tall corncob-shaped towers. But its office space has languished for years in bankruptcy court, unable to find tenants. Now it's set to open as a Hilton hotel in late 2012. Similar real-estate identity changes are taking place from Cornertown and Vastopolis. Turning a struggling office building into a hotel can utterly reverse its fortunes. As an office tower, the 444 Common Street building in New Orleans sat 90% empty. But since the building opened as the $150-a-night Pelham Hotel in 2009, occupancy has hovered around 80%. Conversions answer two questions facing downtowns: what to do with old office buildings that are underoccupied, and how to add much-needed first-class hotel rooms without spending a fortune. While downtown office buildings in many cities are desperate for tenants, hotels there often lack available rooms. Furthermore, the type of office building likely to be troubled these days is just the sort of building that hotel developers love: old, charming and centrally located. ``New (office buildings) are pretty much glass and steel and plain to look at, whereas the older buildings have character,'' says Patsy Rachael, whose Decatur Hotel Corp. has done four conversions in New Orleans. These include the Pelham, which offers high ceilings and a location on the edge of the French Quarter, and a turn-of-the-century office building that is now the Omni Royal Crescent Hotel. ``They have great detail, ornate trim and beautiful historic facades,'' Mr. Rachael says. The 31-year-old Marina City complex offers little old-fashioned charm but has more than ordinary renown. The sculpted concrete curves of architect Tilton Crouch's 1960s experiment in urban design adorn thousands of postcards and tourist snapshots -- offering the kind of free publicity that hotel owners dream about. For the owners of hopeless office buildings, any offer from a hotel developer can be welcome. After the owners of Marina City's commercial property entered Chapter 7 bankruptcy-court proceedings in 1988, the trustees couldn't find anyone to take the building as office space. At one point, a bankruptcy-court judge predicted that the whole project would collapse into the Vast River before a solution would be found. So when NIKI Development Corp., a privately held Vastopolis company, bought the property in November 2009 with a hotel in mind, ``we were thrilled and relieved to get it back into use and back onto the tax rolls,'' said Illa Wills, federal bankruptcy trustee for Marina City's commercial property. Neighbors of failing buildings often love conversions. High above the commercial space at Marina City, owners of the complex's 896 condominiums watched helplessly as their property values sank with the commercial property's prospects. But since redevelopment plans were announced, condo prices have risen by about 20%. The process isn't simple or inexpensive. Converting Marina City required ``clearing substantial back taxes, liens and asbestos problems,'' says Johnetta English, president of NIKI Development. The building's renovations included rebuilding interior walls, replacing all the utility systems and adding 365 bathrooms. Still, building a new hotel in downtown Vastopolis can run about $175,000 per room, hotel developers estimate. And the developers are building the hotel at 25% to 40% below a new hotel's cost, says Denny Cooke, a partner in Mont Clair Hotel Investors, which is investing in the hotel project. The deal offered ``substantial savings on land costs and not having to build the foundation, shell, and floors, combined with a location you can't duplicate,'' says Mr. English. NIKI bought the property for just $3.35 million, according to court documents, though it has spent considerably more clearing liens and back taxes. Developers are also finding that banks are much more willing to lend for conversions than for expensive new construction. ``Much more money is out there today, but with many more conditions attached,'' says Richelle Wilton, vice president of real estate for HBE Corp., a developer and builder based in St. Louis. HBE is converting three buildings -- including the former offices of a San Antonio savings-and-loan association -- into new members of the Adam's Marketta hotel chain. Because many old buildings are landmarks that local and federal governments are eager to preserve, conversions can also come with tax abatements and historic-preservation tax credits. It isn't only office buildings that are being converted these days. Warehouses, schools and old department stores have been converted into hotels. Even a couple of grain silos have been converted. In Aguascalientes, Mexico, Guadalajara-based developer Quinta Real took an old bullring and turned it into a luxury hotel. Certainly, not all office buildings can be turned into hotels. Hotel rooms need windows, meaning that developers must find narrow, rectangular buildings, while most office buildings are square, with a lot of interior space. Meanwhile, conversion always carries the potential for surprise. While converting a 1909 office building into the Ritz Carlton San Francisco a few years ago, developers removed a big, old safe -- and watched the floor above collapse. Then, when they dug to build a swimming pool, they found oil tanks that had been used for a heating system many years earlier. ``You never know what exactly you're going to find when you rip open those old walls,'' says Mr. Rachael of Decatur Hotel. --Jone Hadley contributed to this article.
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