Gaylord Entertainment’s chances of finding a deep-pocketed development partner to build a proposed convention hotel in Aurora are slim at best, hotel industry insiders say.
“I don’t think it is logical that any other developer would step in at all,” said Rod Brown, owner of Denver-based Hotel Development Associates, which has been building smaller hotels for two decades.
The question isn’t whether a developer might want to build the hotel — plenty could be interested. Rather, it is who would be willing and able to invest hundreds of millions in the project.
“It is unrealistic to expect an angel to show up out of nowhere to put the money down to build a really large project,” said Maurice Robinson, a hotel development consultant in Manhattan Beach, Calif.
Nashville, Tenn.-based Gaylord said last week it would sell its brand and management rights to its properties to Marriott International for $210 million. Gaylord will convert to a real estate investment trust, or REIT, that owns its properties, and it is seeking a developer for the Aurora project.
Gaylord said it won’t proceed with the $824 million Aurora hotel as previously anticipated and will look at how it might be completed with “minimal financial commitment.”
Aurora officials said that they are working diligently to get the Gaylord project completed and that developers have come forward expressing interest since last week’s announcement.
“We are still very focused on making this project happen,” said spokeswoman Wendy Aiello. “We are not looking at this as an impossible situation.”
But hotel consultant Kenneth Free said financing likely stands in the way of building the 1,500-room hotel, even with its commitments from the state and Aurora for up to $381 million in tax breaks.
“Hotel financing for new construction continues to be quite difficult, even for the smaller ‘formulaic,’ limited-services hotels, which are relatively low-risk propositions,” said Free, president of Straightline Advisors, the consulting arm of Straightline Hospitality Corp. in California.
Lenders have been burned by real estate projects that didn’t come through as promised, leaving them reluctant to put their necks out.
Private opportunity funds are among the few investors that might step in to help finance a big hotel project, Robinson said. But the high-risk, high-return funds charge interest rates of 15 percent to 20 percent.
Players in that area include Canyon Capital Realty Advisors, Blackstone and Goldman Sachs’ Whitehall, he said.
Higher financing costs, not to mention the profit margin a developer would want, only add to the costs of a project that Gaylord struggled to complete in-house.
Marriott is known for managing, not building, properties and wouldn’t take on that risk, analysts said. Marriott did not respond to an interview request.
Gaylord’s new structure as a REIT and market conditions make it easier to buy rather than build a hotel, but there aren’t many large convention hotel properties on the market.
Depending on location, existing hotel properties are selling at discounts of 10 percent to 30 percent or more below the cost of building new, Robinson said.
Aurora has offered $300 million in incentives, which represents a 36 percent discount. But building new entails more risk, one of the biggest being the ability to win over customers in a weak economy.
One scenario that might save the project would be to scale it back until it reaches a size and cost investors would support, say 500 to 800 rooms.
But that creates a Catch-22. The smaller the Aurora project gets, the more it has to compete with other venues, making it less attractive to the meeting planners that Gaylord and Marriott are trying to win over.
“The problem with going smaller for Gaylord is that it defeats their successful business model, which is the mega-builds,” Free said.
Gaylord owns four of the nine largest convention hotels in the United States. Of the others, three are in Las Vegas and two are in Orlando, Fla.
At 800 rooms, an Aurora hotel would be competing with dozens of other locations. Hence, the smaller and more affordable the project becomes, the more likely that investors and lenders would pass on it, Free said.
Aldo Svaldi: 303-954-1410, asvaldi@denverpost.com or
