20 March 2009

In Motown, Hotel Project Hits A Sour Note

As Originally Posted at The Wall Street Journal

Few cities have been hit harder by the recession than Detroit, and few property types have suffered more than hotels.

So the odds were stacked against an effort to revive the city's Hotel St. Regis by a group of investors, some with ties to Motown's recording industry. Indeed, that effort has fizzled.

The group, led by Detroit entrepreneur Herb Strather, defaulted on its $8.7 million construction-and-mortgage loan made by Chicago-based ShoreBank, which provides loans in inner cities and underserved communities. The 124-room hotel has received shutoff notices from utilities, has failed to pay taxes and insurance and has missed some payroll payments, according to court papers.

The St. Regis "is in imminent danger of ... going dark," ShoreBank said in papers to persuade a U.S. district court judge to appoint a receiver. The judge granted the bank's request. AlixPartners, a Southfield, Mich.-based firm that specializes in corporate turnarounds, took control of the property last month and is now trying to revive it.

The receiver faces a challenge. With Detroit struggling with a myriad of urban problems and the automobile industry in shambles, the metropolitan area's hotel occupancy rate was at 40.6% in January, compared with a national rate of 46%, according to Smith Travel Research. The region's average daily room rate fell to about $87 compared with $101 nationally in January.

The St. Regis, which has no connection with the St. Regis brand properties run by Starwood Hotels & Resorts Worldwide Inc., has been hurting even more than other Detroit hotels. Its occupancy rate was below 35% at the end of the 2008 and room rates were below $80 a night, according to one of its owners.

The St. Regis opened during the 1960s, across from what was General Motors' headquarters. During its heyday, such notables as Mick Jagger, Michael Jackson and Martin Luther King Jr. stayed there, according to its owners.

But as the city deteriorated so did the hotel. In 1996, GM began moving its corporate headquarters from the New Center building to the Renaissance Center in Detroit's nearby downtown, hurting the hotel's business with itinerant auto-industry executives. While the state government offices are located in the complex, now called Cadillac Place, the hotel never regained its luster.

Mr. Strather's investment group, which also includes Detroit-area ministers, purchased the property in 2006 for $6 million and closed it for a roughly $4 million renovation during which rooms were updated and plumbing problems fixed. Mr. Strather said in an interview that some of the hotel's struggles may have stemmed from the decision to close down during the renovation. Instead, the group should have fixed it in stages, maintaining a revenue stream.

This month, the court-appointed receiver hired Alliance Hospitality Management LLC, a hotel-management and development company based in Raleigh, N.C., to improve its bottom line. Alliance plans to raise the hotel's profile on travel Web sites and bolster its ties to local businesses and citywide events. The goal: raise its occupancy above 50% in the next six months.

The property's central location in the city's so-called New Center area remains a prime draw, says Joseph Smith, president of Alliance. The property also had successes during some citywide events and its rooms are sold out for the NCAA men's basketball championship to be held at Detroit's Ford Field April 4-6, Mr. Smith says.

The court gave the receiver the power to sell the property, though Mr. Strather's group has the first right of refusal on any offer. Mr. Strather said the group is talking to the lender and hoping to work out a way to retain ownership.

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