McSam Hotel Group, the prolific hotel development company led by Sam Chang, is getting more involved in the operations and management side of the hotel business.
The company said it plans to operate about half of its new hotel projects going forward — a jump upward from the 30 percent that it currently operates.
“Third-party management is not our focus; however, we bought into an existing management company that already has a full infrastructure,” said Gary Wisinski, chief operating officer at McSam Hotels. “We’re only doing it because we want to have our people involved in our properties if we want to be the long-term owner.”
The move represents a shift for McSam, which has, in the past, developed hotels and then quickly sold them. (Chang, who has built his reputation as the most prolific developer of limited-service hotels in the city and is the subject of this month’s “Closing” interview, has more than 5,500 hotel rooms in the development pipeline in New York.)
However, with a development market that is slowing due to the commercial credit crunch, getting a stronger toehold in operations could be another revenue stream for the company. Indeed, Chang entered into a partnership in 2007 with the hotel management company Packard Hospitality Group. Packard, which is based in San Diego, has worked with McSam on more than a dozen hotel projects around the country, including the Holiday Inn Fresno Downtown, which opened in Fresno, Calif., in May, and the Hilton Tulsa Southern Hills, which opened in Tulsa, Okla., in January.
“Mr. Chang has the ability to assess, analyze and evaluate a property, not only from a real estate standpoint, but an operating standpoint,” said Michael Goldstein, president and chief executive of Packard, and Chang’s partner in the business.
In the New York area, Packard operates the Holiday Inn JFK Hotel under its partnership with McSam, and will open the Hilton Garden Inn Tribeca.
Packard is slated to operate at least three additional New York hotels for McSam over the next 18 months; however, the details have not been finalized, Goldstein said.
John Fox, senior vice president of PKF Consulting, said hotel developers may benefit from having a management arm, because flipping properties quickly has become very difficult amid the current credit crunch.
“For those folks that are well into deals, this provides another avenue for them to maintain their position until the markets recover,” said Fox.
He noted that hotel development and management are very different businesses, and said the economic slowdown is forcing hotel operators to keep costs low and keep hotels occupied without slashing room rates. He said Packard is an established hotel operator and said McSam has a solid staff at its company already.
Chang is adamant about the fact that his company is in solid financial shape, noting that it purchased $180 million of real estate in the city in the first three months of 2008 and that it is still in buying mode.
“Very few hotel developers are buying right now, and McSam Hotels is one [of them],” Chang said, during a recent meeting at The Real Deal’s office.
Wisinski said the company has concurrent strategies of “selling-selling,” and “holding-selling,” and that operations is one more profit source.
Still, the change comes amid a challenging environment for hotel development, which hotel and real estate experts said is due to increasing caution about funding hotel projects by major lending institutions.
One industry executive, who asked not to be identified, said the weak financing environment stems in part from a decision made by Lehman Brothers in early 2007 to pull out of debt and equity financing for new hotel projects.
Lehman Brothers had been an active player in the hotel business, both lending billions of dollars to fund new deals and forming joint ventures with various hotel chains to expand their brands.
However, Lehman began to pull back on hotel investment by early 2007 and by the fall, rival investment banks like Goldman Sachs were warning investors to shy away from hotel deals, amid concerns that companies would be slashing travel spending.
Bjorn Hanson, who retired last month as head of the hospitality practice at PricewaterhouseCoopers, said without Wall Street investment banks to finance deals, hotel developers must rely on relationship banking with smaller community and regional lenders, who will demand more formal lending agreements, smaller loan-to-value ratios, and in some cases, require recourse, which means personal or business assets are on the line if a loan defaults.
Hanson said that an experienced developer like Chang, who has a proven record of return on his investments, will have a much easier time obtaining financing than others; however, with fewer lenders available, the environment is tough on all developers.
“The investment climate in general is often overstated as being overly negative,” said Hanson, but he added: “I don’t want to make it seem like it is easy to finance a hotel. Hotels are specialized real estate. The market is tougher than it was two years ago.”
Goldstein of Packard said the companies will continue to look for new opportunities, but the market is making everyone be more selective.
“There’s never a buy for the sake of buying,” he said. “I understand the market is soft right now. If the opportunity is there, there will be expansion. If the opportunity doesn’t make sense, there won’t be.”