Over the past six months, McSam Hotel Group has unloaded a half dozen of its New York development sites to the Magna Hospitality Group, a small hotel investment and management firm that is not that well known to many in the local real estate community.
Indeed, the firm — which is based in East Greenwich, R.I. — has emerged as a key business partner to Sam Chang’s budget hotel empire since entering the fray here in 2005. Its role is not just as a willing investor that can pony up money to buy up development sites; it has also carved out a niche as a reliable manager of many of McSam’s new hotels.
And while many of the McSam-Magna joint deals have been documented in The Real Deal and in other publications, they have been chronicled in a piecemeal fashion — and little has been publicized about Magna.
“We are partners with them,” said Gary Wisinski, chief operating officer at McSam. “We still have an appetite to do deals with them. It’s all based on the depth of their interest.”
Wisinski said that Magna was one of McSam’s “many partners” and did not elaborate.
But Alan Miller, senior director at Eastern Consolidated and a top commercial broker working on behalf of McSam, recalls Magna’s first major New York City deal, when the company bought 13-15 West 45th Street from Chang for $36.5 million in 2005.
The site was the city’s first Holiday Inn Express, a 22-story limited service hotel that Magna Hospitality was selected to manage under a licensing agreement with InterContinental Hotels Group, the Atlanta-based parent of Holiday Inn.
“They have some sort of good relationship there,” Miller said, referring to Magna and McSam.
Indeed, that first deal has been followed by a slew of additional deals that have established a pattern between the two hotel firms.That’s not to say that McSam hasn’t worked with a number of other real estate companies in recent years. It has sold several properties to New York-based Gemini Real Estate Advisors and worked closely with San Diego-based Packard Hospitality Group, which manages several hotels developed by McSam in New York, California and other states. But Magna seems to be becoming an ever more important partner.
For example, McSam sold a vacant 6,800-square-foot site at 8 Stone Street in the Financial District to Magna for $60 million. McSam bought the site for around $17 million in January 2007 and filed plans to develop a 192-unit Doubletree Hotel before flipping it to Magna.
This past March, about 14 months later, McSam sold hotel sites at 60 West 36th Street and 231 East 43rd Street to subsidiaries of Magna for $16.2 million and $24 million, respectively.
The deals came one month after McSam sold two unfinished hotels to Magna. They were 505-513 West 43rd Street, a 192-room budget hotel, for $42 million, and a Sheraton Hotel at 370 Canal Street for $83.5 million.
More recently, in July, McSam sold a 74,000-square-foot site to Magna for $59 million, according to city records. McSam bought that site at 309 West 39th Street in 2006 for $13.48 million, while later acquiring additional development rights, a zoning lot merger and the right to develop a 39-story hotel.
In addition, last month, the New York Observer reported that Sheesan Hotel, a McSam-affiliated company, sold the new Holiday Inn Manhattan Hotel in Chelsea at 121 West 26th Street to Magna for $66 million. Sheesan originally bought the site in 2005 for $9.1 million. While not on the same scale as McSam, Magna has enjoyed a sizable amount of growth in its relatively short history.
The company was started in 1998 by William Burruss, the co-founder and president of Grand Heritage Hotels, a company that owned and/or managed 25 historic hotels nationwide before it was sold.
Robert Indeglia, the co-founder, president and chief executive of Magna, characterized the McSam and Magna partnership as “simply a buyer-seller relationship.”
He also noted that the company is not working exclusively with McSam and is also buying sites from other hotel companies both inside and outside of New York City.
“We take an opportunistic approach, looking at each investment individually, and these properties are an example of this,” Indeglia said, referring to the projects Magna has worked on with McSam.
While McSam paved the way for Magna to enter the New York market as a hotel operator, McSam appears to be relying on Magna more than ever now that the credit markets have dried up. Their most recent joint deals have come amid one of the weakest markets for hotel development in the last few years.
“[Chang’s] got all these projects under development that were conceived at a time when he thought he could flip them pretty quickly,” said John Fox, senior vice president at PKF Consulting, a leading hotel industry advisory firm. “While he sees a lot of the projects as being good projects, it could be a buy-and-hold strategy. Sometimes he’s holding them and Magna is running them, and in other cases, he’s out-and-out sold them.”
Investing in the industry
Based in Annapolis, Md., before it moved to Rhode Island, Magna operates 17 hotels around the country with a total of 2,600 rooms, and has another eight hotels under development with about 2,000 rooms.
It also has launched three small hotel investment funds, including the $8.65 million Magna Hotel Fund I, the $9.1 million Magna Hotel II and the $75 million Magna Hotel Fund.
In addition to its work with McSam, Magna has also started stepping up its own projects in New York, buying the former Pepper & Potter car dealership site in Downtown Brooklyn for $10.8 million. The company is planning a limited service hotel on the site.
The partnership with McSam also includes several additional hotels, including the Holiday Inn Express on Union Street in Brooklyn, a Comfort Inn on Butler Street in Brooklyn, and another hotel at 232 West 29th Street in Chelsea.
The relationship has in many respects allowed McSam to continue its penchant for buying empty lots and obscure development sites and flipping them into profitable hotels. Whether Magna will eventually open up the hotels under another brand identity or sell the hotels to another investment firm is not clear.
Indeglia said that from the outset, the company’s mission has been “finding, acquiring, developing … and ultimately selling hotel real estate.” However, he acknowledged that acquisition and construction opportunities are “limited” and said that the climate “will impact the amount and pace of new hotels being built in New York City.”
Miller said in the current climate, half of all hotel projects in New York are on hold due to the inability to get financing under favorable terms.
“Even McSam at this point needs to buy land at a discount,” said Miller. “To open a hotel in this market is pretty ambitious.”