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Strategy key when repurposing in the Caribbean
April 30 2012

Taking a hard look at an opportunity is crucial before hoteliers in the Caribbean consider repurposing a troubled asset stalled after the economic crisis.

Highlights
  • The one positive insolvency brings is it gives everyone a chance to re-evaluate the project, said David Holukoff of KPMG Barbados.
  • Repurposing activity in the Caribbean is slower than hoteliers in the region previously anticipated it would be once the economy began to recover.
  • “The longer a project has been closed, what once really looked like a fantastic idea … might not be the project you’d build if you’d started today,” said Rob Webb of Baker Hostetler.
By Stephanie Wharton
HNN contributor
swharton@hotelnewsnow.com

SAN JUAN, Puerto Rico—The economic crisis hit the Caribbean hard—not only drastically hurting hotel performance but also causing a significant number of developments to halt construction and properties to go into distress.

As things start to pick back up and hoteliers consider taking on stalled projects, taking a hard look at all the details is fundamental, according to panelists at the Caribbean Hotel and Tourism Investment Conference.

The legal process
When a property or development goes into distress, the earlier the legal team lays the situation out on the table for the parties involved, the easier it makes the process, said Rob Webb, partner at Baker Hostetler, during a session titled “Strategies & Options to Deal With Troubled Assets.”

“We often have to act as mediators,” Webb said. It is important to let everyone with involvement in the project know cooperation is necessary to avoid letting the asset die. If the government wants to preserve and create jobs and if the owner wants to leave with his or her reputation intact, then everyone needs to cooperate.

When dealing with insolvency, “We work really hard to stay as much out of the court systems as we can,” said David Holukoff, director of KPMG Barbados. Although sometimes it is inevitable, the process is extremely time-consuming, he said.

The one positive insolvency brings is it gives everyone a chance to re-evaluate the project because the whole capital structure needs to be changed, Holukoff said.

Although a particular owner or investor might have paid for 30% or 40% of the project, it could be determined this person no longer has a stake in the asset. “It can actually bring the parties that need to come together … and eliminate those who shouldn’t participate,” Holukoff said.

Moving forward
Repurposing activity in the Caribbean is slower than hoteliers in the region previously anticipated it would be once the economy began to recover, Holukoff said.

Lenders in the region don’t know how to say, “That would be a great workout alternative,” he said.  “We need more nimbleness.”

The most important factor is ensuring a seasoned hospitality professional is on board from an operational standpoint, said Nikolas Eastwick-Field, principal at  EFM Hospitality. In addition to creating a more efficient process, his or her insight will result in savings in the long term, he said.

One of the issues financial institutions are dealing with is the cost of construction has not evolved since the economic crisis but values have. “So when we look at the assets, the value isn’t really there,” Holukoff said.

Another common problem, Holukuff said, is that financial institutions often decide not to contribute additional money toward repurposing.

Ron Sutherland II, president of The Hemisphere Group, said the responsibility of paying for the new development should fall on the institution that owns the property and the developer looking to finish the project.

“The longer a project has been closed, what once really looked like a fantastic idea … might not be the project you’d build if you’d started today,” Webb said.

For hoteliers who decide they do want to undertake the task of redeveloping an asset, the first step is to determine why it became troubled in the first place, Eastwick-Field said.

Whether it was a marketing- or sales-related issue, everything needs to be examined to get a clear understanding of why the project originally failed. Doing this will help hoteliers not repeat the same mistakes twice, Eastwick-Field said.

Working out the costs necessary to finish developing a solid structure is important to do early on, he said. “Partially completed projects deteriorate very quickly in the Caribbean climate. … Don’t just pick up where the last person left off.”

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