GLOBAL REPORT—Located on 102 acres of the Pacific coast in Southern California, Terranea Resort appears, at first glance, as if it blossomed organically on the Palos Verdes Peninsula. The property’s Mediterranean architecture bleeds seamlessly into its surroundings, conveying a casual elegance that ebbs and flows with the crashing of the blue ocean waters on the rocky shoreline below.
But under that facade is the 13-year odyssey that saw Terranea’s birth from drawing-room dream to brick-and-mortar reality.
As hotel developers eye breathtaking locales and previously untouched landscapes, government and local agencies are cracking down on development to maintain ecological integrity.
“When we started with Terranea, we realized there were some fairly significant regulatory hurdles we needed to overcome,” said Todd Majcher, VP with Lowe Destination Development, the development arm of Destination Hotels & Resorts, which owns and operates the property.
Building along any coast would present challenges, but California’s heightened sensitivity to ecological issues further complicated matters, he said. Lowe Destination Development had to get consensus from the state government, U.S. Army Corps of Engineers, local municipalities, fish and game departments, the local fire department and more.
“There was a litany of regulatory agencies, and in some cases they had competing interests,” Majcher said. “For us to accomplish what we wanted to do, we needed to get consensus amongst those groups.”
Building a narrative
When Laura and Steve Galbreath oversee sustainable development for hotel clients at design firm RTKL Associates, they try to get those groups on the same page as early as possible, meaning they contact the local municipalities, state government officials and federal agencies before the designs have even been finalized.
It also means quite a bit of homework, said Britt Daiss, director of sustainability for Xanterra Parks & Resorts, which specializes in hotel development and operations in U.S. National Parks.
The first hurdle is often convincing owners that sustainable development is worth the investment—if there even is an extra investment, she said.
“When you’re talking to somebody who has no experience, it really is a hand-holding process a lot of the time,” Daiss said. “… It’s hard to make somebody see the end result, to see that it really doesn’t cost much without actually being involved in a project or sitting down and going through numbers with them.”
After experiencing enormous momentum during 2006, 2007 and early 2008, sustainable development took a hit during the downturn as development died down and owners looked to cut costs, said Laura and Steve Galbreath.
But the stigma surrounding sustainability and cost is unwarranted, said Steve Galbreath, VP of RTKL. Obtaining basic certification with the Leadership in Environmental Efficiency and Design, a third-party certification service that has gained international recognition, typically requires no extra cost, he said. Higher levels of certification, such as Gold or Platinum, typically recoup the initial investment after a period of five to eight years.
“You can easily do certified or maybe even Silver without any up-charge just by following industry best practices,” Laura Galbreath, a principal at RTKL, said.
Once the owner is onboard, the next step is getting buy-in from various agencies and government officials.
“Know your audience,” Majcher said. “… The regulatory environment is difficult. A lot of developers get very frustrated, they get very heavy-handed, and I think they often come across as not wanting to cooperate. We came up with the narrative (to describe our motivation behind Terranea) … almost like a mission statement.”
The narrative was simple: Lowe Destination Development wanted to build a beautiful resort to fit California’s historic lineage of iconic coastal hotels. The resort would have a sense of place; it would be designed to reflect its surroundings. It would be built with the surrounding landscape in mind; the company would reuse 45 mature trees on the 102-acre plot, 100,000 tons of excavated rock and 500,000 yards of dirt.
“The intangibles that create the narrative of this place are very hard to quantify, but it’s why Terranea is successful,” Majcher said.
But even the best-laid narrative does not guarantee success, said Bob Merrigan, VP of property services, Asia/Pacific region, for Outrigger Hotels & Resorts.
When helping an owner develop a property in Thailand, for example, the company was in the process of getting an environmental impact assessment when new legislation with stricter environmental standards meant a 40% reduction of rooms in the original design.
“We found a solution to it, got all the approvals, but by the time it had taken to do it and the cost of time and effort of redoing things and submitting, ultimately once all the approvals came through, the owner of the property decided, ‘I might as well sell this (land).’ And he did,” Merrigan said.
The challenge with environmental regulations is they are always changing, he said. And often a change at the local level will contradict a regulation at the national level.
“You seldom get things through the first time,” Merrigan said, adding hotel projects built in environmentally sensitive or fragile areas typically take 50% longer to approve. “You can get caught in a bit of a minefield. You have to be lucky, frankly.”
Developers can hedge their bets by bringing in experienced counsel right from the start.
Bring on the right team that knows what you don’t know, Steve Galbreath said, adding hire the right consultants to take care of it, and do it early.
Jared Eigerman specializes in bringing the right team together as a partner with law firm Dalton & Finegold, LLP.
“The first thing I do is bring in local counsel who already know how to do permitting,” he said. “They’ll know not only what the planning codes require … they’re going to know whether there is any departure from state building coding, whether there’s some local flavor.
“The next thing to do is find out about incentives.” Eigerman said. “It’s not all sticks; there are carrots, too. There are ways you can offset the costs of designing your hotel to be more sustainable.”
But finding those incentives is not always easy. While comprehensive databases such as www.dsireusa.org exist, understanding the nuances and how they apply to a unique hotel project can be challenging.
“It’s difficult. It’s daunting. It’s a maze,” said Ann Kayman, CEO and owner of New York Grant Company, which helps guide developers through the bureaucracy.
For those patient enough to endure some headaches, the cost savings can be substantial—up to $2 million in New York, where Kayman conducts most of her business. And developers can start unlocking those incentives simply by following industry best practices.
Furnace Creek Resort
Installing high-efficiency HVAC units, for example, might unlock some tax credits. The same goes for redeveloping existing buildings in certain zones or building a property close to public transit.
Costs and benefits
Incentives and tax credits notwithstanding, is developing a property in an environmentally sensitive area worth the hassle? Was the Terranea, for example, worth 13 years of pain?
It depends on who you ask.
“Absolutely,” said Lowe Destination Development’s Majcher.
“We struggled to get here, but the fact is that we got here and in fact the journey ultimately resulted in a better project,” he said. “The input that we got from the community, the input that we got from the regulators—that collaborative-consensus building style that we had may have added a couple years to the project, but it ultimately benefited the project.”
Terranea, which opened in late 2009, has performed incredibly well in the past few years and consistently outperforms its competitive set, Majcher said.
At Xanterra, Daiss said each sustainably developed project is a point of pride that’s deeply engrained in the company culture.
“We have the privilege to work in some of the most beautiful places on earth, and we feel as though it’s our responsibility to keep them that way,” she said.
It doesn’t hurt that some of those eco-minded decisions represent good business practices.
“A lot of them are just smart business decisions. We work in very remote places. Electricity is hard to get. Water is hard to get sometimes. Being conscious in how we’re using it is just smart business,” she said. “And park guests are asking for it.”
But Outrigger’s Merrigan cautioned that every eco-conscious decision should be backed by solid numbers.
“What we also find is specifically in risky or fragile locations, the right solution for the environment quite often will reduce the (number of rooms at the hotel). That’s the right thing for the environment, but it doesn’t give you the right business answer from an owners’ growth or (earnings before interest, taxes, depreciation and amortization) perspective, because you end up with not enough critical mass to make the hotel property successful.”
In the end, both interests have to align, the sources interviewed for this report agreed, as in the case when Xanterra works in partnership with the U.S. National Park Service.
“They’re looking for the best situation for the park, and they trust us that we’re going to do the same,” Daiss said. “We’ve really cultivated that relationship as best we can.”