DRAKE HOTEL OWNER PUTS HISTORIC FACILITY ON MARKET
By: Thomas A. Corfman March 09, 2003
(Chicago Tribune) - The Drake, a Magnificent Mile landmark and one of Chicago’s most prominent hotels, is for sale.
The hotel houses some of the city’s most famous restaurants, such as the Cape Cod Room, the Coq d’Or and the Palm Court, a popular afternoon tea spot.
There is no set asking price. A unit of the English Hilton Hotels Group PLC hired real estate investment bank Eastdil Realty Co. LLC to market the historic Gold Coast property, which is completing a $40 million renovation.
The decision to sell the 537-room property comes on the verge of a threatened war against Iraq, which could inflict more pain on a lodging industry still smarting from the Sept. 11 terrorist attacks and the economic recession.
“If now is the bottom, now is going to be a good time to buy,” said Arthur Buser, managing director of Jones Lang LaSalle Hotels, a unit of the Chicago-based real estate firm with the same name.
“There is an overabundance of money looking for quality hotel deals right now,” Buser said.
Low interest rates are helping buyers make deals, and so is investor disappointment with the stock market, hotel investment specialists say. Four months ago, another premiere hotel, the Marriott on North Michigan Avenue, also went up for sale.
The Drake, built in 1920, has in recent years regained its position as a strong financial performer.
Last year the hotel had an average daily room charge of $186 and a 70 percent occupancy rate, well above the market averages, according to sources familiar with its finances. This year its management is ambitiously projecting an average room rate of nearly $200 a night, and a slight increase in occupancy.
Revenue per available room, a key measure of hotel profitability, is predicted to top $140 a night, sources said.
No asking price has been set for the 14-story structure, said Howard Friedman, president of the Americas for Coral Gables, Fla.-based Hilton International, a unit of Hilton Group, based in a North London suburb.
A key factor in the value: whether a buyer will be allowed to make the Drake part of another hotel chain, which would raise the price, or whether Hilton International will insist that the property remain one of its hotels under a long-term management agreement.
Selling to a competitor is a possibility, Friedman said. “Any transaction depends on the price offered.”
The parent company said last month that its 2002 profit before taxes slipped 3.1 percent, to $430 million, citing a drop in travel due to concerns about a war with Iraq.
Hilton Group’s Ladbroke division operates more than 2,500 betting shops in the United Kingdom, Ireland and Belgium.
The Drake, at 140 E. Walton St., is the only hotel owned in the U.S. by the company, which owns the Hilton brand name outside of the country.
Hilton Group is separate from Beverly Hills, Calif.-based Hilton Hotels Corp., which has the domestic rights to the famous hotel name.
Real estate experts say estimating a value is also difficult because of the hotel’s complicated ownership structure.
Hilton International has a ground lease on the hotel, while the land is owned by a partnership controlled by the Brashears family, longtime real estate investors and owners of Oak Brook-based National Realty & Investment Co.
Under a ground lease, the landlord, in this case the partnership, retains ownership of the land but rents to a tenant who owns the building that sits on the land.
Hilton International acquired the Lease interest in 1996 from a venture controlled by Edward Ross, vice chairman of Chicago-based Jupiter Realty Corp., paying just under $40 million.
The hotel currently pays annual fixed rent of $5 million plus 1 percent of the revenue over $18 million, sources said.
The fixed rent is based on the market value of the land, which in 1999 was pegged at $50 million. The rent is recalculated every five years.
The Brashears partnership acquired the hotel in 1930 from its original developers, John and Tracy Drake. In 1979 the partnership made the lease deal with Ross and financier Jerrold Wexler, who died in 1992.
The Brashears partnership unsuccessfully sued the Ross venture in 1996, claiming that the hotel was no longer being run as a premiere property, in violation of the ground lease.
The lease expires in 2039, but under certain circumstances could be extended 20 years. At the end of the lease, ownership of the 680,000 square-foot building reverts to the landowner.
In 1980, the Italian Renaissance-style hotel was placed on the National Register of Historic Places. Five years later, the City Council created the landmark East Lake Shore Drive District, which includes the Drake.
Boosting the value of the hotel is 17,000 square feet of retail space, with prime Michigan Avenue storefronts leased to luxury boutique Chanel and Danish jeweler and porcelain-make Georg Jensen.
The retail tenants are scheduled to pay a total base rent this year of $1 million, and average of about $70 a square foot, sources said.
As a result of the Drake’s strong lineup of restaurants, food and beverage revenue last year topped $150 a room, a very high number but lower than in 2000, when increased travel pushed those sales up to about $160 a room.
Despite the recent, costly renovation, some potential buyers may be concerned about high maintenance and operating costs, which are typical of older buildings. And some experts warn against aggressive predictions about a hotel market turnaround.
“Everybody’s going to anticipate room rate growth at some point in time, just nobody knows when it’s going to be,” said hotel consultant Brian Flanagan, president of Chicago-based Property Valuation Advisors Inc. “It could be awhile.”
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