TESTIMONY ON BILL NO. 32- COMMITTEE OF THE WHOLE 20 JULY, 2018 ST. CROIX, VIRGIN ISLANDS 10:00 A.M. BY: THOMAS MUKAMAL

Transcription

1 TESTIMONY ON BILL NO. 32- COMMITTEE OF THE WHOLE 32ND LEGISLATURE OF THE VIRGIN ISLANDS 20 JULY, 2018 ST. CROIX, VIRGIN ISLANDS 10:00 A.M. BY: THOMAS MUKAMAL CHIEF EXECUTIVE OFFICER, IGY MARINAS

2 Good morning. I am Thomas Mukamal, chief executive officer of IGY Marinas, the owner of the Yacht Haven Grande development on St. Thomas. The Governor asked me to appear today to describe for you the new hotel project we are developing for the Yacht Haven site with the Government s support, authorization for which is part of the legislation before you today. The Yacht Haven Hotel Project in General YHG Hotel, a U.S. Virgin Islands (the USVI or the Territory ) limited liability company (the Developer ) is seeking to construct a branded lifestyle hotel (the Hotel ) inside the mixed use commercial project known as Yacht Haven Grande ( Yacht Haven ). The Developer is a joint venture between Yacht Haven USVI LLC and an affiliate of Polcom Group ( Polcom ). It is contemplated that the Hotel will be six story- 65,000 square feet, 110+ room business/lifestyle branded hotel with a roof deck overlooking Charlotte Amalie Harbor. The Hotel will be the first newly constructed hotel in the USVI in over 30 years. It is anticipated that the Hotel, when constructed will be branded either by Hilton or IHG and will cost approximately $38 million. Post construction, it is estimated that

3 the Hotel will result in the creation of a minimum of 150 direct and indirect employment positions. Yacht Haven Hotel Economic Impact Located in the Charlotte Amalie downtown corridor, the Hotel would reinvigorate the existing site at Yacht Haven as well as the nearby shops at the Havensight Mall and downtown Charlotte Amalie (collectively, with Yacht Haven, the Downtown Corridor ). Rather than creating a new resort product which can often take years to permit and design, cause environmental concerns and strain natural resources, the Hotel will be built downtown on a site with existing permits and infrastructure in place to accommodate new development. With an estimated 28,000 occupied room nights upon stabilization, it is anticipated that these room nights would result in significant additional pedestrian traffic throughout the Downtown Corridor. This traffic would benefit not only local retailers but tour operators, nightlife venues, taxi drivers (i.e. to local beaches) etc. It should also result in longer stays by high value yachts at the marina which result in greater consumption of goods and services throughout the Territory.

4 The Territory would benefit from increased revenues from multiple sources including, new hotel occupancy taxes (estimated at $750,000/year), income taxes paid by employees, increased gross receipts taxes paid by local merchants benefitting from increased sales. Additionally, assuming a conservative $150 in daily spending per guest for each of the 28,000 room nights (2 guests per room) at the Hotel, the annual contribution to the local economy upon stabilization will be approximately $8,400,000. The Hotel emphasizes that the entire Territory is leading the Caribbean recovery and indeed open for business and domestic and overseas private investment in the aftermath of Hurricanes Irma and Maria. It will also cement St. Thomas and Yacht Haven Grande as the market leader in nautical tourism in the Eastern Caribbean for years to come. The Need for the Hotel Aside from the Frenchmen s Reef Marriott and the luxury Ritz Carlton, St. Thomas there are no other internationally branded and recognized hotels on St. Thomas. Furthermore, there is a lack of business class and lifestyle accommodations that are priced, amenitized and outfitted appropriately for governmental, business, mid-

5 market and inter-island travelers. With an estimated average daily rate (ADR) of just over $200, well below that of other branded offerings on St. Thomas, the Hotel will be attractively positioned to bring new travelers to the USVI. With the recent conversion of some local hotel inventory to timeshare or for-sale product, there has become a shortage of appropriate hotel accommodations on St. Thomas, particularly during peak season. As a result, many international visitors seeking a branded hotel experience have been priced out of the local market. New additional supply at an attractive price point will both increase demand visitation from new market participants and will also help to raise the profile of St. Thomas as a destination open for business in particular as the islands recover from Hurricane Irma and Maria. The Hotel s location at Yacht Haven Grande, central to the Downtown Corridor also ensures that guests will not be sequestered at a resort campus and will have access to a varied experience across multiple experiential zones including Yacht Haven Grande, the Havensight Mall, downtown Charlotte Amalie as well as various beaches and waterfront access areas on island. This product outcome squares with the requirements of younger travelers seeking a more varied experience as

6 well as business travelers seeking a branded hotel experience embedded in a safe environment with a broad local offering. Significant Hotel Development Challenges - Development Parties As evidenced by the lack of new hotel development in the USVI over three decades, standalone hotel island projects are expensive to construct and often labor and material constrained. Further, Caribbean hotels are highly seasonal, revenues are limited to short periods and burdened with high operating costs in particular the cost of both energy and property and casualty insurance which are far greater in the USVI (and particularly after the hurricanes of 2017) than in other parts of the continental USA. This recipe makes it difficult, if not impossible to obtain construction debt financing for hotel projects on commercially reasonable terms. Simply put, these projects are more often than not deemed too risky by traditional banks and sophisticated equity investors. In fact, the independent third-party feasibility studies produced for the Hotel were skeptical about its ability to generate financial returns adequate to justify new equity investment. In light of this seemingly insurmountable challenge, over the course of the past three years, Yacht Haven and its parent company IGY sought to find alternative

7 strategies to source both equity and debt financing to construct the Hotel. Over this period and as a result of intense diligence and long negotiations, Yacht Haven has assembled a public private partnership where each party has a strategic concerns to construct the Hotel which outweigh many of the financial risks inherent with this type of project: Party #1 - Yacht Haven: Since 2005, Yacht Haven already invested in excess of $100 million into the Virgin Islands economy. This investment has not been financially successful and the company has lost significant sums due to many factors, including but not limited, to extremely high construction costs, stubbornly high property and casualty insurance premiums, the effects of the financial crisis on its EDC tenant base and retail tenant mix, and a very challenging retail climate in the Downtown Corridor. More recently, in the aftermath of Hurricanes Irma and Maria, many of Yacht Haven Grande s remaining retail and commercial tenants have vacated the USVI all together. A broader offering at Yacht Haven is needed to attract new tenants on island not only to Yacht Haven but also to the adjacent Havensight Mall and downtown. Our recovery remains uncertain. That said, Yacht Haven Grande remains one of the premium developments in the Eastern Caribbean. Yacht

8 Haven is prepared to make a significant equity investment in the Hotel as a potential catalyst to bring new diverse retail and commercial tenants to the USVI, resulting in longer term stability to the challenged complex which has struggled since its delivery. Yacht Haven is accepting a significantly below market return on an $8 million equity investment in exchange for the aforementioned strategic benefit. Party #2 - Polcom Group: Polcom is based in Chojnice, Poland and has pioneered and is a leader in an innovative approach to modular construction in the hospitality industry (discussed in more detail below). Polcom has constructed hotels under various brands including Marriott and Citizen M in both Europe and the United States. Polcom s innovative approach to design and construction would allow the Hotel to be built on an accelerated timetable of approximately months. Further, its product is CAT 5 rated and therefore has broad applicability in the Caribbean market. Polcom in many respects sees the USVI and the Yacht Haven location as an expedient entry point for its modular product into the Caribbean market.

9 Polcom is accepting a significantly below market return on a $20 million equity investment in exchange for the strategic benefits of speed to market at Yacht Haven Grande. Party #3 - Government of the Virgin Islands: Despite obtaining approximately financing close to 75% of the Hotel project with $28 million in private equity investment funds, neither Yacht Haven nor Polcom were able to source a construction lender for the Hotel. It should be noted that usually 50%-60% of a project of this type would be financed with debt and the private parties have agreed to fund in excess of this amount with equity. Yacht Haven held multiple discussions with regional lenders, private lenders and even European lenders and there was little interest in financing new construction in the Caribbean. Any available debt financing would therefore be at rates reflecting the perceived and real risks of investing in the Caribbean and would therefore be on terms that do not render project viable. As sustainable urban development, increased economic activity, private sector investment, new jobs and new tourism, and an overall recovery from the Hurricanes are local strategic priorities, the Government

10 of the Virgin Islands has agreed, subject to legislative approval, to form a public private partnership with a vested party in Yacht Haven, a new investor in Polcom who together will invest $28 million. The Government has agreed to make a $10 million strategic loan (the Loan ) to the Developer to achieve the Territory s strategic goals. It must be stressed that the Loan is secured against and fully repayable by the project. It bears interest and will be secured by a first priority mortgage against the Hotel and the land that the Hotel is constructed upon. In short, the Government s money is adequately collateralized and is senior in priority to $28 million of equity being invested by Yacht Haven and Polcom. In addition, during the term of the Loan, the Government will receive 5% of the net cash flow of the Hotel (as a kicker ) as well as the rights to 7% of the profits upon a sale of the Hotel after (i) the Government s loan is repaid with interest (ii) Yacht Haven and Polcom have been repaid (iii) Yacht Haven and Polcom have achieved an 8% annualized return. If the Hotel is a success the Government will realize real profits. If the Hotel is a failure, the Government will get its money first before Yacht Haven or Polcom.

11 A Model Public Private Partnership In the aftermath of Irma and Maria, the need for public support of real private investment is dire. Even with the Loan from the Government, the project will still require proactive support from multiple stakeholders including the Virgin Islands Economic Development Athority (EDA), the Department of Planning and Natural Resources ( DPNR ), Coastal Zone Management ( CZM ) and the West Indian Company Ltd. ( WICO ) as well as numerous private stakeholders having interest in Yacht Haven and the Downtown Corridor. Yacht Haven has been working hard with these stakeholders for months to pave the way for the Hotel development. However, this support isn t enough. The Loan and the partnership is required to bring this project to life and all parties have worked hard over months to structure a partnership which protects the Government s investment and couples that investment with a vested strategic and financial partner in Yacht Haven and a new strategic investor in Polcom. Novel Construction/ Fast Delivery

12 YHG Hotel is proposing an innovative procurement plan utilizing cutting edge modular construction to help shorten project duration and mitigate construction risks. The project will feature state of the art construction methods and materials and ultra-efficient mechanical systems. Polcom s projects are designed to be constructed using modular techniques, utilizing off-site construction which minimizes time on site; reducing disruption, waste and environmental impact. This innovative off-site construction methodology allows delivery projects in up to half the time of traditional construction. Polcom s approach to modular construction ensures that the room s will be built to brand standards and local building codes (for IHG or Hilton) in its factory in Chojnice, Poland. In fact, the rooms themselves and pedestal upon which the rooms will be erected can be constructed in as little as 30 days. These components will then be shipped to the USVI. The balance of the Hotel approximately 35% of the construction budget will be spent locally on St. Thomas. Because all the site utilities and infrastructure already exist at Yacht Haven Grande, it is possible to have this Hotel constructed in months. Once the foundation is constructed the rooms will be delivered and stacked in 30 days. It will then take several months for the rooms to be properly connected and installed and Polcom will train the local workforce in the proper assembly and

13 maintenance of the completed structure. Tradespersons on the USVI will be the first in the region to learn this technique. Critical Timing We have a very narrow window to bring this project to market. Equity and debt financing has been arranged in principle and is coupled with real strategic considerations for all parties. We cannot stress that this alignment will not last and the window won t stay open for long. Yacht Haven and Polcom have spent over $1 million over the past year in planning and are currently spending hundreds of thousands of dollars readying the site and the design. Polcom is holding a production slot for the hotel rooms in the Fall of Delay or inability to move forward with this partnership at this time will result in loss of the 2018 production slot, a halt of expenditures and an ultimate shift in strategic priorities. A shift in strategic priorities would close the window of opportunity and would render the development financially unviable. We have this narrow window to realize a benefit for stakeholders throughout St. Thomas but in particular those in the Downtown Corridor. The time is now for the

14 Territory to approve this partnership which includes close to $30 million of new investment, including $20 million from an overseas investor. The time is now to approve the Loan which has been structured to safeguard the Government s support. The time is now to bring real tangible benefit to the Territory and demonstrate its leading role in the recovery from Irma and Maria. The time is now to move ahead together with a sense of excitement toward a better future for St. Thomas and the Territory. Mr. Chairman, this concludes my testimony. Thank you.