Hoteliers outline pros and cons of mixed use

There are challenges and opportunities when it comes to mixed-use developments in South America, panelists during SAHIC said.

HotelNewsNow – 27/09/2013 – By Jason Q. Freed, News Editor

Ernesto Estefan of Grupo Contempo (left) and Francisco Rencoret of Territoria discuss the opportunities and challenges of developing mixed-use projects in South America during SAHIC 2013
Ernesto Estefan of Grupo Contempo (left) and Francisco Rencoret of Territoria discuss the opportunities and challenges of developing mixed-use projects in South America during SAHIC 2013

BOGOTA, Colombia—Mixed-use developments in South America are often considered a lucrative way to finance projects, particularly when a residential component is involved. But panelists during the South American Hotel & Tourism Investment Conference cautioned mixed-use developers to be careful and flexible as all projects are different and come with different challenges.

“It’s important to understand the challenges of mixed use,” said Clay Dickinson, executive VP of advisory and asset management services for the Americas Region of Jones Lang LaSalle’s Hotels & Hospitality division.

The challenges …

Panelists stressed they like the prospects of mixed use, but only if done correctly.

“There are operational conflicts between the hotel and residential, office and retail components. That has to be planned for,” said Francisco Rencoret, CEO of Territoria, a development company based in Costa Rica. “There are some efficiencies to doing mixed use, but it might entail high costs. The structure of the project might also be quite complicated and sometimes the regulatory agencies might be old fashioned when it comes to adjusting to those mixed-use projects.”

Rencoret listed several challenges:

  • There often are difficulties and confusion when it comes to funding;
  • “cross contamination” can complicate projects—experienced developers understand the next to keep different components of a project separate;
  • and safety is a challenge, as well as the legalities in the case of an accident.
  • “Maybe people don’t think about these challenges until it’s very late,” Rencoret said.

Maurice Chartier, ‎senior VP at Sinergo Development Group, said having a hotel component to a mixed-use property is only logical if the overall project is more than 50,000 square meters. “Less than that it doesn’t make sense,” he said.

“The problem is that when these assets mature they mature differently than a different project,” Chartier said. “They mature like the hotel model, not the residential model.”

Therefore, mixed-use developments need special attention.

“It’s important to work with world-class partners for design. It’s essential to use international expertise because developers in South America don’t have this expertise,” Chartier said.

Balancing management of the separate components of a mixed-use project—ensuring synergies exist but maintaining independent financial records—can prove difficult.

“You need to be flexible enough to manage the asset because you cannot disconnect the hotel from the rest of the project because you’re only losing synergies,” Chartier said.

… and the opportunities

Denis Ebrill, executive VP at Club Melia by Melia Hotels International, said Melia often participates in projects where the hotel component and residential component, such as a vacation club, share the same space.

“The challenge there is evening out the cash flow,” he said. “It is very important to minimize the use of capital by having enough interested buyers in the residential component.”

Ebrill suggested selling residential units before beginning construction of the hotel. “We normally estimate the buyer is willing to wait between 18 and 24 months to enjoy what he has purchased and that allows us to develop the project,” he said.

Rencoret also outlined a handful of success factors when dealing with mixed use:

  • Have a local investment partner who is committed for the long run and has a clear vision of what he or she wants;
  • the destination has to be unique—developers must create an experience that cannot be replicated;
  • access to the property needs to be relatively easy—mainly from the United States—because shorter flight times are critically important;
  • and the ability to partner with a brand. Brands are “strategic allies” in any type of project, he said.

Savvy developers can construct a property and begin selling the rooms as a hotel but then start converting some of the keys into vocational ownership, Ebrill said. But he cautioned that you lose much of the sales potential “so you have to think about all this in terms of timing.”

Rencoret said multiple towers are easier to operate over a single-tower design, which he called “difficult.”

“In a single tower, it requires generosity on the part of operators because there are conflicts of interest between standards and costs,” he said.

For example, a convention hotel mixed with office space could prove challenging when the bank executive is entering the same building for work as 1,000 convention attendees.

“Separate towers mean less of a clash because problems come up in interaction,” Rencoret said. “In most projects, guests go directly to the elevator and then J.P. Morgan goes up and sees a girl in a bathing suit or someone in a robe. It’s much more difficult to handle.”

“It really requires strict administration and that’s difficult in South America because asset management is just starting to take over,” he said. Infrastructure also can provide some opportunities. Ernesto Estefan, GM of Grupo Contempo, said sharing parking spaces can be a source of revenue and can attract demand.

“We have learned many lessons,” Chartier said. “Have flexible planning because projects are going to be developed in a long time over a large space. There might be times when you feel the project is lacking something and that’s because some of the amenities aren’t going in until future phases. So make sure the minimum amenities are available right off the bat.”

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