Global Winds Brush Bay Area Hospitality Sector

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By Jon Peterson

Offshore investors are driving the San Francisco Bay Area hotel market. Last month a Chinese investment group acquired the 309-room Crowne Plaza San Francisco International Airport Hotel in Burlingame for more than $29 million. Now another offshore buyer from the British Virgin Islands has acquired the 153-room Hotel Frank at 386 Geary St. in San Francisco, paying approximately $32 million, or $209,000 a room. It is the third time the Hotel Frank has sold in six years.

“Many of these investors are high net-worth individuals from China who think that hotels are a safe place to invest their capital. They also like that the property type is a place where they can bring their families and friends to entertain them during certain parts of the year,” said Holden Lim, a managing director for Holliday Fenoglio Fowler in its San Francisco office who focuses on hotel sales.

Hotels are not the only property type that offshore buyers are looking for, said Anton Qiu, a principal with TRI Commercial in its San Francisco office. “There are many offshore buyers looking for all property types,” he said. “A good portion of this capital is coming from Asia where they believe that real estate markets and the political climate in the U.S. is more stable than in their home countries.”

The seller of Hotel Frank was Boston-based pension fund advisor AEW Capital Management, which purchased the property in December 2010 for approximately $20 million from Wells Fargo & Co. The previous owner was the Lembi family of San Francisco, who paid $35 million then invested another $9 million. The company has suffered a massive and highly public meltdown of its property empire since the financial crisis. When it ran out of money, there were 50 rooms in the hotel that still needed to be renovated, multiple inside sources said.

The Hotel Frank has now been sold three times since 2006. The property was sold that year for $20 million to Mill Valley-based House Properties and two San Francisco firms, Skyline Pacific Properties LLC and Joie De Vivre Hospitality, a hotel management company. This group then sold to the Lembis in 2007.

The AEW purchase from the bank involved a three-property sale that included San Francisco’s Hotel Metropolis at 25 Mason St. and Hotel Vertigo at 940 Sutter St. All three of the hotels could be characterized as boutique. AEW only owned the other two hotels for a couple of weeks, selling both to a Chinese investment group.

The Registry learned about the Hotel Frank’s sale through documents presented to the pension fund board of San Francisco City and County. AEW bought the property for its commingled fund, AEW Partners VI, a real estate opportunity fund. The San Francisco pension fund invested $25 million in the AEW fund. AEW did not disclose the sales price to the board, said Lindsey Adams, senior portfolio manager of real estate for the pension fund. The sale yielded a 35 percent internal rate of return and an equity multiple of 1.6 for AEW and its investors, AEW said.

The Frank Hotel is now closed for business. “I went by the property one week ago, and the hotel was not open and the asset is not occupied by anyone,” said Lim.  There have been issues with the hotel workers union and the previous owners. It will be interesting to see how the new owners work this out, he said.

Lim is currently selling the 309-room Ontario Hilton in Southern California and expects that offshore capital will be a factor in that transaction, too. He anticipates a sales price in the neighborhood of $60,000 a key, or about $18.5 million. The Burlingame hotel also sold for less than $100,000 a door. Both values are clearly a good deal lower than the $200,000 a key that assets can go for in San Francisco.

“It think it shows that the offshore capital is a not a player for the luxury hotels but more for the three- to four-star kind of assets,” Lim said.

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