Updated 1:15 p.m. Eastern Standard Time, 17 December 2013 with deal confirmation and comments from Sean Hennessey of Lodging Advisors.
NEW YORK—After leasing the hotel since it was constructed in 1982, Host Hotels & Resorts has purchased the New York Marriott Marquis Hotel in Times Square for $19.9 million.
Host had been leasing the property from Empire State Development until 10 December, when it exercised its option to buy, according to a spokesperson for Empire State Development who confirmed the sale but declined additional comment.
“I think it’s a great deal for everyone,” said Michael H. Sonnabend, managing member of the Hotel Finance Group at PMZ Realty Capital, a New York-based real estate investment firm which was not part of the deal. “The seller got a great price for their asset and the buyer got one of the most visible and consistent assets in NYC.”
Sonnabend noted that Empire State Development sold the retail portion of the property earlier this year.
At the time of the building’s construction, New York was attempting to redevelop Times Square, considered a risky location to travel and invest. Therefore, the government provided several tax breaks and other incentives to encourage development.
Empire State Development signed a 75-year lease with Marriott Corporation in 1982 that provided many of those incentives, reports show, one of which was the option to buy the land for “fair market value,” after paying all deferred rent and repaying a low-interest federal loan.
Marriott later split its operations into two separate companies, forming Host Marriott Corporation in 1993. This ownership arm later became Host Hotels & Resorts as it began diversifying its assets.
A Host spokesperson declined to comment on the Marriott Marquis transaction.
In 1998, Marriott and the city revised the terms of its lease so it could comply with requirements for forming a real estate investment trust, which became Host Hotels & Resorts.
In February, New York comptroller John C. Liu conducted an audit on the Marquis, valuing it at $193 million. At the time, he told The New York Daily News that the contract amendment, including an option for Host to purchase the property for a fixed $19.9 million, was “one of the worst deals since Manhattan was sold for $24.”
“From what I have been able to glean it appears the property was having difficulties at some point back then (in 1998),” said Sean Hennessey, founder and CEO of Lodging Advisors, a New York-based consulting firm. “There’s no reason to believe or indicate that it was anything other than an arm’s length deal at the time.”
John A. Fox, senior VP at PKF Consulting USA, said Host should be able to reap the benefits of what at the time was considered a highly risky investment.
“It’s great to sit here in hindsight and say, ‘That was such a bargain deal that shouldn’t have been made,’” Fox said. “But if you look back to where things were when that hotel was conceived, a lot of people were questioning whether it should’ve been done. Let’s not forget (Marriott) put in the money to build the building.
“Even well after the hotel opened the area was still pretty seedy,” Fox continued. “But (the Marquis) was the lynchpin to revitalization.”
Hennessey said the growth of New York’s east side can be attributed to the redevelopment of Times Square. Today, the city government is mulling development incentives to build up certain parts of the east side.
“Not only were they (Marriott) taking a chance building a 1,900-room hotel, but they were building a property with a huge amount of meeting space,” Hennessey said. “It was a major, major commitment to the area. A 400-room Hilton or Hyatt wouldn’t have had the same impact.”
Fox acknowledged that a deal between the city and Host “could have been structured differently” to include a buyout option that centered more on fair market value, but to cast judgment on that “is total hindsight.”
The Marquis has more than 1,900 rooms, a ballroom, exhibition and meeting space, shops and a theater.
“It’s an iconic hotel that should do well no matter the market conditions,” Sonnabend said.