Oil heiress Caroline Rose Hunt was stunned, the story goes, when she got four offers in April for her 92-room Hotel Bel-Air at more than $1 million a room.
Never before had a hotel in the United States sold at the $1-million-a-room mark, and Hunt thought her 1940s landmark was only worth in the $600,000-a-room range, said Chris Leinberger of Robert Charles Lesser & Co., a Los Angeles-based real estate consulting firm.
A Tokyo company, Sekitei Kaihatsu, closed escrow in late May at a total purchase price of about $110 million, or $1.1 million a room.
"I don't know how they justified paying so much," said an appraiser with a national real estate firm, which estimated the hotel's value a year ago for some potential buyers at $47.5 million.
For the Record
Los Angeles Times Sunday June 18, 1989 Home Edition Real Estate Part 8 Page 3 Column 6 Real Estate Desk 1 inches; 33 words Type of Material: Correction
A chart accompanying Ruth Ryon's June 11 article, " 'Trophy Hotels': Record Sales Break All the Rules," contained an incorrect figure. The price per room at the 800-room Hyatt Regency, Maui, when it was sold in April, 1987, was $391,000.
The sale of the Bel-Air is the latest in a buying frenzy, fueled mainly by foreign investors, of America's blue-chip hotels, or what analysts call "trophy hotels," at prices that don't seem to make economical sense.
Said Maurice Robinson, senior manager of real estate consulting in the Los Angeles office of KPMG Peat Marwick, which handles accounting for Hunt's Rosewood Property Co.:
"For 90% of the hotels, which sell from $100,000 to $200,000 per room, the same rules of buying and selling apply. But for the top 10%, the trophy properties--the four- or five-star hotels--there is no economic justification."
Using the rule of thumb that an investor should get one-tenth of 1% of the purchase price as a daily room rate, the Bel-Air should get $1,100 a night per room. But the average room rate is $375, said Robinson. And daily rates won't change soon, manager Paul Zuest said.
Clearly, Sekitei Kaihatsu bought for other reasons.
"There are four reasons why people buy at these prices, beyond the value of the yen versus the dollar," said Paul DeMyer, national director/hotel consulting at Kenneth Leventhal & Co. in Los Angeles. Other hotel experts among the dozen queried agreed.
The first reason: A trophy hotel is like an art asset. "This has nothing to do with value but with owning something for pleasure or satisfaction," DeMyer said.
"These hotel properties are glamorous and appeal to the egos of people," Robinson said. As examples, he cited the La Costa Resort Hotel & Spa, which he said was sold in September, 1987, to "a golf fanatic," with title taken by Shinko Sports of Japan, and the Beverly Hills Hotel, purchased a month later by the Sultan of Brunei.
Sol Leonard, a national partner in the Los Angeles office of Laventhol & Horwath, a Philadelphia-headquartered international accounting and consulting firm, pointed out that Donald Trump also bought The Plaza in New York last year for personal, not economic reasons.
"This is an extension of the businessman's desire to own a restaurant or a pro baseball team. If you're in the big leagues now, you want to own a luxury hotel."
These buyers are what Bill Bahrenburg, chairman of New York-headquartered Morgan Stanley Realty, which handled the Bel-Air sale, terms "the Forbes 400 ego buyers."
And Leonard singled out the increase in world travel as a related element:
"If you want to be a factor in your own country, you want to be a factor where people from your country stay when not in your country. Hence, American hotel operators are expanding overseas, and foreigners are coming over here."
"There is a need for all major players to have a presence in key markets," said Earl Reiss of Cushman & Wakefield in New York. The Hyatt Regency Maui, which a Japanese company bought in April, 1987, from an American firm, was given as an example of this.
The second reason trophy hotels are purchased at eyebrow-raising prices: Buyers are looking at the trade value.
As DeMyer explained it, purchasers may not make money while they own the hotel, but will make a profit when they build or sell.
"Buyers of trophy properties don't just look at the bottom line," said Dave Daley, a partner with the Arthur Andersen Real Estate Services Group. "They factor in the appreciation in value of the real estate."
What DeMyer termed "ego green-mail" can bring a quicker profit, as when the Sultan of Brunei was outbid on the Beverly Hills Hotel by Marvin Davis, who made a $40-million profit months later, in 1987, when he sold the hotel to the sultan.
A third reason for a trophy sale: It may be a strategic buy.
"Stouffer bought the Stanford Court for a princely sum," DeMyer said, "but the hotel is strategically located in San Francisco, and the Stanford Court is a name that enhances the Stouffer image. This might enable the company to charge higher rates at all its hotels."
Another strategic buy was the Peninsula Group's purchase of Maxim's in New York.
"The Peninsula Group paid an enormous amount, but Maxim's enhances the Hong Kong Group's global market strategy," DeMyer explained. The Peninsula Group also expects to operate the $100-million Belvedere in Beverly Hills, on which work is under way.