Call it a bailout, Caribbean style.
Barbados, a popular vacation spot for the affluent, is bailing out
the troubled Four Seasons luxury-resort development on the tiny island.
Construction of the project stalled a year ago as financing dried up and
sales of its private villas slowed, after initially attracting a cast
of celebrity buyers.
In a bid to salvage jobs, the government of Barbados agreed last
month to guarantee a $60 million loan from a Caribbean bank to help
restart construction. In return for the guarantee, the government
ultimately will end up with a 20% equity stake in the project.
The down side: if the developer defaults, Barbadian taxpayers will
get stuck with the loan.
While $60 million is small in comparison with the hundreds of
billions of dollars spent on bailouts in the U.S., it is a big
commitment for a nation whose government revenue totaled just $549
million last year. Like other Caribbean islands, Barbados, with a
population of roughly 270,000, depends on tourism, which accounted for
15% of its gross domestic product last year and 64% of its total
earnings.
Government loan guarantees for hotels are rare. But they might become
more common in the Caribbean, given the recession's toll on the
industry, which has hit hardest at the market's luxury end. In the first
three quarters of 2009, developers canceled construction of 20 luxury
hotels in the Caribbean, which would have added 4,000 rooms in the
region, according to hospitality-research company Lodging Econometrics.
By comparison, 23 luxury hotels with a total of 5,300 rooms were
canceled in the U.S. over the same period.
In such a tough environment, hotel-industry analysts say, some
tourism-dependent islands could choose to get more involved in various
projects to help ensure their flow of well-heeled visitors in coming
years. "It's going to take government subsidy and government
intervention to jump-start many of these deals" in the Caribbean, says
Scott Berman, a hospitality-industry consultant at
PricewaterhouseCoopers LLP.
The Barbadian project is one of several hotels in the Four Seasons
Hotels & Resorts chain that have run into trouble amid the current
slump. The chain runs 83 hotels that carry its brand, but doesn't own
any of them. It makes money by charging their owners management and
branding fees.
In Dallas and San Francisco, Four Seasons hotels have gone delinquent
on their mortgages, their owners have confirmed. Beanie Baby tycoon Ty
Warner is negotiating with lenders to extend a mortgage on his New York
Four Seasons and three other resorts because they weren't generating
enough cash flow to automatically qualify for an extension, says a
person familiar with the matter.
The Four Seasons chain, which the investment arm of Microsoft
co-founder Bill Gates bought for $3.4 billion in 2007 in partnership
with Saudi Prince Alwaleed bin Talal, is squabbling with some of its
hotel owners over cost cutting, which it fears could cheapen its luxury
image.
A particularly nasty dispute with the owners of the Four Seasons
Resort Aviara in Carlsbad, Calif., is in arbitration, both sides have
said.
A Four Seasons spokeswoman declined to comment on issues involving
the owners of the chain's hotels, but added that the properties'
operations continue as normal.
For Barbados, stepping in to backstop the Four Seasons loan was a
final, dramatic solution. Two previous efforts by the resort's
developers to land new financing, most recently from Maybach Group of
Canada, had failed.
The new loan from Caribbean bank Ansa McAL Merchant Bank will go
mostly toward paying off a previous $31.5 million loan from Bank of
Scotland used to buy the resort's 32-acre site.
In a statement outlining the deal, Barbadian Prime Minister David
Thompson said, "I am pleased to support an initiative where Barbadians
pull together to put an iconic project back on track–one that will help
shape the future of tourism in Barbados."
The Four Seasons Barbados is the brainchild of Mike Pemberton, a
68-year-old, U.K.-born developer who has lived in Barbados for three
decades. Among the Caribbean properties he helped develop are Barbados's
Glitter Bay Hotel and the Fairmont Royal Pavilion hotel, as well as a
Ritz-Carlton in St. Thomas.
Mr. Pemberton began planning for the Four Seasons when Sandals
Resorts International put Barbados's former Paradise Beach Hotel on the
market in 2004. He assembled a group of European investors, arranged for
the Bank of Scotland loan and bought the hotel and its surrounding
land.
Mr. Pemberton's group then razed the hotel to make way for a 110-room
Four Seasons and 35 private villas priced at $11 million to $18 million
apiece.
Early on, the villas attracted big-name buyers, including "American
Idol" judge Simon Cowell, composer Andrew Lloyd Webber and Formula One
team owner Eddie Jordan. Inspired by Mr. Pemberton's home on the island,
the models ranged from 10,000 to 20,000 square feet, and included
private pools, indoor ponds stocked with koi or small sharks,
floor-to-ceiling windows and hardwood floors.
Mr. Cowell's villa spans two plots and cost $32 million. His
representatives didn't return calls seeking comment.
Mr. Pemberton, who initially planned to handle only sales and
marketing for the project, had to step in as general contractor when no
suitable contractor could be found on Barbados, he and others say.
By late 2008, his project was running into difficulties. Only 16 of
the 35 villas had been sold. Buyers who had made deposits of 10% to 40%
were slow to make additional payments. In January 2009, Mr. Pemberton's
group stopped construction with the villas only partially completed and
little more than groundwork done on the hotel.
Now that Barbados has stepped in with a loan guarantee, Mr. Pemberton
and his investors expect construction of the development to resume this
quarter. Once they find a new contractor, Mr. Pemberton's company,
Cinnamon 88, will go back to handling the project's sales and marketing.
Mr. Pemberton's investors, led by British real-estate investor Robin
Paterson, reckon they will need another $250 million in villa sales to
finance the completion of the resort.
To do so, they must find another 19 buyers willing to pay
eight-figure prices. "The government and we are confident about the
continuation of villa sales," Mr. Paterson said.
That won't be easy in the current economy. Scott Smith, an analyst
with hospitality-research company PKF Consulting Inc., predicts
Caribbean villa sales will remain in a lull for several years until
travelers rebuild enough wealth for such discretionary purchases.
"It's going to come back, but probably not until 2012 or 2013," he
said.
By: Kris Hudson