Richard Millard, who’d probably look like he was having fun at a funeral, wants you. The quirky and always engaging CEO and chairman of Trust Hospitality—Tecton and Desires until recently—ended the opening general session at last month’s Lifestyle/Boutique Hotel Development Conference with an impassioned plea about the allure of the lifestyle and boutique segments of the hotel industry:

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“This is a fun thing to do. This is the place to be—the most fun. This is where the industry is going, it’s what the customer wants. There’s so much room for more.”

Judging by the atmosphere—the optimistic, outgoing and enthusiastic speakers and attendees, not to mention the Bloody Mary and Mimosa cocktail bars with breakfast and the cigar rollers at the evening receptions—Millard was absolutely right. The leaders and key players in the lifestyle and boutique segments—more than 250 attendees—converged on the Fontainebleau in Miami Beach for LBHDC, and despite what some termed “choppy” economic times, the outlook for these segments was far from bleak.

Lodging Hospitality and HVS Hotel Management are founders and producers of the Lifestyle/Boutique Hotel Development Conference. The School of Hospitality Business at Michigan State University is the conference academic partner.

Tim Miller, the leader of Marriott’s new Edition brand, was forthright and honest about the recent fiasco in Honolulu. But despite the early challenges to the brand, he was confident and so was his employer, Marriott, who he said was in the process of putting millions, hundreds of millions of dollars even, of its own money into developing Editions in gateway cities around the world.

Other brand companies were in attendance and talking about their own forays into this space, from Wyndham and Hampshire Hotels and their new Dream offering, to Choice Hotels and its Ascend Collection, and Marriott with its Autograph Collection, and even Best Western, with its long history of allowing independent-thinking owners the freedom to succeed in this arena.
There were owners, like Tim Dixon of the Iron Horse in Milwaukee, and Richard Kessler of the Kessler Collection, who were both discussing new projects they were hoping to soon get off the ground.

This space is fun. It’s different and it’s refreshing. There’s a reason companies like Marriott and Choice are breaking away from the conformity they’re known for. This is what today’s consumer wants. Whether it’s lifestyle or boutique and whether we as an industry can define those terms doesn’t really matter.

THE LATEST ON EDITION
Marriott’s original strategy for Edition, a partnership between Marriott and boutique hotel innovator Ian Schrager, was to buy and fund the first five or six properties in key gateway cities, such as New York, Los Angeles, Paris, London and Miami. However, the concept generated such interest Edition management agreed to allow developers to build the first generation of the product, including the first two hotels in Waikiki and Istanbul, Turkey.

“It’s all about education and expectations,” said Miller in explaining the roots of the brand’s fall-out with the Honolulu developers, M Waikiki LLC, which led to a middle-of-the-night ousting of Marriott management in late August. Marriott got a court order allowing it to regain control of the property, but the owners filed bankruptcy, putting the entire dispute in the hands of the court. “The lesson we learned is it’s important to keep owners information of all the issues facing a hotel.”

Now, revealed Miller, “We plan to relaunch the brand, only this time on the company’s dime, as was the original strategy.”

Target markets are Miami Beach, London, New York, Abu Dhabi, Mexico City and Bangkok. Miller described Edition as having the “chassis of Ritz-Carlton, the finest luxury lodging experience and known for its consistency of service and standards, layered on the creativity and boutique experience represented by Ian.”

Not surprisingly, Miller is a believer in the power of branding, noting, “It’s no longer a choice between either brand or independent. Now there is a convergence of the two around a new philosophy that is still all about the bottom line.”

Another panelist, Richard Kessler of The Kessler Collection, championed Marriott’s soft brand, the Autograph Collection. Seven of Kessler’s properties formed the core of Autograph when it launched in early 2010. The soft brand now has 26 hotels in the fold.

“It comes at a cost,” said Kessler said of Autograph, “but it provides us with what we want: the ability to keep our independence, our name, our website and control of our properties and our standards. And, of course, it provides marketing exposure for our hotels.”

In the 18 months since joining the soft brand, Kessler’s properties have seen twice the growth in revenues of hotels in their competitive set and a gain in RevPAR of three percentage points higher than the competition. “In baseball terms, we think it’s a double, but within 18 months we hope it’s a triple.”

The third panelist, Millard of Trust Hospitality, offered the audience his insights on the critical success factors in boutique hotel development and operations. The strategy for his company’s Desires boutique brand was to initially avoid the major markets and instead tackle adaptive reuse projects in secondary cities. “The key is to go where the other guys aren’t going,” he said. “With the right product, you can lead the market and unbranded boutiques have no rate cap, as do the branded hotels in a city.”

“Ultimately, it’s all about the product,” said Millard. “Be sure you understand the experience you’re giving to your guests. Create a relevant hotel, not a trendy one, so you’re always in the conversation in the neighborhood in which you’re located.”

FUNKY MONEY
To hear Tim Dixon tell it, “funky money” is the new gold in boutique hotel development financing. Dixon, the celebrated developer and owner of the very successful Iron Horse hotel in Milwaukee, said he was able to access $22 million in tax credits (which he converted to nearly $10 million in cash) to develop his 100-room, three-year-old hotel.

“The success of the Iron Horse is based on a lot of things, but all things being equal it’s the capital stack that makes the hotel successful,” said Dixon during a panel discussion on new approaches to boutique hotel development. “Milwaukee is a $180,000 per-key [of development cost] market. We spent $300,000 per key, all in, but what we did differently than everyone else is we received nearly $10 million in free money.”

Dixon admits the process was complicated, time consuming and expensive (he spent $2 million in attorney fees). The key element was the property’s location in a qualified census tract that ultimately enabled Dixon to procure a laundry list of tax credits: new market, historic, state, tax increment financing and a few grants. As Dixon explained it, the federal government designates qualified census tracts as geographic areas with low income and high levels of unemployment. “And, instead of passing those credits to the benefit of the investors, we brought down the development costs, helping us create a lean capital stack and a property that stands out in the market.”

Taking advantage of these credits created other advantages, said Dixon. The financing piece that includes the credits is viewed as subordinated debt or equity and sits underneath’s the project’s first mortgage in the capital mix. The credits are in effect for seven years, “and on the seventh year they disappear from my balance sheet and all I’ll have is my first mortgage.

“That works really well for hotel projects because seven years is typically when an owner will recapitalize the hotel to refresh the property,” he said. “And, all of a sudden, nearly $10 million of obligation is gone. It’s a perfect scenario for a hotel.”

“That’s the power of tax credits,” noted another panelist, John Campo, president of Campo Architects and an expert in applying tax credits to development projects. “It’s a strategy that’s been around since the 1970s, but not many people know about its power or they’re just scared because it’s complicated. It has landmines all over the place, but at the end of the day the result is a quality product in a great location with a competitive edge because those tax credits form its basis.”

Federal historic tax credits have been used for many years by many developers, noted Michael Kitchen, an associate with Paramount Lodging Advisors. He said between 1995 and 2010, the program helped finance 17,000 properties, including 950 hotels with credits worth $8.8 billion. “There’s a lot of money out there and you would be surprised how many properties can qualify for it,” he said.

Both Campo and Dixon said it’s important for developers seeking financing through credits to surround themselves with experienced and knowledgeable advisers. “At the very beginning of the project, you need accountants and tax lawyers who specialize in this concept,” said Campo. “And, if possible, it’s good to have a lender on board that understands and has attorneys who understand the complexities of a deal like this.”

The panel also discussed EB-5 financing, another federal tax credit program that’s been available for a number of years but has come into vogue recently as money from banks and other lenders has dried up.

“EB-5 is the newest kind of funky money because it means, in essence, you’re creating your own international bank,” said Dixon. As he explained, properties in qualified census tracts are often also in targeted employment areas, a requirement for the EB-5 program. Under the scheme, foreign investors (many of today are from China) who invest at least $500,000 in a business in a targeted employment zone that creates 10 indirect or direct jobs can receive a green card for them and their direct families. The green cards can lead to permanent residence status in five years if the investment remains in the business.

“In one of the deals I’m looking at, we hope to raise $22 million through this program, which means I’ll need to generate 440 directly and indirect jobs,” said Dixon. “That’s why the program works so well for hotel projects, because hotels create a ton of construction jobs, permanent jobs in the business and indirect jobs in the community.”

Dixon is currently exploring development project in a Scottsdale, AZ zipcode but on Native American tribal land, which will enable him to access a range of credits.

“That’s how we’re looking at all of our future development because it you don’t have a tremendous amount of funky money or credits or free money, banks and equity investors won’t work with you,” he said.