Commercial ObserverKEITH LORIA
Oct. 28, 2019
Market players expect plenty of upcoming buzz and interest among those in the hospitality industry in response to recent reports that the Trump Organization was looking into selling the rights to the Trump International Hotel in Washington, D.C., with several outlets revealing the price would be around $500 million.
The Washington Post reported that the Trump Organization had hired JLL to market the property, a 263-room luxury hotel located at 1100 Pennsylvania Avenue NW.
“The speculation around the property will surely set off a real estate frenzy in the D.C. market, with many hospitality companies making bids over the next year,” Bruce Rosenberg, president of the Americas for HotelPlanner.com and Meetings.com, told Commercial Observer. “The property will be highly sought after by real estate investors and hotel brands. Having a luxury hotel in this location would be a major coup for numerous high-end investors and hotel brands.”
The Trump Organization signed a 60-year lease at the historic Old Post Officebuilding, which houses the hotel, in 2013 and oversaw a $200 million building renovation in 2014. The company pays the federal government approximately $3 million a year in rent, according to public records.
“Since we opened our doors, we have received tremendous interest in this hotel and as real-estate developers, we are always willing to explore our options,” Eric Trump, executive vice president of the Trump Organization, said in a prepared statement. “People are objecting to us making so much money on the hotel, and therefore we may be willing to sell.”
J.B. Andreassi, a real estate agent at Nest Seekers International who has worked on many new construction projects in the D.C. area, including The Wharfdevelopment, thinks a potential sale would greatly impact the region’s hospitality market.
“The building has been an architectural cornerstone and a nation’s capital landmark for 100-plus years,” he told CO. “That coupled with the fact that the sale indirectly affects the President of the United States and his business partners, and could result in one of the most expensive hotel transactions in history, it’s definitely something to monitor and keep tabs on over the next few weeks.”
Originally built from 1892 to 1899 to house the United States Post Officedepartment headquarters and D.C.’s post office, the property is the second-tallest structure in the city trailing just the Washington Monument.
The Trump Hotel in D.C. is also a key producer in the Trump Organization real estate portfolio. The hotel officially opened for business in late 2016, about a month before Donald Trump was elected president, and the Wall Street Journal reported it became one of the biggest revenue producers for the Trump family, raking in $40.8 million alone last year.
“The design and aesthetics of the property, where it is situated, and its extremely high price points for accommodations combine to create an environment for the political and entertainment ‘who’s who’ from around the world,” Andreassi said. “The decision seems to send the message that the Trump Organization is seemingly taking action against the call outs that have been increasing from Democrats and other Anti-Trump supporters. If sold around the projected asking price, it would be one of the most expensive hotel deals to date.”
According to Rosenberg, the quality of the hotel and location — being very close to the White House — makes it a highly desirable asset.
“Properties of this caliber do not come onto the market often,” he said, projecting the sale price could fetch anywhere from $400 to $500 million. “At $1.5 to $2 million per guest room, this estimated cost per guest room will drive a big profit for the Trump Organization.”
Plus, many Trump supporters like being associated with the hotel either as a guest or as a place to meet for business.
The Political Slant
In addition to taking advantage of the strong market, the sale would also eliminate any conflict of interest charges of making money from a government-awarded lease.
Rosenberg said for President Trump and Republicans, it creates a proper narrative going forward that the Trump Organization is not making money off the government while President Trump is in office. Having the property in the Trump Organization portfolio gives credibility to the emoluments charges discussed at different times by Democrats.
“Democrats will call this a win to ‘force’ the sale and reduce operating profits earned by the Trump Organization,” Rosenberg said. “Since this is a government GSA lease, Democrats can review the sale to see if a ‘fair’ profit was generated and perhaps challenge for part of the sale’s profits to be awarded to the Treasury.”
Additionally, selling the property now reduces the election outcome risk because post-election, things can change greatly.
“Assuming a sale is approved and completed, it’s one less issue for Trump on the campaign trail,” Rosenberg said. “Overall this is a savvy decision by the Trump Organization. It will generate a sizable profit, eliminates conflict of interest charges at this specific hotel and reduce future valuation risk with the election a year out.”
Andreassi noted there was strong interest in the property when initial bidding began about eight years ago, with the only difference now being, if it sold, the new owner will have assurance that if the space is utilized correctly, it can be a massive revenue generator. Especially if it remains a hotel and hospitality venture. Still, a potential sale may affect the use of the property.
“You may see an aggressive play from a big real estate developer come in and convert to residential condos [and] apartments,” Andreassi said. “The PSF numbers would be unprecedented for D.C. compared to other luxury residential buildings. I do think it’s better served as a hotel though, since it was initially set up for that purpose.”
At 600 square feet on average, the size of the rooms inside the hotel are significantly larger than the average hotel property in the area, so those units could technically become nicely sized studios or one-bedrooms in a residential property, Andreassi said.
“The large atrium on the first floor of the property is an interesting element and may be a bit unconventional for a residential luxury property,” he said. “I also think when you do a quick crunch of numbers, although it may be an enticing project to some private real estate developers that do a lot of business in the D.C. area, a hotel company will most likely see greater returns.”
With such high potential asks for condos and or apartments (if converted for other projects), the property could struggle filling the spaces since it would most likely be asking the highest prices in all of D.C.
That’s why, although it’s very early in the process, Andreassi could definitely see a player like Hilton having interest since the company was outbid by the Trump Organization in 2012.
“The success of the hotel over the last three years is evidence that the property is a valuable investment now and into the future,” he said. “The location of the hotel inside the city and so close to the National Mall is ideal as well. It’s arguably the best hotel location in the entire District.”
In Rosenberg’s opinion, if a sale comes to fruition, he expects the property will continue to operate as a hotel and doesn’t see any changes to the operations — especially in the short term.
“It’s totally remodeled and well run today,” he said. “The hotel will perform better with new management and a new brand as some groups or individuals will not use this hotel due to the Trump affiliation. This will allow a new owner [and] management to drive higher occupancy and maintain or increase the current very high price per room, per night.”
Any lease transfer would have to be approved by the federal General Services Administration.
Source - Commercial Observer
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