Caribbean developers get creative for capital

The lack of traditional sources of capital has left developers with no choice but to find creative ways to fund hotel development, said Adam “Buddy” Petrillo, executive VP of Miami-based Trident Development, during a general session titled “From an Investor’s Perspective.”

“Traditional sources of Wall Street capital are not happening. The banks are not playing into that kind of project risk right now,” Petrillo said.

In the United States, there are myriad techniques that serve as helpful tools for developers looking to plug the gaps in the capital stack, he said. In the Caribbean, however, most things of that nature do not exist.

Petrillo referred to a complex hotel project in St. Maarten he is currently working on with Hill International and Royal Caribbean.

In the beginning, some capital was put up by both Hill and Royal Caribbean. Petrillo’s team also was able to work through the Dutch Ministry of Finance to ensure up to 85% of the funds.

“But then to fill in the additional capital pockets, we really had to be creative,” Petrillo said. That meant looking to the hotel industry for appropriate partners; the gaming industry, as the project has a casino component; and looking into the timeshare industry, where the team could sweep the capital proceeds to try to pay down the senior debt, getting the hotel component off risk as quickly as possible.

Other nontraditional sources of capital Petrillo found in the Caribbean include regional lenders and family offices of high-net worth individuals.

Petrillo’s team still is looking to close the financial gap and is hoping it can be done by this summer.

Another component that could cause some concern as development moves forward is the high cost of energy. “The players in this region need to think about how they will contain these costs because they will affect development in the future,” Petrillo said.

Government incentives

Phil Keb, executive VP of resort development for the Christophe Harbour Development Company, said his company takes advantage of the incentives the government of St. Kitts & Nevis has to offer.

Christophe Harbour in St. Kitts was an approximately $170-million investment, which is a combination of equity provided by partners and some debt on the project.

The St. Kitts & Nevis Citizenship-by-Investment Program, established in 1984, is in place to reward investors who advance development in the country.

“The program’s got some momentum over the last few years,” Keb said.

Executives of Christophe Harbour were fortunate enough, he said, to be able to structure the program to meet their needs.

For example, a developer in Dubai, United Arab Emirates, was able to finance the project with a $400,000 investment. That investor then applied for citizenship in St. Kitts & Nevis. This allowed him to obtain a St. Kitts passport.

“The St. Kitts passport allows you to go to 123 countries with no visa necessary, and no residency is required,” Keb said. This is an attractive incentive for investors from countries with strict travel requirements.

The government of Puerto Rico also plays a crucial role in hotel development, according to Jose Delgado, senior VP of development at development company Interlink Group.

Interlink was selected by the Puerto Rican government to develop the Sheraton Puerto Rico Hotel & Casino in 2003. After three years of completing the design, getting permits, finding capital partners and solving any legal issues, the Sheraton broke ground in 2006. “Three years is pretty much a record in Puerto Rico and the Caribbean from the moment you start the development process to the moment you break ground on a hotel,” Delgado said.

The Sheraton, approximately a $250-million investment, opened in 2009. “Financing was not easy at all. The government played a very important role. Without the government’s support and participation, it’s impossible to do a project of this magnitude in Puerto Rico,” he said.

The government provided its support through tax credits and also served as co-investor in the project.

“For the equity, we counted on local partners that believed in the project,” Delgado said.

Interlink went through a similar process for the 139-room St. Regis Bahia Beach Resort in Puerto Rico.

The process for the St. Regis took about five years from the time Interlink started working on the hotel to the time it opened the hotel in 2010. The investment was approximately $150 million, and again the government was important, Delgado said.

In 2011, Interlink took a different route and purchased the San Juan Marriott. The process took only six months. “When you compare development versus acquisitions … well, I’m buying the next one,” Delgado said.

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