After years of highly lucrative deals with the City of Industry, Ed Roski Jr.’s Majestic Realty Co. has scored another home run there.
This time, it’s a master lease from the city on the money-losing Industry Hills Sheraton Resort & Conference Center at a base rent of only $300,000 a year.
Real estate experts are once again shaking their heads over the terms of the deal, which allows Majestic to take over operation of a multimillion-dollar hotel, conference center, golf course and other facilities for a remarkably low lease payment to the city.
“That seems like an incredible deal for Majestic,” said Alan X. Reay, president of Costa Mesa-based Atlas Hospitality Group. “I’ve never seen a deal like that unless I’m missing something. It’s ridiculously cheap.”
It’s far from the first time Majestic has scored an eyebrow-raising coup in the City of Industry. Just last summer, Majestic quietly cut a favorable deal with the city to develop a prime 425-acre site under a long-term ground lease, much to the dismay of competing developers who said they never had a chance to bid on the property.
Majestic and Industry officials said the Industry Hills lease deal, which begins in June, is actually advantageous for both parties. The city won’t be saddled with the complex’s operating losses and Majestic will bring in new management, invest in a major overhaul, expand the meeting space and increase the property’s revenues.
“We’ll take it over and the red ink will immediately stop,” said John Semcken, vice president at Industry-based Majestic, the county’s largest commercial real estate developer. “We’ve got a significant investment we need to make. If we’re right, we’ll be able to turn it around.”
Despite the property’s ongoing deficit, the deal is extremely favorable for Majestic, hospitality experts say. The basic outline is as follows: The first year’s rent is free, then the $300,000 base rent kicks in during the second year and increases by $20,000 a year for the remainder of the 25-year lease. In all, it adds up to $15.96 million a little more than half what the city paid Majestic just for the hotel about 10 years ago.
Majestic built the 294-room hotel in 1981, then sold it for $29 million to the city as part of a settlement of a lawsuit brought by Roski and his partners. In its suit, Majestic claimed the city reneged on an agreement to help build a proposed second hotel on the site. Roski demanded the city either purchase the hotel or turn over management of all the facilities. The city has owned the neighboring golf course and convention center, as well as the dirt underlying the entire complex, since it was built in 1979.
A $30 million complex
The lease deal covers not only the hotel but the convention center, Olympic-sized swimming pool, 17 lighted tennis courts and two 18-hole championship golf courses the entire 650-acre complex, except for the equestrian facilities.
The total assets of the complex amount to $30.4 million, according to the city’s balance sheet. Revenues generated from the facilities total about $20 million a year. But it has been posting a loss of about $4 million a year, or $1.4 million if depreciation is not included.
A hotel with that level of sales would be expected to net about $3 million a year, hotel experts said, but occupancy is only 50 percent and the food and beverage operation also loses money, though the golf course appears to be profitable, based on a review of the complex’s financial statement for the six months ended Dec. 31, 1999.
On the open market, the complex could have fetched at least $20 million, even on a ground lease, based on its revenues and price per room, Reay said.
“I know it could have sold and they could have achieved higher dollars for it,” Reay said. “People buy properties based on their potential.”
Chuck Nester, president of brokerage Brown Hotel Group, said the negative cash flow makes it tough to place a value on the property.
“(Majestic) got a hell of a deal if they can turn it around,” Nester said. “With those revenues, you can do something with it.”
The city never took bids, although an unsolicited offer of $17 million was made to buy or lease the hotel several months ago and other groups have expressed interest in it, said City Manager Philip Iriarte. Instead, city officials negotiated a lease arrangement with Majestic after the company approached the city.
“The city’s had a long association with Majestic and the council is comfortable dealing with Majestic,” Iriarte said. “Obviously, there’s a high trust level between the city and Majestic.”
A win for the city
In addition to the lease payments, Majestic also will pay possessory interest taxes, which are akin to property taxes for properties on ground leases. And the city continues to collect an 8 percent room tax.
“All those things are good for the city,” Semcken said. “The city recognized the management and investment needs to be put in private hands.”
Bruce Baltin, a senior vice president at hospitality-industry consultancy PKF Consulting, said the fact that Industry Hills has been losing money “makes it a tough deal to do.”
“For whoever did it, it’s tough because of where it is (in the outlying suburbs), and it needs renovations and it’s losing money,” Baltin said. “But it has two golf courses and it’s in the L.A. basin, so there’s an opportunity for it.”
He said the lease is a good deal both for Majestic and the city.
“The city gets the positive economic impact. Majestic has a big stake in the City of Industry, so they have an incentive to do a good job,” he said. “They really need to renovate it and market it as a destination mid-tier conference hotel.”
Semcken noted that Industry Hills is one of the only hotels in Los Angeles County with golf courses, but it has not been aggressively marketed. And up until about three years ago, the city really made no significant investment in the property.
“It was too little too late,” Semcken said. “They were not marketing it the way a private company would. We need to cut the fat and increase the marketing. It wasn’t operated to its optimum use.”
Iriarte agreed.
“There’s a tremendous operating expense and the city didn’t have the expertise to run the property,” he said.
The 25-year lease officially begins June 24, but Majestic took over the operation on an interim basis starting last week. A new management team also started last week conference center management firm Dolce International of Montvale, N.J.
“We’ve been waiting a long time to find the right spot in California and this is it,” said Andrew Dolce, chairman and CEO, who was visiting the resort last week. “It will be a showcase for this community and the San Gabriel Valley.”
Dolce said his goal is to raise the hotel’s average nightly occupancy to 75 percent over the next three to five years, marketing both to local businesses and customers who do business with Dolce worldwide.
Semcken said Majestic hopes to double the size of Industry Hills’ meeting facilities, with an additional 25,000 square feet of high-tech space; as well as upgrade the guestrooms and add a fitness center and game room, at a cost of $10 million to $15 million.
“The idea is to build an entire state-of-the-art meeting complex,” Semcken said. “We think it’s a tremendous property from the standpoint of professional meetings. The people of L.A. don’t really know what they’re about to get.”
