The Arizona Biltmore Phoenix Arizona

VOLUME 26 NUMBER 2 JANUARY-MARCH 1996

RESORT THE ARIZONA BILTMORE PHOENIX, ARIZONA

PROJECT TYPE

The renovation and expansion of a historic and architecturally significant 500-room resort hotel. The $32.6 million repositioning initiative combined new construction and value-added rehabilitation, including refurbishment of the hotel's guestrooms, lobby, and kitchen, as well as the construction of a new pool complex, a banquet facility, and 78 resort condominium villas.

SPECIAL FEATURES

Value-added hotel rehabilitation Preservation of historic design theme Resort condominium development Conference/banquet facility development Independently owned and managed hotel/resort

DEVELOPER

Grossman Company Properties 3101 N. Central Avenue Phoenix, Arizona 85012 602-285-1300

ARCHITECT

Vernon Swaback Associates 7550 E. McDonald Drive Scottsdale, AZ 85250 602-991-6700 GENERAL DESCRIPTION

With the renovation and repositioning of the Arizona Biltmore Hotel and Resort, an historically significant hotel was transformed from obsolescence to a real estate opportunity.

Originally built in 1929, the 500-room resort, located in Phoenix, Arizona, is widely recognized for its architectural design and detail. Frank Lloyd Wright played a valuable role in the resort's original design and development, serving as the consulting architect during the property's initial construction. Over the years, however, the property lost much of its luster, becoming physically dated and lacking in the level of services and amenities required in an increasingly competitive luxury hotel and resort marketplace.

The resort was acquired for $61.5 million in June 1992 by the principals of the Grossman Company Properties (GCP). To reposition the underperforming property, GCP devised a strategy that successfully combined value-added rehabilitation and refurbishment, new construction, and strengthened management and marketing.

Throughout the project's repositioning and development initiatives, GCP was faced with the formidable challenge of preserving the property's architectural integrity, while simultaneously maintaining a competitive construction cost budget.

DEVELOPMENT PROCESS

In an effort to adhere to the resort's original design, the developer/owner hired architect, Vernon Swaback, (a former apprentice of Frank Lloyd Wright) to supervise the three-phase project. Early in the development process, the design team researched the hotel's prominent history and original design concepts by studying archival photographs. As the resort is made up of several architecturally significant buildings (each designed and developed during different time periods), the project's design and construction team had to learn, and adapt to, the different construction methodologies applied throughout the resort's phased buildout.

To decrease the exposure to risk typically associated with the hidden conditions of a renovation/rehabilitation construction effort, the development team avoided wall and demolition work wherever possible. The team stripped away the hotel's dated fixtures and furniture, most of which had been installed during the property's previous renovation. Throughout the rehabilitation and refurbishment of the hotel's guestrooms and common areas, the development team aimed to achieve a casual elegance with more of a residential theme than had existed in recent years. Dated hotel furnishings were replaced with fixtures designed in the Arts and Crafts idiom, creating a more integrated, elegant, and historically correct interior design theme. To meet market expectations for upscale resort accommodations, all guest bathrooms received marble detailing.

The Biltmore's central kitchen facility was so outdated that early in the development process the Department of Health required GCP to renovate the facility to comply with local codes. Expanding and renovating the property's kitchen cost approximately $1 million more than the original pro forma projections, largely due to hidden conditions that came to light during the renovation.

Throughout the resort's 30-month renovation and repositioning, all construction and refurbishment initiatives were phased to allow the hotel to operate efficiently. No more than half of the hotel's guestrooms were removed from the rental pool, allowing the hotel to maintain reasonable occupancy rates and cash flow throughout the various phases of construction.

DESIGN/CONSTRUCTION

The resort occupies only 29.9 acres, however, strategic building placement and view corridors, combined with extensive landscaping, make the property appear far larger and more spacious. Into this confined, but extremely well-laid-out site, GCP built several essential improvements, including: a pool complex (with food and beverage facilities and a 92 foot-long waterslide), a large conference/ballroom facility, and 78 two-bedroom resort condominium villas. In improving and enlarging the resort's facilities, the developer managed to maintain the resort's Frank Lloyd Wright character and sense of openness and elegance.

To compete with the growing number of upscale hotel resorts within the Phoenix market, GCP added a luxurious pool complex, which includes six pools and two spas, an elegant bar and café, guest cabanas, and a waterslide. The waterslide, designed by Swaback (to attract and accommodate a younger demographic), was built within an architecturally prominent structure.

The Biltmore's banquet/conference facilities were expanded in response to a predevelopment feasibility analysis indicating that an expansion of such facilities was essential to the financial success of the resort. A 16,000-square-foot freestanding banquet/ballroom and conference facility that can accommodate up to 1,500 guests was completed in January 1995. The development team chose an innovative design for this facility, spending a considerably higher percent of construction costs on technological applications (including a rear screen projection system and a state-of-the-art lighting system) than on fixtures and furniture (that is, plush carpeting, ceiling finishes, and chandeliers). Innovative sales and marketing tools, including the production of a CD-ROM, allow prospective clientele to visualize the reception space and its wide range of applications. This new facility was built for approximately $60 per square foot.

A central component of the Arizona Biltmore's repositioning is the development of 78 for-sale second-home resort condominium villas. Constructed on 4.9-acres surrounding the resort's historic 1929 Catalina Pool, the villa complex comprises 18 individual structures, each housing four to six condominium units. Also designed by Swaback, the villas are two-story, stick-built structures with scored stucco exteriors resembling the resort's historic concrete block buildings. The decorative brickwork (a.k.a."Wrightian Block") found on buildings throughout the property also has been incorporated throughout the newly developed villa complex. The ornate blocks (trademarked by the developer as the Biltmore Block) were reproduced cost effectively by using a light-weight, but extremely dense, molded polyurethane foam that was later painted to resemble the original decorative concrete block.

Biltmore condominium owners are given the option to place their respective units within the resort/hotel rental pool when not in use. With this in mind, the 1,626-square-foot, two-bedroom, two-bathroom condominium units were planned and designed with two separate outside entrances and a locking door, which allow each unit to be divided into a one-bedroom suite and upscale hotel room.

Built for approximately $118 per square foot, the villas cost more than had been originally projected. After the model units were designed, built to residential specifications, and sold, local regulatory officials required that the remainder of the units be built in compliance with commercial specifications (requiring enhanced fire protection features including a two-hour firewall separation between units and extensive sprinkling systems).

OPERATION AND MANAGEMENT

Condominium/Villa Management. The condominium villa/hotel strategy created "win-win" opportunities for both the condominium owners and GCP. By placing their condo units within the resort's rental pool, condo owners can generate a limited cash flow when the unit is not in use. The developer was able to generate profitable yields from the initial sale of each unit, and at the same time finance the expansion of the hotel with a minimal capital investment and no future debt service obligations.

The management of the villa rental pool is relatively straightforward. Participating condominium units are pooled. The total room revenue generated by the villas is divided equally among the villa owners and the developer. Once the villa owners achieve a predetermined level of return, the developer receives approximately 65 percent of the total villa revenues. This "hurdle rate" gives the hotel an added incentive to increase villa rental occupancy. With an average sale price of $204 per square foot, all 78 villa units were sold between November 1994 and December 1995, 12 months sooner than expected. Approximately 80 percent of the villa owners have decided to participate in the rental program, increasing the resort's room inventory by approximately 20 percent.

Resort/Hotel Management. Shortly after assuming ownership of the underperforming hotel, GCP dismissed the national hotel management corporation that had been operating the property for approximately 17 years. The typical standardization and institutional practices of a national hotel management entity were contrary both to GCP's repositioning and management philosophies and to the image of the Arizona Biltmore. Independent management and operation have proven to be a successful initiative for the Biltmore owners. In 1990, two years before acquisition, the property generated a $4.1 million loss before debt service and capital expenditures. In 1995, the hotel produced a positive cash flow exceeding $11 million, also before debt service and capital expenditures.

LESSONS LEARNED

Meeting guest expectations while a project is under construction within a resort setting can be a challenging endeavor, requiring considerable management initiatives. Nevertheless, this period can serve as valuable training for resort employees who are often forced to devise appropriate and cost-effective solutions to problems during these potentially difficult times.

While the developer was able to use condominium development to increase the resort's profitability, room inventory, and future cash flow, a possible drawback to this approach is the cadre of condominium owners who may perceive that they have an interest in the resort's management and operational decisions, thereby requiring strong property management and residential services efforts.

By embracing the resort's unique historic and architectural assets, the developer successfully repositioned the property in a sensitive, yet market-driven and cost-effective manner.

By choosing to operate and manage the upscale resort independently, GCP was able to enhance and capitalize on the resort's distinctive attributes and historic reputation and avoid any conflicting identity that an institutional hotel management entity might have. PROJECT DATA

LAND USE PLAN Percent Acres of Site

Attached/multifamily 4.9 16% residential

Hotel 25.0 84

Total 29.9 100%

ATTACHED/MULTIFAMILY CONDO VILLAS Number of Square Range of Current Unit Type Units Rents Footage Sales Prices Planned/Built

$1,850 Condominium 1,626 1 2 78/40 $289,000/$435,000 (night)

HOTEL ROOM/CONDO VILLA UNIT INFORMATION

Total Hotel Rooms Planned: 600 Average Daily Room Rate: $190 Average Annual Occupancy Rate: 68% Total Villa Condo Units Completed: 40 Typical Price per Villa Condo Unit: $372,000

VILLA DEVELOPMENT COST INFORMATION

Site Improvement Costs Excavation/grading $110,315

Sewer/water/drainage 173,801

Paving/curbs/sidewalks 229,715

Landscaping/irrigation 38,874

Fees/general conditions 122,578

Total $675,283

Construction Costs Superstructure $4,065,205

HVAC 196,629

Electrical 220,828

Plumbing/sprinklers 13,673

Finishes 2,103,272

Graphics/specialties 20,000

Fees/general conditions 308,260

Total $6,927,867 Soft Costs Architecture/engineering $93,722

Project management 74,583

Marketing 250,000

Legal/accounting 54,331

Construction interest and fees 118,688

Total $591,324

Total Development Costs (to date) $8,194,474 Total Development Costs Expected at Buildout $16,899,684

RENOVATION AND EXPANSION EXPENDITURES Rooms Renovation and $8,936,006 Upgrade

New Pools, Tennis, and Spa 3,023,195 Facility

Public Area and Site Upgrades 1,981,296

New Pavilion Conference 4,021,554 Facility

Engineering, HVAC, Roofs, 3,435,484 Fire Safety

Systems Upgrades and 760,307 Electronic Locks

Laundry Expansion and 322,868 Upgrades

Food and Beverage 5,690,449 Renovation and Expansion

Soft Costs 4,443,138

Total Renovation and $32,614,787 Expansion

Notes:

178 units sold. 2Plus furniture package at $45,000.

DEVELOPMENT/RENOVATION SCHEDULE

Hotel Purchased: June 1992 Planning Started: June 1992 Renovation Construction Started: May 1993 Renovation Completed: November 1995 Villa Sales Started: November 1994 Villa Sales Completed: December 1995

DIRECTIONS From Phoenix Sky Harbor Airport: I-10 to Squaw Peak Parkway, exit at Highland; right to 24th Street; left to Missouri; right into resort and hotel.

Driving time: 15 minutes in non-peak-hour traffic.

The Project Reference File is intended as a resource tool for use by the subscribers in improving the quality of future projects. Data contained herein were made available by the Development team and constitute a report on, not an endorsement of, the project by ULI - The Urban Land Institute.