DiamondRock Signs $155M Agreement for Hotel

MINNEAPOLIS-DiamondRock Hospitality Co., based in Bethesda, MD, has signed a purchase agreement to pay $155.5 million for the 821-room Minneapolis Hilton here. The hotel, the largest in the city, is owned by a joint venture of Greenwich, CT-based Starwood Capital Group and locally-based Haberhill LLC. The venture bought the property in March 2006 for $92 million.

The contractual purchase price for the Hilton Minneapolis is $152 million. In addition to the contractual purchase price, DiamondRock has agreed to fund the seller's cost to defease the existing mortgage debt secured by the hotel, since the company will not assume the existing mortgage debt as part of its acquisition. The buyer expects the defeasance cost of about $3.5 million to be paid at closing.

DiamondRock said in a statement that it has committed to make a $15.2 million deposit that will become non-refundable on June 17 unless the company terminates the purchase and sale agreement prior to that date. The firm said it expects the acquisition to close early in its third fiscal quarter of 2010, subject to satisfactory completion of its due diligence review of the property and other customary closing conditions, including the receipt of third-party consents.

However, Haberhill Managing Director Douglas Greene tells GlobeSt.com that the sale is far from a done deal. “The closing is not going to happen until the end of June,” he said. He refused further comment. A DiamondRock spokesman did not return a call for comment.

Haberhill, which put the transaction together and negotiated the terms and conditions of both the purchase agreement and long-term management contract with Hilton, serves as the operating partner and asset manager. The hotel is owned by indirect subsidiaries of Starwood Capital Group Global LC and an affiliate of Haberhill LLC. To fund the acquisition, the ownership group borrowed $83 million from Greenwich Capital and invested approximately $15 million of equity.

The Hilton is the largest hotel in Minneapolis and connects directly to the convention center by the city’s unique skyway system. Beginning in the fourth quarter of 2006 and ending in March 2007, Haberhill completed the renovation of 740 guest bathrooms, installed new guestroom and hallway carpet and wallpaper and new guestroom desks and desk chairs. This renovation complemented the hotel’s 2005 renovation program, which included a similar renovation of the remaining 81 rooms, a significant expansion of the hotel’s meeting space, as well as a complete renovation of the restaurant and bar facilities.

Subsequent to this renovation, Haberhill and Starwood successfully raised an additional $30 million in mezzanine financing from an affiliate of AREFIN US Investments LLC in two tranches - $16.5 million in November 2007 and $13.5 million in June 2008. This financing allowed both Haberhill and Starwood Capital to return more than two times their equity investment in a little over two years. Additionally, the hotel continues to return significant cash flow in excess of debt service on both the Senior and Mezzanine loan facilities.

In 2008, Haberhill completed the renovation of all of the suites at a cost of approximately $1 million. In early 2009, Haberhill finished the renovation and addition of 10,000 square feet of meeting space at a cost of approximately $1.6 million. The 10,000 square feet of space consisted of an existing 5,000 square feet of breakout space and 5,000 square feet of existing retail tenant space that was under-utilized. Forward bookings in the space currently exceed $3 million, according to Haberhill’s Web site.

With the purchase, DiamondRock would own 21 hotels with about 10,400 rooms. The company also recently agreed to acquire the $69 million senior mortgage loan secured by the 443-room Allerton Hotel in Downtown Chicago. The company said in a statement that it will purchase the mortgage at a discount that is significantly below replacement cost. “This is an exceptional opportunity for DiamondRock to gain ownership through foreclosure of a distressed asset,” said Mark Brugger, CEO, in the statement.

The Allerton is operated as an independent, non-branded hotel. Chartres Lodging Group, then known as Oxford Lodging Advisory & Investment Group, bought the hotel in 2006 and has been working on a $10 million renovation program for the property.