Resort's backers mix faith, funding

Cambridge Hyatt conceived as tool for area's development

March 24, 2002|By June Arney | June Arney,SUN STAFF

Perched at the edge of the Choptank River, the 400-room Hyatt Regency Chesapeake Bay Resort, with its five restaurants, marina and European health spa, amounts to a $74.4 million gamble.

Not only are its developers and investors betting on its financial success, but Cambridge and surrounding Dorchester County, where unemployment hovers near 12 percent, are counting on it for a much-needed economic boost. That was the project's wellspring.

"The reason that this project was even conceived was that this project creates a lot of jobs," said Hans F. Mayer, executive director of Maryland Economic Development Corp., the quasi-public nonprofit agency that owns the resort. "The state still has that interest at heart, to see that jobs are created."

Projects conceived primarily as development tools are based on different premises from those that are purely market driven. Typically, some type of subsidy is needed to make the economics work and to attract investors and operators such as Hyatt. Results have been mixed for such projects.

"In my experience, I'd have to say there are more failures than successes," said Chekitan S. Dev, an associate professor of marketing at Cornell University's School of Hotel Administration. "It's hard to make them work. ... There is no straightforward economic model. A lot of it is done on faith."

Such alliances are usually created when the business model is questionable, the scale of the investment is so large that one company is not willing to go it alone, or both, he said.

In Cambridge, the deal was made possible by the state's sale of a 350-acre waterfront parcel - the site of a former mental hospital - for $5 million.

"If it had been a slam-dunk location to start with, the Hyatt would have been capable of going in to pay fair market value for the land," said Gregory L. Cory, senior vice president in the San Francisco office of Economics Research Associates, an international consulting firm. "I think you have to approach these things with a slightly different set of standards than if it's a purely private sector project."

The Cambridge Hyatt is embroiled in a cost dispute between MEDCO and the builder, Clark Construction Group Inc., that will delay its opening, which was originally set for Dec. 1, for a third time, perhaps until late summer.

Once completed, the six-story luxury resort must attract enough customers to keep its occupancy adequate to make a profit for the private investors, mutual fund companies that purchased $130 million in tax exempt bonds. By the end of five years, the Cambridge Hyatt is projected to have a 68 percent occupancy rate and revenue of $49 million, Mayer said.

As the Cambridge Hyatt lurches toward an opening, a similarly conceived project across the state continues to struggle.

Rocky Gap Lodge & Golf Resort, with its championship Jack Nicklaus golf resort, opened four years ago with the goal of bringing jobs and tourists to nearby Cumberland and to Allegany County, where the jobless rate exceeds 9 percent.

It is falling behind projections that call for it to fill 65 percent of its rooms and attract 35,000 golfers next year. Last year's occupancy level was less than 50 percent, and the resort played host to about 19,000 golfers, Mayer said.

The resort is about to come under its third management company since opening.

"What bondholders have said is that the analysis provided shows that we need a stronger, more visible management company," Mayer said.

Projects operated under well-known names typically fare better, Cornell's Dev said.

"Would Hyatt have more of a chance of success?" he said "I think so. The Hyatt name is one of the blue-chip lodging names. The brand represents drawing power."

Although the stated goals of the Hyatt and the Rocky Gap projects are the same, the state's financial contribution to the two projects is considerably different, Mayer noted.

The state has about $22 million invested in Rocky Gap, including loans, grants and tax-free bonds.

About $2 million in state money has gone into the Hyatt project, he said, although tax-exempt bonds were used to lure investors.

"The state of Maryland has zilch obligation on the part of this project," he said. "It's the investors who are on the hook for this."

Despite Rocky Gap's disappointing numbers, Mayer defends its success in creating jobs. It has 250 employees during the peak summer season and 75 during the winter season, he said.

"We're an active little economic engine out there, which is the whole purpose," he said. "If we had 100 percent occupancy, I'm not sure we'd hire a lot more people. ... For a public-private partnership, you have to decide what you're looking for. If it's jobs, you've done that."

Anne Lloyd-Jones, a senior vice president with HVS International in New York, which did the feasibility study for the Hyatt, said assessing such projects' success goes beyond the bottom line.

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