Business & Real Estate

Roseville’s hotel dreams on hold after South African investor declines to finance deal

Roseville’s latest effort to land a large hotel and conference center has ended after a South African investor declined to finance the deal and asked the city to bear the upfront risk.

Roseville officials and Issar Investment Holdings initially discussed a 50-50 joint partnership to build a $90 million, 10-story four-star hotel next to the Westfield Galleria at Roseville. But last month, Issar decided it wouldn’t finance the deal and wanted the city to build and operate the hotel for three years before selling it to the investment firm.

“The deal continued to morph to the point where it was not acceptable to the City Council,” said Roseville Deputy City Manager Mike Isom. “Our goal was to minimize the amount of city finances.”

The 175,000-square-foot hotel, which had been slated to open in 2016, called for 248 rooms and 22,000 square feet of event space.

Before negotiations concluded, the city purchased 11 acres of land for $2.6 million in 2013, drew up development plans at a cost of $900,000 and spent nearly $600,000 on market studies and other consulting fees. The city also completed an environmental impact report, conducted traffic studies and acquired entitlements.

City officials say that those efforts, along with real estate appreciation, have doubled the value of the land to $5.2 million.

Roseville officials noted that the development process was carefully orchestrated into “bite-size chunks” so that the city could walk away if necessary. Neither the city nor Issar will pay a financial penalty for ending discussions.

Isom said there remains demand for a major hotel in Roseville. But he said this deal unraveled because the developer questioned whether it could recoup the upfront costs of building the venue.

“No private developer is going to enter into a development project expecting to lose money,” Isom said.

Tony Dimond, a hotel expert and principal at Horwath HTL, isn’t surprised the South African funding evaporated.

“They were worried,” Dimond said. “Look how far away you are. You have to come to the U.S. and sue a city to get back your money. That’s not easy to do.”

Dimond noted that Roseville faces several challenges to developing a significant hotel, including its distance from Sacramento International Airport and the fact that the city is not widely considered a destination.

Peter Detwiler, a California State University, Sacramento, professor and local government expert, called it a cautionary tale for cities that seek public-private projects.

“This wouldn’t be the first time that cities had been enticed into speculative deals,” said Detwiler, whose career in the state Legislature spanned 40 years. “Speculative investors dream big in California. What surprises me is that local officials are still enchanted by these schemes without looking into them very deeply.”

Roseville has been working to land a hotel and conference center for more than two decades, citing the growing population and concentration of businesses in south Placer County.

Last year, the city paid for Roseville City Manager Ray Kerridge, Isom, council members Susan Rohan and Carol Garcia and two private consultants to travel to South Africa to meet with investors. They spent $47,019 flying business class and another $8,500 staying at luxury hotels that included the DaVinci Hotel and Suites in Johannesburg.

Kerridge and Rohan also brought their spouses, who paid their own way. City regulations call for travel only in coach, but Kerridge made an exception because of the 26.5-hour travel time to Johannesburg.

“It was important to ensure that participants could be as well-rested en route as possible when traveling that many hours,” Kerridge said in a written statement.

Rohan, who was mayor at the time, said it was necessary to meet the investors in person.

“We were asking for money to be invested in our community,” Rohan said.

The city of 127,000 people has a few small hotels, but the bulk of the region’s room and event offerings remain in Sacramento. The Sacramento Convention Center has 134,000 square feet of contiguous exhibit space, 31 meeting rooms and a 24,000-square-foot ballroom. Downtown Sacramento is also home to the Hyatt Regency (503 rooms), Sheraton (503) and Embassy Suites (242).

Roseville faces fierce competition in the hotel sector, as the region sees a mini-hotel boom centered in Sacramento. The Kings will soon begin construction on a $200 million, 250-room high-rise hotel next to the new arena. A Southern California developer is poised to break ground in June on a Hyatt Place hotel at Sacramento International Airport.

West Sacramento officials continue to explore a possible waterfront hotel and conference center, a key piece to the revitalization of its Bridge District. In Rancho Cordova, the City Council recently assembled a $1 million incentive package to attract an 89-room Marriott extended-stay hotel, as it seeks to turn the area near the Sunrise exit on Highway 50 into a “convention district.”

The region’s hotel occupancy rates stand at about 62 percent, according to the latest analysis by PKF Hospitality Research in San Francisco, a leading industry consultant. In downtown Sacramento, the picture is even rosier with 72 percent occupancy, up from 55 percent in 2009.

Building in downtown is a no-brainer because “the more hotels you build, the more synergy you get,” Dimond said.

But “hotels are a risky investment,” he said. “It’s a question of whether Roseville is ready.”

Call The Bee’s Richard Chang at (916) 321-1018. Follow him on Twitter @RichardYChang.