In January, hotel developer Gary Matthews appeared before the Illinois Finance Authority (IFA). According to their website, The IFA “is a self-financed, state authority principally engaged in issuing taxable and tax-exempt bonds, making loans, and investing capital for businesses, non-profit corporations, agriculture and local government units statewide.” The IFA is subject to the Open Meetings Act, so their agendas and minutes are public information.

The IFA’s proceedings give us a bit of insight into what lenders and other governmental bodies may think about the proposed downtown hotel project since hotels are really important for people travelling, and many places have hotels or even lodges for people to stay as you can find in the Borneo Eco Tours that offer the best nature surrounded lodges for people to stay. It looks like the concerns are more than just the economic downturn:

Director Meister also noted that the Hotel Pere Marquette project will not come before the Board this month, but the project’s developer, Mr. Gary Matthews, is in attendance at the Committee of the Whole Meeting to answer the Board’s questions. Mr. Durburg stated that he was aware of the Pere Marquette Hotel project and wanted to know if it would be appropriate to ask tough questions of the developer as a new Board Member. Dr. Herrin emphatically stated that it was not only appropriate but Mr. Durburg’s duty as a Board Member to ask tough questions of any project. Chairman Brandt explained to the Board that aside from lack of specificity on project costs, there is also a potential issue with the way this project could be perceived. The fee that the developer is requesting is large and is of concern.

Dr. Herrin agreed with Chairman Brandt regarding the fees. Dr. Herrin stated that he needed firm numbers from Mr. Matthews as to the exact project costs, and then the sources and uses. He wanted to emphasize that this would not be a conduit financing, but essentially a commercial loan to EM Properties.

Chairman Brandt clarified for the rest of the Board that if this project is approved as presented; it would allow the developer to take as much as $9 million in fees out of the project at the completion of construction. Mr. Durburg offered his assistance underwriting this project as he has experience in this field. He also asked if this project would result in other hotels in Peoria closing.

Chairman Brandt explained that the Hotel Pere Marquette is an important civic facility that acts as the main event venue for the area. The project is also part of a downtown redevelopment plan for Peoria. Chairman Brandt cautioned that the State of Illinois has a history with hotel developments that is not positive and the IFA must avoid any similar entanglements.

That was just introductory. Later in the meeting, they dealt at length with this project:

No. 4: EM Properties, LTD (Hotel Pere Marquette Project)
Request for the preliminary approval of the issuance of taxable bonds backed by the “additional security” of the moral obligation of the State of Illinois. The moral obligation financing will finance a portion of the energy efficient upgrades of the 270-room historic Pere Marquette Hotel that will be renovated and converted to a Marriott and a “to be” constructed 180-room Courtyard. The development is located in downtown Peoria on Main Street two blocks from the Caterpillar world headquarters. The developments adjacent and will be connected to the skywalk to the Peoria Civic Center. Proceeds will be used to acquire the land, rehabilitation of the Pere Marquette Hotel, construction of the 180-room Courtyard Hotel, construct the parking desk, pay costs of issuance and fund capitalized interest and bank fees.

Mr. Bill Claus, Funding Manager, introduced the Board to Mr. Gary Matthews, the project developer; and stated that Mr. Matthews attended the meeting to answer questions regarding his project. He clarified that the project had already been pulled from the agenda and would not be presented for approval this month.

Mr. Matthews stated that he understood the Board was concerned about the developer fees for his project. Mr. Matthews explained that the fee was only 9%, well within the industry average of 7 to 12%. He added that he would still be willing to compromise on the exact number or timing of the fees.

Mr. Durburg asked Mr. Matthews how he could reconcile the supply and demand in a small area such as Peoria, where most of the major economic agents (i.e. Caterpillar) are suffering from the economic downturn. Mr. Matthews responded that the nearby Embassy Suites hotel has had four rate increases in the recent past. He understands that that project is doing very well, despite the economy. Mr. Mathews stated his belief that older hotels are suffering in this economy while the newest hotels in any area are not. Mr. Matthews stated that Peoria is lacking new, quality hotel rooms. He believes that with Marriott’s 30 year management agreement, along with several other factors, this property will succeed.

Mr. McInerney asked what the “per key” value of the Embassy Suites was. Mr. Matthews responded it was between $170 and $180 “per key”. Mr. McInerney requested an explanation of why the Embassy Suites’ per key rate was lower than the Hotel Pere Marquette’s. Mr. Matthews explained that the Hotel Pere Marquette project also includes an elevated walkway to the Civic Center and a 500 car parking lot that the Embassy Suites does not have.

Mr. Durburg asked if the project was contemplating any sort of agreement with Caterpillar for rooms. Mr. Matthews stated that Marriott was not interested in that sort of arrangement as they want to remain flexible. Mr. Matthews is not concerned, as Caterpillar has a long history with the Pere Marquette given the fact that their international headquarters and training center are within a few blocks of the hotel.

Dr. Herrin added that St. Francis Hospital will be developing a new children’s hospital across the street from the proposed project. This is expected to be a premier children’s hospital with people traveling from far away to receive treatment. This may be positive for the Hotel Pere Marquette. Mr. Matthews pointed out that this project was structured by Marriott based on its analysis of the market. This project includes the Hotel Pere Marquette as a full service property and the yet-to-be-built Courtyard by Marriott property will be special service.

Mr. Durburg asked if the first mortgage on this property will be non-recourse. Mr. Matthews responded that it was recourse debt to him, personally. Mr. Durburg then asked if Mr. Matthews had prepared a pro forma for occupancy over the first few years. Mr. Matthews responded that he could not off the top of his head, but that he believed that Marriott had prepared and submitted that report. He believed Marriott projected 73% occupancy for the Courtyard and Pere Marquette in the first few years. The breakeven point for the project is 50% occupancy for the Pere Marquette and 53% for the Courtyard by Marriott Hotel. This data is based on three different feasibility studies that were conducted.

Dr. Herrin asked if the IFA had all of these studies. Mr. Matthews responded that he believed the IFA did. He added that Marriott disagreed with one of the studies that suggested both hotels be full service. Mr. Claus added that the IFA will need an “as built” study as well. Mr. Durburg then asked what the occupancy rate at the Embassy Suites was. Mr. Matthews stated that December was not a good month for the Embassy Suites, but that other than that occupancy has been high. Embassy Suites has projected that January through February will be rough as well but that occupancy will pick up in March with March Madness. It is currently at about 45%.

Mr. Durburg pointed out that to break even, the project must have 50% occupancy and the projections are for 73% occupancy. He asked how Mr. Matthews could account for that.

Mr. Matthews stated that the project will have other sources of revenue including shops, restaurants and the parking deck. Mr. Durburg asked if there would be a need for the additional parking. Mr. Matthews explained the site lay out and adjacent businesses on a large scale map of the proposed development, clarifying the need for additional parking.

Mr. Durburg then asked if Mr. Matthews will be competing with the Embassy Suites hotel. Mr. Matthews responded affirmatively.

Dr. Herrin stated that he would like Mr. Matthews to prepare a finalized total project cost, including acquisition and renovation, as well as a list of the pledged financials. The IFA can then determine if it is possible or appropriate for the IFA to fill any gaps in total financing.

Mr. Matthews explained that the City of Peoria will not close on the funds they have pledged until a guaranteed construction cost agreement has been reached with a contractor. This cannot be completed until the design for the project is completed, which is still in process.

Mr. Durburg asked who currently owns the Hotel Pere Marquette. Mr. Matthews responded that it was a long established partnership. Dr. Herrin asked if Mr. Matthews would be able to break down and identify the actual costs of the project. Mr. Matthews stated he would be able to in two to three weeks.

Chairman Brandt stated that the State of Illinois has not had a positive experience with hotels in the past, which could create problems for this deal. He added that while that alone is not a reason to forgo this project, it is an excellent reason to proceed with great caution. Chairman Brandt stated that the other primary concern for the Board is the lack of certainty on numbers. The IFA will need a final project cost before we can proceed any further.

Large developer fees, “lack of certainty on numbers,” extremely high occupancy rate projections — these are the kinds of questions the IFA had for the developer. Nobody called it a “wonderful development,” incidentally. My guess is that other lenders had the same kinds of questions.

The next IFA board meeting is Tuesday, March 9, 3 p.m., at (are you ready?) the Pere Marquette Hotel in Peoria. The agenda hasn’t been posted yet.