Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, March 15, 1991 TAG: 9103150131
SECTION: VIRGINIA PAGE: A/1 EDITION: METRO
SOURCE: DANIEL HOWES BUSINESS WRITER
DATELINE: LENGTH: Long
The request would be for "$10 [million] or $12 [million] or $15 million . . . to make sure there's enough money to make it go," a person close to the project said this week.
"The general concept is that the city and Tech are going to make a pitch to Norfolk Southern to make some kind of meaningful contribution to the project," the person said. "My feeling is it's something they're going to do in the next few months."
A Tech administration official said Thursday the request would be "in the neighborhood of $8 [million] to $10 million. There isn't a number yet, that is a fair, honest statement."
Senior Tech officials and their counterparts in Roanoke City Hall - eight in all - refused to talk about the request. They said they fear any public comments will be seen as an attempt to pressure the railroad's board of directors through the press.
"I'm not going to talk about soliciting gifts for the project," said Raymond Smoot, Tech's vice president for business affairs. "The reason I'm not is [that] I don't know of any corporate gifts that have been solicited in the newspaper."
Several members of an advisory committee charged with finding a developer for the hotel also declined to comment. "I'm not going to comment . . . because I don't have all the details on that," said Horace Fralin, a commercial real estate developer in Roanoke, who chairs the committee. "I can confirm to you that we're searching for all kinds of ways . . . to make this project work."
Still, other Tech officials say that a proposal is being drafted and that one may be ready in time for a Norfolk Southern board meeting scheduled March 26 at the company's retreat in South Carolina.
When asked whether a presentation from Tech might be on the board's meeting agenda, Don Piedmont, a railroad spokesman in Roanoke, said, "anything that is brought to the board . . . is proprietary and confidential. Any organization that puts a proposal to the board . . . has a right to expect confidentiality."
"Norfolk Southern does not know about the proposal," said a Tech administration official who would not be named. "It literally is changing by the day."
The Norfolk-based transportation company donated the 109-year-old hotel to Tech in 1989, at which time the university announced plans to transform the brick-and-timber landmark into a 415-room conference center. Consultants say renovating the hotel and building an adjacent conference center would cost $43 million. Of that total, $8 million would be provided by Tech and Roanoke for the conference center.
In donating the hotel to the Virginia Tech Foundation Inc., the railroad escaped the costly burden of a needed modernization and was able to claim the gift of the hotel - appraised at $14 million - as a charitable contribution.
Should Tech be unable to reopen the hotel, however, the agreement gives Tech the option of returning the hotel. That would erase Norfolk Southern's tax deduction and saddle it with an asbestos-ridden hotel it does not want to operate.
And even if the railroad chose to demolish the old hotel - a certain public relations disaster for a company historically tied to the Roanoke Valley - it still would be forced to spend as much as $5 million to remove asbestos.
Norfolk Southern, despite a persistent erosion of its Roanoke Valley work force, insists it remains committed to the region. It points to continued support for civic and cultural causes but refused to disclose the amount of its charitable contributions.
Tech is likely to suggest to the company's board that a second donation would ensure the initial tax deduction, create a second write-off as well as cement the company's legacy in Roanoke as a good corporate citizen, said sources familiar with the project. They spoke only on condition they would not be identified.
Indeed, the conference center's success could prove a further boon to the railroad. Its office buildings across North Jefferson Street - a favored site for a separate $25 million trade and convention center - would increase in value. If the company chooses to donate those buildings to provide a site for the city center, it would enjoy a third, even larger, tax advantage.
Tech's plan appears to make good business sense, according to regional tax specialists. "If I were working for the university, I think I could find a way to channel money through Virginia Tech to the Hotel Roanoke and make it a charitable contribution," said Eugene Seago, a Tech accounting professor.
"They'd have to give it to Tech with no strings attached," he said. "For sure, they couldn't get anything back out of it, such as an equity position."
With lenders generally cautious about financing commercial real estate ventures, bankers and other officials say contributions to the project's equity pool may prove crucial.
"Yes, a $10 [million]-to-$15-million equity kicker up front gives everybody something to sit down and chew on," said Scott Farrar, a vice president in commercial real estate at Dominion Bank. "Hard equity coming in up front speaks the loudest. Cash is cash."
But some obstacles could loom. Foreign investors with large amounts of money likely would avoid a plan to redevelop a century-old hotel in a smaller city such as Roanoke, said Peter Carlsen, a hotel analyst with Kenneth Leventhal & Co. in Washington.
"In a nutshell, even with that kind of equity, it's going to be a tough, uphill road to get a project like that financed," Carlsen said. He suggested that local or regional banks with ties to Tech and the community might be more helpful.
Even if regional banks such as Dominion or Richmond-based Crestar Bank were willing to lend the balance of funds as part of a construction loan, permanent lenders - life insurance companies and pension funds - would have to be found.
"What permanent lenders out there have an appetite to finance a hotel?" Farrar said. "That's a tough market. It's chilly out there.
"The lodging industry has basically been in an overbuilt position and has been difficult to finance for about four years now," Farrar said, adding quickly: "That doesn't mean a project like this doesn't make sense."
Hotel-development projects are generally considered to be high-risk endeavors. Their numbers have dwindled in recent years as occupancy rates have dipped below profitable levels and operators have been forced to close their once-grand hotels.
by CNB