It was a good idea at the time. Acquiring the Sheraton World Orlando Resort for $87 million may seem pricey at first glance, but the hotel sits on 28 prime acres on International Drive—less than a mile from the convention hub. Besides, this was 2006, the economy was strong, financing was readily available, and with Florida’s voracious appetite for condominiums, the plan to convert the Sheraton into a hotel-condo property couldn’t miss.
Richmond S. McCoy, president and CEO of UrbanAmerica Principals III (No. 3 on the BE Private Equity firms list with $1.1 billion in capital under management), felt good about the deal. His firm invests primarily in commercial real estate in urban areas and currently has a portfolio of nearly 30 properties collectively valued at $1.1 billion. “There were a number of hotel-condo projects planned that were new developments that we didn’t think would get off the ground,” McCoy recalls. “So we thought we had an asset that we could get to the market very quickly and be able to take advantage of the appetite in the market.”
Sure, it was a fixer-upper. The bar, an important revenue stream for most hotels, hadn’t been renovated in years. Only 180 of the 1,094 rooms had been modernized, and rates were discounted to less than $60 a night to attract bargain hunters. Since the hotel had fallen into disrepair, its reputation suffered. With the abundance of social media and review sites, the bad news spread like wildfire.
On the plus side, however, the property was literally next door to SeaWorld and Aquatica, two popular tourist attractions. McCoy’s rationale was that with enough investment it could be upgraded, converted into condos or “flagged” under a prominent hotel brand, and sold at a profit. But what he could not have anticipated was a housing bubble that would burst and lead to some of the sharpest declines in prices ever recorded, the steepest increases in foreclosure rates, and an economic downturn that’s lasted three years and counting.