by Richard Coulson
First published in The Tribune Business and posted here with the kind permission of the author.
In all the recent writing about Baha Mar, no mention has been made of the precise structure of the project—a structure that suggests a basis for resolution of the present impasse and a path towards completion and opening.
Virtually all major hotel projects around the world are split in two: an owner and an operator (sometimes called a lessee or franchisee). That’s the pattern for the British Colonial Hilton, which has had a variety of owners ranging from the Oakes family to the present Chinese group, all the time being leased to a series of hotel operators, currently Hilton.
The same structure can be found at Baha Mar. The underlying land and buildings are owned by Baha Mar Ltd. or affiliates , with the Izmirlian family as the principal shareholders. They provided the equity funding and the Chinese EXIM Bank (CEXIMB) provided the loan to finance the total $3.5 billion capital cost that has been expended on construction to date. Under the recently announced receivership, the receivers Deloitte & Touche can foreclose the mortgage on the loan and thus seize ownership for CEXIMB, wiping out the Izmirlians’ equity.
However, CEXIMB has no interest, or experience, in operating the Bahama Mar hotels itself. To enjoy any financial return, it must find hotel companies to do this—to be the front-line parties hosting guests and collecting room revenue. At present, four separate hotel “partners” are signed up as lessee/operator, each responsible for guest rooms in its own tower with its own distinctive style and occupancy rates:
- Baha Mar Casino & Resort, the flagship, with 1,000 rooms and the potentially lucrative casino in a separate building, run by a gaming company with Las Vegas and Macao experience.
- Hyatt Hotels, with 700 rooms (reportedly in merger talks with Rosewood)
- Rosewood Hotels, with 300 rooms (currently in litigation about its commitment)
- SLS Hotels, with 200 rooms.
None of these partners contributed to the capital cost of construction, but they each incurred hefty up-front expenses, probably a few million dollars each, in branding, publicity, thematic design, and legal fees, plus hundreds of hours of executive time negotiating detailed contracts with Baha Mar under which each hotel would pay, typically, a fixed rental plus a share of gross revenues, topped by a share of net profits , with complex provisions for sharing advertising, common area maintenance, landscaping, and a myriad of other items.
In short, this investment of time and money has made the hotels, in effect, stakeholders in the project, and naturally they are eager to see Baha Mar open so that their investment will not just be written off.
Rather than search for a new operator and give up a large stake to a competitor like, for example, the Genting group active in Bimini, CEXIMB can simply contract with the four present hotel companies. It will be much easier for the Bank to take over the existing contracts with these hotels rather than to start from scratch negotiating new deals with new parties.
Of course, many functions must be handled centrally and not by the individual hotels, like the cooling plant, the Jack Nicklaus golf course, the convention center, restaurant and retail franchises, and the unique collection of Bahamian art assembled by curator John Cox. These centralized responsibilities are exactly what Chairman Sarkis Izmirlian, President Tom Dunlap, and a small team of senior executives have been successfully managing since the beginning of the project. Sarkis might now incorporate a special company to continue this role and act as a global coordinator between CEIXIMB and the four hotels, receiving a fee for its services. Whether Sarkis would retain any minority equity stake in the Baha Mar project would be a matter for negotiation between him, the Bank and the receivers.
The present Baha Mar employees, both the few remaining and the 2,000 recently let go, have had a warm relationship with Sarkis whom they regard as a visionary leader (despite efforts by headline-seeking politicians to blacken his name) and want to continue the contact. Many of them have key skills that will be sorely needed, and CEXIMB as new owner will find employee relationships much more amicable and efficient if it retains these people under Sarkis’ umbrella rather than seeking a new staffing pool and bosses.
One of the current stakeholders must be dropped from the equation. The Chinese lead contractor for Baha Mar , known as CCA, was leveraged into its role at the insistence of CEXIMB. I and many other Bahamians have ample testimony from responsible sources that CCA was incompetent to handle a project of this size and complexity. Worse, they simply downed tools and refused to put forward a firm completion date even when Baha Mar offered to settle financial disputes—the proximate cause of the failure to open. Abandoning Baha Mar is no great loss for CCA. Many of its imported Chinese laborers have remained in Nassau and simply been transferred downtown to work on The Pointe, the mixed use harbor-front development being actively marketed by CCA, owners of the BC Hilton. One of CCA’s principals, Daniel Liu, has transferred his presence from Baha Mar to a handsome suite of offices at One Bay Street to better supervise The Pointe and its multi-story parking garage. He may well be kept busy, as they are raising the wrath of many Bahamians because the glitzy design was never submitted for public approval.
Removing CCA from its Baha Mar role will be no loss to the project. The many Bahamian firms who were acting as sub-contractors and are owed at least $75 million are perfectly capable of completing the construction promptly, since the major elements are 97% finished. All that is needed is for CEIMB to retain them, and surely our Prime Minister is eager to see that solution. While CEIMB and CCA may have been linked like Siamese twins, a quiet word from Mr. Christie, backed by public opinion, can promptly separate the two.
A plus factor for Baha Mar is the financial benefits that can flow from the 300 residential units that have been built throughout the complex. I understand that about 150 of them have been sold, at prices starting at $2 million payable in installments. As soon as construction re-starts and a completion date is set, sales will recommence and installments will be paid. A substantial chunk of cash will become available to CEXIMB, to be used for reduction of its mortgage or the possible $600 million of completion costs. As long as the present publicity and marketing teams that were assembled by Sarkis can continue their aggressive campaigns from offices in New York, Europe and Hong Kong, there should be no need to take the dire step of “re-branding” away from the Baha Mar name.
As my readers know, I have always favored the Delaware Chapter 11 bankruptcy process as the best solution for Baha Mar—and for The Bahamas. But that battle is lost, and we now must look to the Chinese EXIM Bank as Government’s choice of a well- funded rescue party. I cannot predict precisely what will happen, but I believe the outline I have suggested could be successful. By combining the financial strength of the Chinese with the experience and personal standing of Sarkis Izmirlian, a reasonable compromise of interests can be found, that can extinguish present animosities in a business-like manner. A re-structured Baha Mar will attract new investors and soon repair any damage to our reputation for tourism.
And it should certainly please our Prime Minister, who whatever his faults is a kindly man who likes to remain on friendly terms with all sides to any dispute.
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Mr. Coulson has had a long career in law, investment banking and private banking in New York, London, and Nassau, and now serves as director of several financial concerns and as a corporate financial consultant. He has recently released his autobiography, A Corkscrew Life: Adventures of a Travelling Financier.
