By Marlize van Romburgh Friday, November 25th, 2011

The international hotel firm behind El Encanto Hotel in Santa Barbara has received $45 million in construction financing for the project and plans to open the luxury hilltop villas by late 2012.

When all is said and done, Orient-Express Hotels will have spent more than $90 million to buy and renovate a project it’s not sure will do much more than break even, but that it’s  certain will give it a foothold in the U.S. luxury hotel market.

“We do think it’s worth proceeding with just because we’re going to have a fantastic hotel on the West Coast of the United States, which will be among our premier resorts and will do an enormous amount to lift the brand awareness in the United States, which of course is our key market,” interim CEO Robert Lovejoy told investors in a third-quarter earnings call.

Orient-Express, a publicly traded boutique firm that owns 34 high-end hotels around the world, plus a collection of safari experiences and luxury trains, bought El Encanto for $26 million in 2004, after the untimely death of previous owner Eric Friden.

It estimated then that it would spend $10  million to upgrade the property in the following off-season. It also said it felt it could beat the $400-per-night average rate and 75 percent occupancy other luxury hotels in Santa Barbarbara were fetching.

But when the U.S. credit crisis hit, Orient-Express shut the project down almost completely and decided to wait out the recession.

“We obviously had a difficult decision to make before we went ahead with the investments in El Encanto, especially after shutting it down during the financial crisis, and being able to continue was very much conditioned upon getting bank financing, which happily is in place now,” Lovejoy said in the recent conference call.

Orient-Express said recently that it now estimates it will spend another $65 million on top of what it has already invested to finally finish the hotel over the next year. It will need another $20 million in construction financing in addition to the recently secured funds, it said.

When contacted for this story, Director of Corporate Communications Vicky Legg declined to give out details about the hotel’s progress, plans or the recent financing.

A November newsletter from Orient-Express to neighbors of El Encanto said the company’s work with the city of Santa Barbara on permits and plan-check corrections was drawing to a close, and that it expects to receive its final permits in coming weeks.

Apartment-style hillside cottages dating to the 1970s were demolished in late September and Orient-Express has started excavation and shoring on El Encanto’s underground parking structure.
The company spent November restoring the arbor and several historic garden cottages on the property.

With most of the funding in place, Orient-Express is shooting for a soft opening of the 92-unit El Encanto by late 2012.

Los Angeles-based real estate investment company Sonnenblick-Eichner Co. said Nov. 15 that it had arranged the recent construction financing, which comes from “an international money center bank.”
Elliot Eichner, a principal at Sonnenblick-Eichner, said in a statement that his company was able to arrange the financing “despite a dearth of construction financing in the market for hotel development” because of the strength of the Santa Barbara tourism market.

In the third-quarter earnings call, one analyst asked Orient-Express’ executives about the financial feasibility of El Encanto. “I mean, you say you’ve completed the new loan facility and that you’re going ahead with the renovation, but when we last spoke, or when you last mentioned this, you said you weren’t sure that you were going to go ahead and the full costs that were shown to us were … showing very low returns, barely breaking even,” he said. “And I’m just wondering: What your returns assumptions are now, and what you assume for occupancy and room rates and when you expect to break even?”

Lovejoy said he did not have occupancy or room rate estimates on hand. “Look, it’s not going to be the best financial return on a forward-looking basis — it will be just below our cost of capital,” he said.

But a presence in Santa Barbara, one of the best-known resort towns in the world, will be key to boosting the Orient-Express brand in the U.S., he said.  “I can tell you that it’s going to be stabilizing out at around or about $6 million, and that will take three or four years after opening.”