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Beleaguered Watergate Hotel Draws an Offer, But Will the Deal Close?

Beleaguered Watergate Hotel Draws an Offer, But Will the Deal Close?

After sitting vacant for two years, the famed Watergate Hotel on the bank of the Potomac River in Washington, D.C. is embarking on a new chapter in its storied life. It is once again for sale and has attracted a purchase agreement. The big question is: Will the deal go through?

The hotel has been for sale off and on over the past few years, and although the sellers and their brokers are optimistic, in this economic climate, financing for hotels and other commercial real estate isn’t easy to secure. And the property, built in the 1960s, needs renovation, particularly after languishing unoccupied for two years.

Broker CB Richard Ellis listed the 262-room hotel for sale on behalf of owner PB Capital, part of the German lender Deutsche Postbank AG, and has received a promising offer from Holland Development Group, which develops commercial real estate projects in the District of Columbia, suburban Virginia and Boston.

“There’s a contract being negotiated,” says Marc Magazine, senior vice president of CBRE’s hotel partners division in Washington. “We absolutely expect the property to trade in the $40 million range.” He declined to reveal the amount of the offer.

To be on the safe side, the brokerage is gearing up for a major sales campaign in the event the deal doesn’t close. “You never know if contracts get completed or fall through. We’re getting ready to start the marketing process if need be,” says Magazine.

The Watergate Hotel is part of a five-building office and residential complex that gained notoriety in 1972 following a break-in at the headquarters of the Democratic National Committee, a scandal that eventually led to the resignation of President Richard Nixon in 1974.

Apart from its history, the hotel’s location in the heart of the city near public transportation and cultural sites also is a powerful draw. “I don’t know if there’s a better site that overlooks the Potomac River with views of the Kennedy Center and the monuments,” says Magazine.

A number of potential buyers are paying attention. Some major hotel companies have made inquiries, including chains that want to plant their flags on the icon.

This isn’t the first time in recent years that the Watergate’s owners have tried to sell or convert the 42-year-old property. Previous owner Monument Realty, based in Washington, hoped to win city approval to turn the hotel into permanent residences, and at one point it appeared that the approval would be forthcoming, but the effort fell through.

Facing mounting bills, Monument closed the hotel, and defaulted on its loan from PB Capital, a reported $43 million mortgage. “In the last 18 months, both residential and hotel markets turned sour on them, and they missed the market,” says Magazine. This summer, Monument’s lender, PB Capital, foreclosed and took the property back.

In late July, PB Capital tried to auction the hotel, but the results were disappointing, and the bank wound up bidding $25 million for the property, which it is again attempting to sell.

Needs work

To an extent, the hotel has become the victim of timing. In today’s ailing economy, credit for major commercial real estate acquisitions is hard to come by, which limits the pool of potential buyers to those with ready sources of cash or lines of credit.

Another problem is that the shuttered hotel needs substantial renovation. CBRE won’t hazard a guess on how much it might take to revitalize it, since that depends on whether an owner wants to bring it to say, a four-star or five-star level, and whether it becomes a boutique hotel or chain asset. Any renovation would be expensive — $10 million would be a drop in the bucket.

The hotel has about 262 large rooms, but those could be reconfigured for a larger room count, to perhaps 280 rooms, depending on the renovation and design a buyer chooses.

Holland Development is expected to conduct its due diligence and make a decision on whether to proceed and submit a nonrefundable deposit by early November.

Holland’s current developments include a 108-room Courtyard by Marriott in Warren County, Va., and a Holiday Inn Express in Springfield, Va. It is also working on the $50 million Potomac Overlook at the Watergate project, a 28,000 sq. ft. site located between the Watergate and Key Bridge, which links the District to Virginia. The condominium project is expected to break ground in three years, according to information available on Holland’s Web site.

With regard to the Watergate Hotel itself, the property likely will remain a hotel, says Magazine, and with redevelopment it could once again become a showplace. “No question about it.”

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