How We Work with Cities to Build Hotels that Enable Growth - Stephen Galbreath, Garfield Public Private

Stephen: I'm the Chief Development Officer and Head of Design and Construction for Garfield Public Private. I'm a licensed architect. I'm a lead AP BDNC, which is Building Design and Construction from the USGBC. And I started off this trek into hospitality back in 1993. Graduated from college, graduated from Texas A&M University. and became an architect and worked my way through working, you know, the 80 hours a week or 100 hours a week that we did when we were younger working on projects. And then I was invited by one of the guys in the office said, hey, we're involved in this hospitality project. If you could just help out for a couple months, it would be great. And so I got involved in that project and now that's almost 30 years later, I'm here doing this. And so about eight years ago, I joined Garfield after being a principal at RTKL. And RTKL went through some sales, married together with Callison and became CRTKL and then now is Arcadis. But yeah, so I was traveling way too much. I was overseas all the time and started having a family. I have some photos behind me there if you've seen. Started having kids very, very late in life and decided, hey, I want to be around. So I partnered up with some guys who were actually clients of mine. Ray and Greg Garfield at Garfield Public Private were my clients when we did the Sheridan Hotel, the Convention Center Hotel in San Juan, Puerto Rico. And it was a great project. It was a ton of fun. And I got to know those guys really well. And so when I left RTKL, it just became kind of an easy thing. They were like, come join with us and we'll partner up and do great things here. And so we've been doing that ever since. And I've been able to do, we've done four hotels since I joined here. First was the Westin in Las Colinas, Irving, Texas. about a 350 key Westin hotel, full service convention center headquarters hotel. And just this year, just this spring and summer, we've opened three hotels that were kind of all delayed during COVID. They all stacked up and opened within about 60 days, which is tough. But we opened a DoubleTree by Hilton in Abilene, Texas with the partnership with the city of Abilene, which was spectacular. And then we had two Hyatt Regencies we just opened, both in the Houston market, one in Baytown, Texas, and one in Conroe, Texas.

Josiah: I want to get into the details of this, but maybe to start out at a high level. A lot of folks listening to this show love hospitality, right? And like me, maybe don't have a lot of knowledge around what goes into developing a hotel or a hospitality project. In your view, you've seen this a lot from a lot of different angles. What are kind of some of the big challenges at a high level of developing a new hotel?

Stephen: Sure. So for the first 20 years of my life, I was an architect and I kind of focused on the architecture things. And then I kind of got up and took us, you know, moved over two seats and sat back down. So now I kind of pay attention to a little bit different things, but it's, you know, it's always comes down to money is one of the most important parts of these things, right? Getting things happen to happen right now. Interest rates are a pretty tough, tough thing. I think everybody knows that you, go to refinance your house or buy a car, you're going to see that interest rates are high. They're high for everyone. When we opened, when we closed on these three hotels back in the fall of 21, it was the lowest interest rates of our lifetime. And so those deals did amazing and not to get too deep in the weeds, but less than 4% cost of capital totally for that project. It's probably double that now. So the things that we try to do, we're a fiduciary with our clients and we really look out for them. We're trying to help these cities that have never had a full service hotel or a convention center hotel get that asset and really try to figure out how to bring in high impact business. And that's really the point. As an example, some of the numbers that the GM of the Irving Convention Center told me, before we opened the Westin in Las Colinas, the average guest that was visiting Irving for the day was spending $25 a day. Once the hotel was open, the average guest was spending $250 a day. And it's because they're staying at the hotel, they're eating in the restaurant, they're going to the other restaurants, and really not just picking up fast food on the way out of town.

Josiah: Wow, it's interesting, and I think it leads me to what I was really curious to ask you about, is what is the impact and the potential of a hotel in a community, right? And maybe we use Abilene, your project in Abilene as an example, because that's my, my understanding is that's where Conrad Hilton got started, right? So it has some interesting roots in hospitality, but that community was challenged to open up the hotel project that you were looking to do, right?

Stephen: you know it's it's pretty it's pretty typical that a city will have been thinking about doing one of these for 10 or 15 years and maybe gone after it two or three times and we're never the first guy they talk to because we come in and tell people the cold hard truth here's what it costs here's how long it's going to take and the issues with working with a municipality are The city councils, they kind of have a time limit, right? They're there for a time. The mayor is there for a time. City managers, they move around. So somebody has got to be passionate about this kind of project that's invested in that city and they're going to stay involved. So it's somebody in the economic development group or maybe in the chamber of commerce. that can really grab a hold of this and take this through, you know, one or two or three city councils, right? It is challenging. These are expensive projects. Cities always are trying to get the best deal they can they that that's that's what they need to do for their constituents, right? And so in Abilene, you know, we sat down the I remember the very first time we went to a I don't know like an RFP open house kind of thing. Hey, we're gonna we're gonna put this RFP out there and we went and went and met with the city manager Robert Hanna and and said, hey, you know you have to put in 30% of this deal, right? And he said, absolutely we do. And five or six years later, it took five or six years, but they opened a hotel. And that city was so behind this project. The groundbreaking that we had there was probably the most applause I've ever heard at a groundbreaking in my life. It almost kind of scared me because the crowd behind me was like, So it was fun, and that's the way they were when we opened the hotel. So Abilene was a great example.

Josiah: What's interesting, Stephen, because I'm new to this whole world, but frankly, it kind of surprises me if I heard you right. So the city was putting in some money into the project. I thought it was all private investors, but you got some financing from the city.

Stephen: Yeah, yeah. So typically, and this is way oversimplified, so don't get caught up in my numbers, but generally it's kind of the way it goes. If a hotel, let's say, costs $300,000 a key to build. That's a lot more than that now, but if it was $300,000 a key and you could only get $200 a night in rate. then there's kind of this disconnect of about a third, right? Because one of the old sayings is you can put in $1,000 for every dollar of rate that you get into a room. So $300,000, $200 a night, there's a third gap. And so somebody's got to put that money up. And it's typically what the municipality does. We call that the gap. And so we can come in and do work with a banker like Piper Sandler or a Citigroup and find institutions to go buy the two-thirds, they'll go buy that, and that really is just Amortized by the NOI or the net operating income of the hotel the city doesn't have to stand up for that But the city has to kind of fill this gap and that's kind of what it what it what the city's investment is now in Abilene Robert Hanna was very fortunate and also he really worked hard to get some money from a couple of donors So he got some large grants that picked up a big chunk of that city's input in the project

Josiah: I'm curious, so whether it's a project where you have an ally in the Economic Development Council or you're working with the municipality, you have somebody in there that is maybe not in the political cycle of a mayor or some of this. I'm curious what the message is to other stakeholders of why we need this hotel. Is it about bringing more economic activity to that community? How do you make the broader presentation to others?

Stephen: Yeah, I mean, it's all about high-impact business. It's about sales tax. The state of Texas is, you know, very gung-ho on development. We have a bill that started out with a bill called the House Bill 4347 that allows cities to get back from the state the state's portion of sales tax from that hotel for 10 years. And so That could be a third or a half of what the city's putting in. They're getting in rebates back from the state. So we ask our municipal clients, we say, hey, you put this money in, it's not a subsidy to us, we're a fiduciary to you, you put this money in as an investment, and you are the owner of the hotel. And then we show them all these ways you get the sales tax back from the state here. Here's your city portion of sales tax you're going to make just from this hotel. And then by teaming them up with a great operator, We'll come in and fill this hotel with high-impact business, folks that are coming in for two or three days, coming in for association business, and then transient customers as well, people who are just always going to stay, in Abilene's case, in a Hilton or a Doubletree. They always want to get their Hilton points, so they'll stay there.

Josiah: That's great. And then I think, you know, it's exciting to hear about hospitality being this catalyst for growth, economic activity. Although I also know that, you know, local politics can be a bit of a minefield. What have you learned about navigating that minefield? Even if you get a lot of support, I imagine there's still some sticky stuff to work through.

Stephen: Sure, sure. First off, I'd say, and you're dead on on this being a catalyst, and I don't know the exact numbers, but I read that after this hotel was announced, Abilene had maybe 40 permits pulled in downtown for new work done. So once you start construction, people really start trying to figure out what they're going to do with the space around it. Once it's open, people are just gung-ho. I think we're going to really start to see that side of town really start to develop. Abilene's a great city. And it's got a really neat side of the city that's been developed. And now that the hotel is kind of over here, you're going to see that kind of spread and go throughout there. And political minefields, I mean, politics is tough, right? Texas is a very conservative state. A lot of people don't like the city getting involved in politics. investing in things like this, but these kind of projects really do bring in the high-impact business and the sales tax. These projects should be able to go on their own and actually produce income for the city. I think when we did the bond runs for Abilene with the investment that they put in and the The investment from a couple of organizations in Abilene, I think Abilene's projected to maybe get 60 to $70 million of payments back over 30 years. Now, it's over 30 years, but at the end of that, they own the property as well. Because what we do is we help the city go in, we try to keep it off their books, right? It's not technically owned by the city of Abilene, for instance, right? So the city comes in, we'll open up, help them set up a 501c3 or some sort of not-for-profit tax-exempt structure in Abilene. It's called a local government corporation, an LGC. In other cities, we've used their Municipal Development District, or an MDD. So we have that structure set up, and the city owns the land, and then the city owns the meeting space, and the ballrooms, and the boardrooms, et cetera. And then this not-for-profit owns the tower, and just really leases that from the city. So all of this kind of comes into one big piece, and it's all on behalf of the city.

Josiah: It's exciting because you've articulated a practical path for everybody winning, it seems, right? Where it's not just your investors, it seems like the town's winning, the residents of that community, the people doing business in the community. So it's exciting for me to hear. I'm curious, what is most exciting for you as we close out this year, head into next year, as you kind of think about projects? What are you thinking about or most excited about right now?

Stephen: Yeah, I think the thing that really is the reason why we're a company is to help secondary and tertiary cities get important infrastructure that they couldn't get otherwise. They don't know the path to get to move forward. They don't know how to get a new city hall or a new parking structure for their struggling retail or a performing arts center or a hotel. So we can really help them look at this asset that they're trying to get and really how do we structure it financially? How do we build it? through everything. We don't just do hotels. We're involved in a lot of different kind of things that are hospitality driven. I mean, performing arts, you know, I think we've likely developed more performing arts centers than any single developer because they're typically not done by a developer. But for instance, Buddy Holly Holla Performing Arts and Sciences in Lubbock is something we're very proud of. It's a great project and we just look forward to seeing more and more of those kinds of projects getting built in cities all around the United States, not just in Texas.

Josiah: Yeah, yeah, there's a real power to improving lives, right? But you need the built world to be the stage, literally, in the case of a performing place. But also in a hospitality sense, it's a stage for a lot of activity.

Stephen: Absolutely. I think hospitality is not just hotels. It's a dining experience. It's an entertainment experience. I spent a number of years when I was at RTKL working on projects for Las Vegas Sands. And so I spent a lot of time in Macau and in China building these huge resorts mega resorts, thousands and thousands of rooms, you know, a million square feet of casino kind of projects. And it's all about the shopping experience. It's all about the dining shows. And then it all kind of ends in your room, right? So it's fun.

Josiah: Well, it's interesting, and I think if I understand you right, it seems even in those projects halfway around the world, there's parallels to what you're doing in communities in Texas and across the country in the sense of using hospitality as this economic growth engine. And it depends on the scale of the project, but it's interesting to see each region.

Stephen: Sure. You know, when I was an architect and working on kind of these amazing world-class resorts all over the world, I've now taken those relationships that I have with those people and brought them with me, you know, doing a project in Abilene or doing a project in in Baytown or in Irving, Texas. So the interior designers, the architects, the structural engineers that I know are working on these projects with me. So really these cities are getting world-class design. And I think maybe sometimes these are people that travel all the time. You and I probably stay in hotels all the time and I see the smallest things and I'm like, boy, I would have done that a little differently. And they might not know why they like the hotel so much, But for instance, like air conditioning, one of the things that drives me crazy about when I stay in a hotel is if the air conditioner is just coming on and back off and it's on and it's off and it's all night long. We push our fan coil units all the way to the corner of the room back by the door and duct over the closet so that it's quiet. Now, maybe they don't understand that, but they really like it. And they're like, boy, I got a great sleep last night. It was quiet. Well, there you go. Putting drop seals on the door, right? So you don't hear people going by in the hallway. The door closes and pushes this seal down that makes it quiet. People don't don't maybe always understand that, but they really appreciate it when they sleep well. It's in the details.

Josiah: It's all in the details, right? I love this, Stephen. You've given us, I feel like, a masterclass in development, being creative, making things happen. Appreciate that. Is there anything else you wanted to mention before we go? I feel like you shared a lot, but is there anything I always want to check? Is there anything else that is top of mind for you right now?

Stephen: A lot of developers are doing lots of different projects. City of Dallas has their big convention center, billions of dollars of development going on. While we're helping communities really get themselves ready to start their developments, Maybe right now is not the right time because of interest rates, but we're starting to get things kind of queued up so that when interest rates start to drop, we're poised and ready to go. And we're also trying to go out there and maybe look at the broader sense of things. We're starting to get involved in energy, solar, and things like that that are important in Texas. As I'm sure you guys have all seen, we had the freeze a couple years ago. We had major power issues. We can't solve all of that with wind power, but with wind power and solar and really looking at how we deal with our power structure here, we can really make it better. And so we're getting involved in things like that as well now. You don't stop. You keep going.