If Baha Mar was a boxer, it would be receiving a standing eight-count right about now, chopped down and battered by an underrated opponent: poor planning.
The $3.5-billion Baha Mar project, set on 1,000 acres along Cable Beach in Nassau, Bahamas, was an ambitious project from the start, with a four-year development timeline. That is compared to the 12-year phased development of Atlantis Paradise Island Bahamas.
The complex was to include a 1,000-room casino hotel with a 100,000-square-foot Las Vegas-style casino, a 700-room Grand Hyatt, a 200-room Rosewood hotel and a 300-room SLS LUX. A fifth hotel from Morgans Hotel Group was also slated, but Morgans pulled the plug on the project in April 2014 citing a management dispute.
That was one of the early signs of trouble. The entire development was slated to open in December. That date came and went. A March opening was then announced, but it too didn't come to fruition. Now, it's anyone's guess when the mega-resort will officially be open for business.
The problems stem from dismal planning and broken trust between three main entities: the resort's developer, Baha Mar Ltd., the resort's primary lender, China's Export-Import Bank, which financed the project with a $2.5-billion loan, and the resort's builder, the China State Construction Engineering Corporation.
The project, which got underway in 2011, is now facing mounting trouble. Construction came to a grounding halt after Chinese construction workers walked off the job, saying they were owed back pay. The delays proved too much for the developers, headed by local businessman Sarkis Izmirlian, who were compelled to file for bankruptcy protection, citing the the delays.
More recently, the project sustained another blow when Rosewood petitioned to pull out of the project, citing "numerous incurable defaults' on the original contract signed with Baha Mar in 2011." Rosewood specifically argued that the developer did not have enough money to uphold its obligations under the contract.
In the latest turn, Baha Mar Ltd. filed a plan outlining the way the stalled project could restructure in chapter 11. According to The Wall Street Journal, the structure of the proposed plan swaps the ownership of Baha Mar for new financing, meaning whoever finances the project will end up owning the resort.
Baha Mar has estimated that it will require at least $300 million more to complete the project. Another proposal had the bank teaming up with the project’s contractor, China Construction America Inc., to fund the completion. Of note, the proposal pushes China Construction out of the project by rejecting the company’s contract and canceling its current $150-million equity stake.
Trouble in Paradise
The saga is a reminder that projects—large or small—take trust, communication and smart planning.
"Development of a large-scale, master-planned resort situated in a foreign island nation is challenging and carries a substantial amount of risk," said Daniel Lesser, president and CEO of LW Hospitality Advisors, a New York based hospitality advisory firm. "In the case of Baha Mar, the fact that the financing and construction contractor of the project are based in another foreign-situated country half way around the world further exacerbated the risk profile of the development."
With various moving parts, it's no surprise when a development of this sort goes off the rails. "Projects of this magnitude require a huge degree of continuity and trust between governments, developers and contractors and a recognition that failure will result in economic and reputational damage to all parties," Lesser continued. "Furthermore, the fact that Baha Mar’s hotels include five different hotel operators created more obstacles when compared with the notion of having one management company responsible for day to day operations."
Additional obstacles include the fact that the ownership holding company of the project is domiciled in the U.S., a nation with laws and regulations that differ from those in the Bahamas.
"Based on its conceptual innovation and the quality of its hotel brands and core amenities, intuitively Baha Mar should succeed," Lesser said with a glimmer of hope. "However, the lengthy bitter disputes, construction delays and cost overruns will most likely result in several write-downs before the project becomes financially feasible."
Risk Aversion and Solutions
So, what can developers do to ensure that these problems never arise in the first place? As Sam Cicero, Sr., founder of Cicero's Development Corporation, points out, uncertainty can lead to risk and realized risks can lead to project failure. "Thus, it is critical for project managers to understand the relationship between risk and the success or failure of projects."
Cicero outlines four fundamentals for disaster aversion:
1. Early team involvement
2. Proper planning
3. Project management procedures
4. Good and consistent team communications
While there are variables that can derail a project, sticking to these basic fundamentals can save and deliver projects.
How foreign investors can better and more smartly work within North America will be the focal point of the North America Tourism & Hospitality Investment Conference (NATHIC), Nov. 4-6, at the Fontainebleau Miami Beach. An opening keynote by Barry Johnson, the founding executive director of SelectUSA, will discuss North American foreign direct investment trends, challenges and opportunities, both from a general perspective as well as specifically for the hospitality sector.
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In a can't-miss session, senior-level hotel investors will discuss "The 5 Ws of Foreign Direct Investment in North America," a panel that will showcase cross-border investment as today's biggest hotel real estate story and how investors can succeed within it.
For more information, and to register for the conference, check out nathic.com.