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Indian hoteliers make it big in America

By Megha Bahree, Forbes
June 14, 2006 11:55 IST
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Sant Singh Chatwal did not exactly bootstrap his way up America's lodging industry by starting at a modest roadside motel, as have so many immigrants. His first fixer-upper hotel was in Manhattan, where today his clan is a part of the celebrity whirl. But the Chatwals' perch on the high end is a lodestar for the broader emergence of ethnic Asians in the resurgent US hospitality sector.

Sant, 63, and his two sons--34-year-old Vikram was briefly a model who appeared in Vogue--control Hampshire Hotels & Resorts. Its 17 properties (including 5 in development) have gone considerably upscale since the first hotel, the President, was refurbished in then seedy Times Square in 1987.

Some, especially the boutiques branded as "Hautel Couture by Vikram Chatwal," rent rooms and suites for princely sums, up to $5,000 a night, to the glitterati. The more standard approach of the new immigrant hotel operator is to offer value to business travelers or tourists, a model that has won them a remarkable share of America's inns.

The Asian American Hotel Owners Association says its 8,700 members own 40 per cent of US hotel rooms and more than half in the economy category.

The Chatwal story is unusual, however familiar its opportunistic strains. It began in a Sikh home in Punjab, whence young Sant went forth to teach in Haile Selassie's Ethiopia. Opening an eatery, he grew close to the ruling class there and fled after the 1974 revolution.

A few stops later he opened the Bombay Palace in midtown Manhattan, the first Indian restaurant to win over the fine-dining set. With that success in hand, he turned to the President and later to other hotels in New York and beyond. The Chatwals, who have backing from institutional investors, have 2,700 rooms worth a good $750 million on Wall Street and 500 more in development. Revenues this year are put at $200 million.

Whatever the dollar figures, the Chatwals have social currency. Bill and Hillary Clinton head a list of political pals. Lakshmi Mittal, the steel baron and richest Indian national, is one business buddy. Self-help guru Deepak Chopra and various musicians and models mingle with the Chatwals. When Vikram, whose more serious past is in finance, trekked to the motherland to marry a Mumbai model with a business pedigree last February, it made the cover of New York magazine and a style spread in the New York Times.

Although the Chatwals run fast nowadays, they've had to use survivor instincts at various points. "Do not be afraid to work long, tedious hours," is one Sant mantra.

Other, less heralded (but no less accomplished) immigrants in the hotel trade doubtless would agree. Three of their tales are told here. Success has typically involved building operating profits and equity, and reinvesting in ever more valuable properties--succeeding, in other words, by identifying and serving a market while shrewdly managing the assets of a growing business.

"But this is not a mantra among Indians," notes Vikram. Toil and competitiveness have gotten many Asians a foothold in lodging. On top of that, "One needs a calculated vision to reinvest. The only thing that will really help you grow and expand each year is to meet people's expectations."

The Developer

In 1979 Shan Leong (Sam) Chang, then 19, was already brassy and thinking big, even if he was not then so evidently a good bet. He'd emigrated from Taiwan and dropped out of high school to help his parents run a motel they bought in Los Angeles. In a new Pontiac Trans Am he bought on loan, Chang and a buddy took off to tour the country. Emerging from the Lincoln Tunnel into Manhattan, he took in the skyline and said that owning a little piece of it would make him a happy man.

Today Chang, 45, owns or is building 20 hotels in and around his adopted hometown, offering alternatives to the regal room rates that are the New York norm.

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Chang has zigzagged his way to being "the busiest Asian developer in New York City." Like Sant Chatwal's, his business story began with a restaurant he ran, in a suburb of Baltimore, Maryland, where he'd parked himself on one of his journeys. Several Chinese eateries that he subsequently opened led to the first of a string of modest hotels in the area, which he ran over 13 years. Too time-consuming and not profitable enough, he eventually decided.

In 1997 he switched tactics and purchased his first plot of land in Manhattan, not far from where he'd come out of the Lincoln Tunnel. The bad neighborhood was beginning to turn, and Chang put up a bargain-rate Comfort Inn. His new business model was to build and sell.

His building is done through Tritel Construction, where he is a 50% partner. In his customary suit and tie at a desk in his "second" office at Tritel, Chang punches in a few numbers on a calculator, his diamond-encrusted watch glittering. "I sold a lot of hotels," 22 in all, he says. Unlike many serial hotel entrepreneurs who tend to reinvest 100% of their capital gains under Internal Revenue Code Section 1031, which shields such gains made while trading up on properties, Chang keeps 20% for himself. "That's how I built up my cash," he says. He puts his kitty at about $200 million.

But, he rues, "I made several partners very rich." Hotel operating margins have improved in New York's post-9/11 recovery, so now Chang has changed gears again. He's keeping most of the 20 properties under his wholly owned McSam LLC.

Manhattan's new golden hotel age is a function of both demand and supply. A weaker dollar has made the U.S. an attractive venue for overseas travelers, domestic business travel has picked up again and Wall Street has been strong. Simultaneously, says John Fox of PKF Consulting, which specializes in the hospitality industry, New York has lost about 4,000 hotel rooms, most to conversion in the residential bubble. Total supply at the end of 2005 was about what it was at the end of 2000.

A tight market is fine for Sam Chang. His secret, he says, is a knack for spotting feasible sites for new, midsize, medium-range hotels in a city like New York, which is considered a saturated and high-barrier-to-entry area. The first Comfort Inn set the mold--it was 25 feet wide in front and only 13 feet in back, and he built it 15 stories high. In the financial district he's now building 20 floors on a plot 20 feet wide.

In helping to popularize the pencil-thin hotel property and in spotting the overlooked Far West Side of Manhattan as a locus of new development, Chang has succeeded at creating value lodging in a rarefied real estate environment. But he also is willing to buck established labor practices, and that has invited trouble.

Starting in April brewing tension at three Chang hotel construction sites erupted in altercations with picketers protesting Tritel's use of nonunion labor, unusual on major Manhattan jobs. A carpenters union local, trying to organize what it says is a crew inadequately trained in safety measures and unevenly paid, contends its reps were roughed up by a subcontractor's men. (There were arrests on both sides; Tritel says no operations have been cited for labor infractions.)

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"We can build a hotel in New York City only if we can get a good rate," says Chang. "The union was quoting a price of $400 per square foot, and we're building with $250 per square foot." He says a larger project ahead might offer the scale to afford a union crew, "but they try to force us to give them these small jobs."

For 2006 Chang estimates gross revenues for McSam and other development arms plus his half of Tritel at $380 million. At the top of his game in New York but still a single man, he figures he will keep up this frenetic pace for five more years and then slow down. That's subject to changing market conditions, of course.

The Realty Trust

Sam Chang says that over the years he's sold hotels to nearly two dozen Indian operators. None has been a more regular buyer than the Hersha Group, which has bought ten hotels from Chang and built a few others with him as joint ventures.

Hersha's origins typify the immigrant- innkeeper experience. In today's offices overlooking the Liberty Bell and Independence Hall in Philadelphia, group patriarch Hasu P. Shah recalls how 22 years ago no bank would finance his first hotel purchase. He turned to a loan shark in California. It took him eight months to get admitted to the Rotary Club of Harrisburg, Pennsylvania's capital, where he was starting out, because they thought he owned a "hot-sheet" hotel. Recently the same club gave him a community service award. The company's business model has likewise changed radically.

In 1964 Shah, at age 19, left what was then called Bombay to get a degree in chemical engineering in the U.S. Taking a Pennsylvania state job after graduation, the merchant's son began trading in family residences on the side. After he and his wife, Hersha, a childhood sweetheart from Mumbai (for whom the company is named), bought that first 125-room inn in Harrisburg in 1984, she doubled revenues in the first 15 months. Hasu gave up his job to run the business with her.

They started out with a strategy of owning and operating a dozen hotels in the "tertiary markets"--highway locations in central Pennsylvania and central Michigan using economy brands like Comfort Inn, Best Western and Red Roof Inn. They used cash flow to invest in new deals--the classic bootstrap approach.

Hersha would run the everyday business before heading home to attend to their two sons after school. "A lot of our dinner table conversations used to be about the business," recalls Neil, now 32. He and his brother, Jay, now 37, chipped in--doing maintenance, housekeeping, waiting tables or manning the front desk. Jay worked on their first spreadsheet when he was 13.

In the 1990s the Shahs, persuaded by their sons, decided to push their way into more urban markets. "Our taste and preference as people who grew up here [meant] we wanted to move into the bigger cities," says Neil. While he was an undergrad at Wharton business school, the M.B.A. program there took up the family's business as a case study in strategic planning. The urban push would give the Shahs entrée to better hotel brands, the students argued. An initial turnaround success (the family bought two hotels in Allentown, Pennsylvania for $13 million in 1994 and sold them to a REIT for $22 million four years later) convinced them it was the right way to go.

But the ambitious plan would require more capital, faster, than the 1031 method allowed. In 1999 the company, with then managing director Jay pushing the idea (Neil cheered it on while pursuing his M.B.A. from Harvard), went public with ten hotels, and the Hersha Hospitality Trust was formed. It's part of the overall Hersha Group, which has private hotel development and management. (Hasu says that naming the entity after his wife put off several Indian hoteliers, who wouldn't speak to him for a while for assigning a woman such pride of place.)

In the REIT boom of recent years the listing has yielded bushels of capital. Since 2003 the Hersha Group has invested more than $500 million to purchase medium- to higher-end hotels, such as Marriotts and Hiltons, all in the major metro markets of Boston, Hartford, New York, Philadelphia and Washington, D.C.

Today Hersha Group has more than 60 hotels. Nearly all are in the REIT, which in 2005 had revenue of $85 million, up from $56 million in 2004. The group's total asset value reached $850 million.

The Shahs' next step is their own brand of independent boutique hotels. The first, the Loft Hotel Tribeca in Manhattan, with a fancy bar, famous chef and rooftop deck, is set to open this fall.

Hasu, now 62, is easing off his workload and handing the reins to Jay, the chief executive of the two entities, and Neil, president and chief operating officer. The brothers recently closed a road show for investors. The issue was 2.4 times oversubscribed.

They are also taking the business back to where Mom and Dad met. Hersha recently bought a 1.25-acre parcel in Mumbai for nearly $3 million. Neighbors include multinational tenants, such as JPMorgan Chase, Marriott and Nike. The Shahs are planning a 175-room corporate extended-stay hotel.

The story of the Shahs and Hersha, though now a far cry from its familial origins, is nonetheless emblematic. "Work hard and together, invest capital in what you know and can manage, and grow personally and professionally, while staying together as a family," says Neil.

The Public Citizen

The sky's the limit at the Shahs' new boutique and others in New York City, but one amenity-conscious operator in the pricey market hews to a value model. It's Apple Core Hotels, where Vijay Dandapani is a partner and chief operating officer.

The company buys underdressed properties and repositions them as well-equipped inns for the savvy traveler. Not only does it keep room rates down, but it eschews the nettlesome practice of many high-end hotels of hitting up patrons who are already paying hundreds of dollars a night and want (or expect) access to a cup of coffee or a gym workout in the bargain.

"What are they going to charge for next--sheets?" Dandapani, 48, jokes. "We're in the profitmaking business, but we also provide value."

Apple Core includes fitness centers (it started this in 1994), breakfast (as of 1996), a business center and Wi-Fi and Voice over ip connections. All this, in an "intimate" and sometimes distinctive space in Manhattan, comes for about $165 a night.

Dandapani has not followed the customary path for an ethnic Indian hotelier, either. He did not, for example, bootstrap capital or rise in a family venture. He took the corporate route more familiar to non-Asian careerists in the U.S. industry.
The Chennai-born son of an Indian Air Force officer, Dandapani, while working at India's Oberoi Hotels, received a full scholarship from the Aga Khan Foundation to Cornell University's prestigious School of Hotel Administration.

After getting his M.A. in 1987, he worked at Grand Champions luxury resort near Palm Springs, California and then joined a franchised-hotel operator in North Carolina. His third job landed him in New York as vice president of operations for Sant Chatwal's Hampshire Hotels. The brief stint, he says, gave him an exposure to New York City's high-end, tough-to-enter hospitality market.

Within 15 months Dandapani moved on to Apple Core, where he helped create the brand name as an umbrella for properties his American partners were operating separately. (The hotels are franchised and use the national brands out front, but Apple Core has its own reservation channel, as well.) Since that day in 1993 he has gained 2% to 15% of the shares in the company's six hotels, which retain discrete ownerships.

At $165 a night, can there be anything left for the owners? Dandapani says Apple Core had revenue of $42 million in 2005, with 35 per cent to 40 per cent gross operating margins. Business hasn't always been so good--after the 9/11 terror attacks and the start of the US war in Iraq, margins dropped to 15 per cent. Apple Core responded by looking for new value propositions, even handing out a few handheld GPS devices to appeal to a diminished flow of visitors.

That experience reinforced Dandapani's belief that, for all the operational tinkering, his business is shaped by economic and international forces beyond the company's control.

That inspires Dandapani, the world citizen. After 21 years in the US he's in the process of becoming a naturalized American. But these days he's also involving himself in public affairs to a degree unusual for even a full-fledged American businessman, let alone an immigrant.

One wall shelf in his office is lined with works such as Steven D. Levitt and Stephen J. Dubner's Freakonomics, Gilles Kepel's The War for Muslim Minds and Fernand Braudel's A History of Civilizations. He attends events at the Council on Foreign Relations in New York and supports the Carnegie Endowment for International Peace and the Cato Institute in Washington, D.C. He's had letters to the editor published in both local and global press, including the Wall Street Journal, Financial Times and Commentary.

This instinct to be an active citizen was a part of Dandapani ever since he can remember. "Even as a 10-year-old living in India, I followed the Vietnam War," he says.

There's also family life: Daughter Aditi is seeking a B.A. in mathematics at Columbia University and son Rohan is in tenth grade and a sports buff. Dad, too, likes his cricket: In May Dandapani was off to Trinidad to take in a one-day match between India and the West Indies.

But running a business in a booming though increasingly competitive sector is still what occupies most of his days. These days Apple Core is casting about New York for more properties. The latest unit is near the commercial airport serving affluent Long Island communities.

Like the Shahs, Dandapani is drawn back to his roots and is working with his partners to expand to India. But he complains about the "ridiculous" land costs. "We're paying $2 million per acre in Chennai and on Long Island we're paying $500,000 per acre."

They're still negotiating a deal.

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Megha Bahree, Forbes

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