New Castle County wins Sheraton South auction for $19.5M

The New Castle County government won a heated bidding war in the final day of the online auction for the Sheraton Wilmington South hotel off Interstate 95 near New Castle. | PHOTO COURTESY OF JLL

NEW CASTLE – In what turned out to be one of the most-watched Delaware commercial real estate auctions in recent memory, New Castle County won the auction for the Sheraton Wilmington South hotel Wednesday with a bid of $19.5 million.

Although the county’s winning bid did not appear to meet the reserve bid threshold, which would require the sale to proceed, the auction site now lists the property as in escrow. County Executive Matt Meyer clarified that the sale has not closed, as a due diligence period would ensue before it does. The county will end up paying more than $20 million with the 5% transaction fee factored into the sale though.

The auction became a high-profile affair after New Castle County announced its proposal late last week to buy the hotel using federal CARES Act funds and turn it into a homeless shelter and social services center. After expedited discussions by the Meyer administration and the county council, the plan was approved with an undisclosed bid strategy at the council’s Oct. 27 meeting.

The county entered a heated bidding war that pushed the final bid up $7 million in the final few minutes of the auction with $1 million minimum increments. Despite that push, Meyer said that the county was able to win the bidding at $125,000 less than the appraisal from an independent, third party hired by the county.

While the county may have been prepared to bid higher than it did, Meyer said exceeding the appraised value would have been a difficult decision. County officials do not know the identity of the other bidders.

The 192-room Sheraton located at 365 Airport Road off Interstate 95 was on the block from Oct. 26 to 28. The final bid price was more than 250% over the starting bid of $5.5 million, but would still be a loss for its Pennsylvania-based owner HHM, a publicly traded real estate investment trust formerly known as Hersha Hospitality Management, which bought the hotel in 2010 for $15 million, according to county land records.

The six-floor hotel completed a $6.4 million renovation that upgraded its guestrooms, guest bathrooms, common areas, events space, mechanical and technology systems in May, amid the worst of the COVID-19 pandemic’s economic impact.

The Sheraton is likely suffering like all hotels through the pandemic, which has led to canceled events, curtailed corporate travel, and discouraged leisure vacations for many. According to the Delaware Hotel & Lodging Association, hotel occupancy in New Castle County was down about a third through September compared to 2019. The county’s revenue per available room, the key industry metric that multiplies the average daily room rate by the occupancy rate, is down by nearly 45% through September.

Should the sale close as expected, the county anticipates placing the first people in the hotel in December. According to the 2020 Point-In-Time Survey that annually tracks the homeless population each January, New Castle County had 665 homeless people. As of Oct. 19, the county’s 15 homeless shelters had 199 of 300 beds available to the homeless, but many required either a negative test or a 14-day quarantine before entry.

The audacious plan, which will remove the hotel from the county tax rolls, was spurred by similar homeless housing projects in Los Angeles, Minneapolis, and Forth Worth, Texas, according to officials. They reportedly began to concoct a similar approach utilizing the eligible federal stimulus funds to back the purchase after seeing Delaware Business Times’ report on the impending auction.

One of the major questions now for the county is who will operate the shelter and services center and what the cost of that plan would be. Carrie Casey, manager of the county’s Division of Community Development and Housing, told the county council that officials were negotiating with HHM about operating the shelter. HHM has such an agreement with a shelter in New York that coincidentally also formerly operated as a Sheraton, Casey said.

In a call with the media Wednesday afternoon, Casey said that the analysis for that cost was still being done, but the county expects to be able to tap federal and grant funding streams it already receives for emergency housing to help offset it. While the CARES Act funding to municipalities and states carries a Dec. 31 deadline to be spent, several million dollars in funding from the same federal stimulus bill that comes to New Castle County by way of the U.S. Department of Housing and Urban Development doesn’t have to be expended until 2022, Casey added.

“This is really a testament to some of the amazing things that we can do when everybody’s collaborating together,” Meyer told reporters, noting that includes the county, city, state, and federal officials as well as private providers and individual citizens. “This is a unique time and unique times present opportunity.”

By Jacob Owens

jowens@delawarebusinesstimes.com