Malta Group Buys Nevskij Palace

MTWith the Nevskij Palace hotel, IHI is assuming $130 million in debt.
ST. PETERSBURG -- Putting an end to a 12-year, $130 million saga, Malta's International Hotel Investments, or IHI, announced Wednesday that it had purchased the Nevskij Palace hotel and that it is also planning to develop the buildings on either side of the hotel.

While both IHI and the St. Petersburg city administration refused to disclose the terms of the agreement, which was announced at a ceremony at the hotel attended by St. Petersburg Governor Vladimir Yakovlev and IHI officials, Vedomosti quoted a figure of $40 million. That figure was confirmed by an IHI official, who spoke on condition of anonymity.

Fifty-one percent of the shares in the hotel belonged to the city government, with 39 percent in the hands of state-owned company Hermitage and 10 percent owned by ABV Hotel-Invest of Austria, which was responsible for the construction of Nevskij Palace.

But the $40 million represents only a part of what IHI will have to pay out for the hotel and to develop the neighboring buildings, which are located at 55 and 59 Nevsky Prospekt. IHI inherits not only the controlling stake from the city, but also $130 million in debt owed to Kreditanstalt Bank of Austria. The figure represents the $100 million loan from Kreditanstalt that the city guaranteed for the hotel's construction in 1989, plus interest and penalties.

According to Natalia Belik, head of the public-relations department at the hotel, the company has already reached an agreement with Kreditanstalt Bank on paying off the debt.

"IHI is ensuring that all debt obligations from the hotel toward its Austrian creditors are settled in full," Belik wrote in a press release.

As for the two neighboring buildings, IHI plans to integrate them into the structure of the hotel, creating a five-star complex that would increase the number of rooms in the hotel from the present 282 and add a conference center and retail space.

According to Alexei Chichkanov, deputy chairperson of the City Property Committee for legal questions, the two buildings will be handed over to IHI through a standard procedure by the city Investment Tender Commission.

Yakovlev signed an order in November 2000 saying the buildings must be handed over to an investor and renovated in time for St. Petersburg's 300th anniversary in 2003. While the renovation project won't be finished on time -- IHI said they have yet to submit a building plan -- Chichkanov said they would at least be able to complete work on the facades of the buildings.

And he denied that the inclusion of the two neighboring buildings in the deal was to compensate IHI for assuming the city's debt.

"This is not the price for paying the city debts," Chichkanov said in telephone interview Thursday. "The city's debt has nothing to do with IHI plans for these buildings, and the company will be held to the same procedures as any other firm."

According to Alexei Shaskolsky, a real-estate analyst at Colliers International, to build a five-star hotel with about 200 rooms in St. Petersburg would cost about $50 million.

"And that is only the cost of the construction and furnishing, without the price of land on Nevsky. It will likely cost them a few million more to acquire the lease rights," he said. "Nevskij Palace is in a perfect location, and if the plans for further development are realized, this will be a very positive development for St. Petersburg as well."

But Shaskolsky also said the hotel and the buildings around it have some serious problems and that the city is probably glad to have the property off its hands. Not only did the city get rid of its debt responsibility, but it also found an investor to renovate two buildings with serious structural problems.

"During the construction of Nevskij Palace, the two neighboring buildings were damaged by the weight of the hotel. Their foundations and walls cracked and they've been deserted since that time," he said. "It was and still is a shame for the elegant image of Nevskij Palace, and Nevsky Prospekt as well."

Shaskolsky said the problem stems from the fact that developers were not permitted to do an extensive investigation of the area below the hotel site before construction because of security concerns due to KGB communications lines buried there. The seven floors of the hotel and two levels of underground parking are too heavy for the site.

According to Alexei Shashkin, the director of Georekonstruktsiya research and development firm, which specializes in researching locations for construction, the Nevskij Palace has sunk 20 to 30 centimeters since its construction.

"Even with the naked eye you can see that the neighboring buildings have been pulled in toward the hotel," Shashkin said Thursday. "The fact that the people who live in these buildings were settled in new apartments tells you that these buildings are in a dangerous condition."

Nevskij Palace is one of St. Petersburg's four five-star hotels. Construction of the hotel was begun in 1989 and it opened in 1993. Since 1997, it has been managed by Sheraton Hotels, a subsidiary of Starwood, an American firm. Sheraton will likely have to pull out of managing the site as Libyan interests own some of IHI, which is a public company traded on the Malta Stock Exchange.

U.S. State Department guidelines prohibit U.S. firms and their subsidiaries from having economic dealings with a number of countries, including Libya.

Corinthia Hotels International, one of the major shareholders in IHI, will likely take over management of the property.