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. Last Updated: 07/27/2016

A Makeover for Luzhkov's Sister

VedomostiCity Hall will hold a tender in the fall to sell 70 percent of the Leningradskaya hotel.
An investor is being sought to restore one of the city's landmark "Seven Sisters" buildings, constructed in Stalin's time as the Soviet answer to skyscrapers in the United States.

City Hall is developing a plan for the reconstruction of the Leningradskaya hotel that will give an investor a 70 percent stake in the building with the city retaining a 30 percent stake, Interfax reported last week.

An investment tender is to be held at the end of September or the beginning of October, Vedomosti reported.

The Leningradskaya hotel is known for its extravagant interiors, bronze chandeliers and the views it offers of the capital.

The Leningradskaya and the Ukraina are the only two of the seven buildings that are hotels. The others are the Moscow State University building, the Foreign Ministry, and residential buildings on Kudrinskaya Ploshchad, Kotelnicheskaya Naberezhnaya and Krasniye Vorota.

Completed in 1954, the 347-room hotel is located just beyond the Garden Ring near Komsomolskaya Ploshchad and its three railroad stations -- Leningradsky, Kazansky and Yaroslavsky.

A minimum investment of $40 million will be required to upgrade the engineering systems and restore the facade and interior, Interfax reported.

Citing sources in the Mayor's Office, the news agency said the three-star, 24,500-square-meter hotel will be raised to an international standard four-star hotel by the end of 2006.

Tatyana Yegorsheva, a manager in Ernst & Young's hospitality consulting group, said the property is unique and the hospitality market in Moscow is improving, which is likely to make the Leningradskaya an attractive opportunity.

"However, it is questionable whether reconstruction can provide a true Western standard four-star facility because of the physical limitations of the building as an architectural monument," she said.

"The $40 million minimum suggested investment provides an average of about $115,000 per room, and this may not be enough to reach the four-star level," Yegorsheva added.

By the time the reconstruction is scheduled to be completed, there will be several new three- and four-star hotels in the Moscow market, including a Holiday Inn on Bolshaya Ordynka, several Marriott Courtyard and Radisson SAS Country Inn hotels, and the Minsk, Rossiya, Budapesht and Pekin hotels will have been reconstructed.

"Unless there is a major change in the visa regime and the supporting infrastructure for attracting tourists, the increase in business travel alone may not be enough to support all of these additions," she said.

Gerald Gaige, partner for Ernst & Young's real estate advisory practice, said the way to maximize the commercial potential of the revamped hotel will be to get an international management company to run it.

"As branded hotel management firms rarely invest in ownership of hotels ... the city will need to attract two parties to the deal: an investor to reconstruct the building, and an appropriate international hotel management firm.

"The building is a classic and may be profitably operated as a hotel," Gaige continued.

"However, balancing the amount of investment necessary to restore and modernize the facility while achieving the optimum increased operating results is a very sensitive and difficult process.

"Typically, such attempts result in a classic hotel that provides only nominal returns on its cost."

Gaige also questioned whether the 70 percent stake the investor is to get in the enterprise will be attractive.

"Having put in all the money, if the agreement provides for a reasonably priced buyout of the city's interest after a reasonable term, such a structure may be feasible," he said.

"However, from past deals proposed by the city, the cost from the investor's side has been too high, and not justified by the returns achievable from the investor's share."