Bermudiana Beach Resort returns to residential rental units

Today, I want to report on the refocusing of this project, but first some history is in order so
that there is a full understanding of the journey to this point.

In 2007, the private sector Grand Atlantic Residences project was a 78-unit development to add additional freehold condos to the housing market. To assist the project’s progression in 2009, the Bermuda Housing Corporation (BHC) became involved to purchase the development
expected to be completed in 2012.

However, in 2013, the global crash of the housing market including the decline in housing
prices, decline in demand for housing and a false narrative over the safety of the cliffs, to name
a few had an impact on unit sales- only one was sold. The then OBA Government elected to place
the sale of condo units on the property in abeyance while a reassessment of the direction was considered.

A request for information (RFI) on the property was issued in March 2013 with submissions
due by May 2013. After analysis, meetings and a review of the submissions, the then
Government entered into a memorandum of understanding [MOU] with the selected proponent to convert the property into a condo hotel. The MOU was initially for a period of 120 days and was then extended to March 2015.

After the expiration of this MOU the BHC negotiated with the bank to obtain a term loan to refinance the short-term loan used for the original purchase of the Grand Atlantic condo units.

Following this a second RFI was issued in May 2016 with submissions due by the end of June
2016. After analysis, meetings and a review of the submissions, a proposal was selected and
approved in October 2016 to convert the property into a residential condo boutique hotel, with units available for sale.

In July 2017 an election was held which resulted in a change of Government. The new PLP
Government continued negotiations with the selected co-developer, who was approved by the
previous Government to develop a condo hotel on the Grand Atlantic site and up until 2019, the
project progressed well including the Government announcing a brand deal with Hilton Resorts to increase the caliber and attractiveness of the property.

However, in early 2020 the COVID-19 pandemic started to take hold on the world, which made
meeting sales targets virtually impossible. The pandemic resulted in those targets not being
reached to meet debt financing conditions, and therefore an alternative financing facility was
negotiated with the bank.

After this and again attributed to the COVID-19 Pandemic, in 2021, the co-developer, which was
selected in 2016 and the current Government agreed to an amicable separation. The
Government and the BHC remained committed to the completion of this project, as at the time
there was a need for additional hotel beds as the Fairmont Southampton Hotel was shuttered.
As you can tell, there have been a lot of ups and downs with this project.

More difficulty came with the startling post covid inflation boom, which saw the cost of building materials soaring over 50% in some instances for basic supplies such as concrete and steel. Two loans totaling $35 million dollars were secured to continue construction – they remain in place.

Despite these challenges, the project continued but with pre-sales still not materializing and
costs increasing, the Government decided to investigate the business model of the property.
The Ministry of Public Works retained an expert who found that there was an inherent failure
in the current business model. In general terms, the root cause of many of the issues associated
with the project, including the lack of sales, stem from the direction set by the former
development partner. The former developer’s projections were overly simplistic, and the
current team followed the same plan, but lacked the experience to navigate what would have
already been an extremely challenging, brown field hotel development project from inception.
After this assessment, the Government engaged the international accounting firm Ernest and
Young (“EY”), who have a unit that specializes in evaluating distressed hotel developments, to
conduct an evaluation to determine if the Bermudiana Beach Resort project was still viable
The assessment looked at four options

i. To continue the existing course (a boutique hotel with condominium sales);

ii. Upon completion of construction, sell units individually as condominiums;

iii. Upon completion of construction, run as a standard boutique hotel; or

iv. Convert units into residential rental apartments and complete construction.

Based on this analysis of market dynamics, supply and demand trends, product fit, and strategic alignment with key initiatives, the two most viable uses determined to be Options 3 and 4. In performing a financial assessment of the two most feasible options, the apartment scenario (Option 4) provides the highest net present value as a result of strong demand, limited comparable supply, high rental rates, and significantly reduced operating risks as compared to the hotel option. While generating revenue to pay back outstanding debt remains a priority, the analysis indicated there was substantial resale value to be gained by holding the asset until cash flows stabilized and returns from the apartment scenario approach sufficient levels to meet the government’s financial objective of retiring the $35m debt in its entirety.

To accomplish Option 4, there remains the requirement to complete the construction. Given the proposed product can fit with the current development profile, apartment rentals would help to minimize capital investment with minimum additional expenditures required beyond the completion budget, while also providing the opportunity to reduce investment further by limiting some of the proposed amenity space. Therefore, the Ministry will provide the BHC with additional funding to the maximum amount of $5,000,000.00 to complete the construction. This is compared to the approximately Nine Million dollars that would be needed for the hotel completion.

With this recommendation and taking into consideration the recent announcement for the
commencement of the Fairmount Southampton redevelopment project which would see 593
new hotel beds becoming available by the end of 2026 – and reflecting on the priorities and
principles of this Government, a Cabinet decision was made to pivot the Bermudiana Beach Resort to residential rental units.
This was a difficult decision, as much effort was placed into converting the property into a hotel,
but when presented with the data, and the expert advice, the government choose to change
course yet again, but one that we believe is in the best interest of the country and one that will
prove beneficial to the economy in the long term.
Now all these changes come at a significant cost – overall – $100 million dollars plus will have
been spent on this property over the 12 years. An incredible sum that reflected the change in
direction with each pivot of the project to respond to the prevailing circumstances at each
juncture. Clearly, no one would set out to spend this kind of money on such a project but at each
juncture – those making the decision believed it was the right one and funds would be
recovered. An equally incredible set of circumstances have beset this project, and the aim now is to get as high a return as one can to mitigate the investment.

The challenge with housing impacts all segments of our community, which includes our
international business sector as well. The need to house this sector puts pressure on the local
housing market. The analysis indicates that this change in direction would provide a means to
cater to this sector directly and thus indirectly free up the local housing market to be accessed
by more Bermudians.

Therefore, by December of this year, this new proposed direction will see 94 studio, 1, 2 & 3
bedroom residential units of beachfront property added to fulfil a market demand for
additional rental housing.
The Bermudiana apartments will be a multi-family community catering to young professionals and couples with amenities including beach access, indoor and outdoor fitness area, a pool area, with the potential for a restaurant, and a spa in the future.

While no firm decisions have been made regarding rental pricing, we recognize the added
amenities, location, convenience and money already invested will necessitate a certain price tag – the projections estimate rental values between $3,000 and $7,000. Nevertheless, we believe the market research indicates that these units will help equalize the rental and buying market costs across the country and will promote better quality and standard of living overall, ensuring that people from all economic standings can secure a property at a reasonable and affordable price.

To more directly assist, however, the government will consider how it may provide means for families already on our list, to gain access to the property through existing BHC housing initiatives and support.
Announcements will be made in due course regarding management of the property and when the apartments will be available for rent.
In this Government’s 2020 Election platform under the category for ‘Improving the Quality of
Life for All Bermudians’ – this Administration pledged to continue increasing the stock of
affordable housing throughout the country, expand rent geared to income programmes and
construct residential developments in Bermuda’s Exclusive Economic Zone to increase the
supply of quality, affordable residential accommodation and drive down rental costs.
This move does just that. As the old saying goes, a rising tide lifts all boats, and by adding to the
housing market, regardless of the sector, we are helping to address the needs of all residents.
On Monday I met with the Board of the Bermuda Housing Corporation to advise them of
Cabinets’ decision and subsequently this morning I have met with the staff at both Bermudiana Beach Resort and the Bermuda Housing Corporation. Following this press conference – Hilton will be advised and there is a break fee that will be payable. There will likely be separations at BBR but those will be discussed with staff individually. We will operate fully under the terms of the Employment Act, but our actions will be carried out with compassion and sympathy with the affected staff. Over the next several weeks as this new direction evolves further there will be additional public announcements.

This government is committed to doing all we can to increase the adequate housing options for
Bermudians and we will not stop delivering on this mandate.

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