Will a hotel boost Excelsior’s tourism?

In what should be another storybook summer on Lake Minnetonka, the quaint lakeside town of Excelsior is grappling with development—specifically, a hotel that could plug the city’s revenue shortfalls and revive a tourism economy that would ring merchants’ cash registers. But to a subset of the town, the hotel represents change that will destroy the face of a city that prides itself on its historic character.

As part of an ambitious attempt to boost economic vitality in the city of 2,200 residents, Excelsior has paved the way for a $12 million, four-story boutique hotel that aims to reinvigorate the Lake Minnetonka burg as a tourist destination. If the hotel is successful, it will serve as a model for other cities on the lake that are trying to boost visitor revenues. But opponents say the hotel project threatens Excelsior’s small-town charm and sets a bad precedent for future developments. They also dispute the hotel’s ability to attract guests outside the peak summer visitor season.

Excelsior Mayor Mark Gaylord is confident that “in 100 years, people will look back [on the hotel] and say, ‘This is historic Excelsior.’ ” But local architect and developer Jon Monson counters, “We don’t want to make a 100-year mistake.”

Cash is king in strapped suburbs

The project comes at a time when Excelsior, like many cities, has endured a significant drop in state support and is looking for new sources of revenue. Ten years ago, 8.7 percent of Excelsior’s general fund revenue came from local government aid, designed to help cities meet needs that go beyond what they can reasonably expect to fund through property taxes. By 2008, that percentage had dropped to 2.9 percent—and for the past three years, the city has received no local government aid whatsoever.

At the same time, the amount that the city has had to contribute to the state-mandated fiscal disparities program—which seeks to spread the benefits of development across the Twin Cities and will soon help fund Mall of America’s expansion—has increased rapidly. This year, the city must pay out 8.4 percent of its total tax capacity, up from 0.3 percent in 2003.

“We have to come up with other ways to reduce our budget or come up with other revenue to offset that [state] money we lost,” says Gaylord. The hotel, he claims, is one way to do that. The more commercial properties that pay property taxes, the lower the burden for residents, who now shoulder about 65 percent of annual taxes collected.

The 34,000-square-foot hotel is set to go up on a 0.8-acre lot of prime real estate at the end of Water Street, the main street of downtown Excelsior. The lot has been vacant for the past three years since the demolition of an old Pizza Hut that was described as an eyesore.

Both Excelsior and the surrounding community will benefit from the hotel, says Neil Weber of Weber Architects & Planners, the project’s architect. An economic impact analysis commissioned by Weber and the project’s developer—Charles James of James Family Properties, LLC—found that the hotel is expected to support 27 full-time-equivalent management and “mid-level” jobs, with an annual payroll exceeding $1 million.

The hotel would generate $600,000 in annual tax revenue, a portion of which would stay within the city, Weber says. And the hotel is expected to indirectly add between $3.4 million and $5.6 million each year to the local economy.

58 rooms, many benefits

Last summer, the Excelsior City Council OK’d concept plans for the boutique hotel, and in February, a more detailed general plan got the green light. The project is expected to receive a final nod by early fall. The hotel, which will not affiliate with any chain, will have 58 rooms, lake views, a top-floor ballroom, a restaurant, 800 square feet of retail space, and 113 parking spots, some underground. The exterior will be brick, as are most buildings in downtown Excelsior, and its detailing will have an older, Victorian feel.

Weber says James, a resident of nearby Woodland who doesn’t typically speak publicly, has developed more than 100 properties across the country, although this is his first hotel. According to Weber, James hasn’t yet secured financing, but Weber insists it won’t be a problem; he says James has significant assets and simply hasn’t decided which financing option to pursue. After the project receives final approval and a building permit, construction can begin next year.

The hotel will be situated on Lake Street, across from a pier on Lake Minnetonka, where tour boats typically dock. For years, city officials have wanted to install a system that collects and filters storm water from this intersection before it flows into the lake, and the hotel project could allow it to do that—and to make other street and sidewalk improvements in that area.

The city hopes to work out an arrangement with James under which up to $1.6 million in tax-increment financing would be used to fund harbor and water treatment upgrades. James would essentially front the money for the improvements and be reimbursed over the next couple of decades in the form of lower tax rates for the hotel.

“We feel the hotel is a great vehicle to make [improvements] without raising taxes,” says Gaylord, adding that the arrangement’s benefit for James is contingent upon the hotel’s success—a signal of the developer’s confidence in the project.

Opposing change

But some residents aren’t as sure of the hotel’s prospects and say the approval process was flawed. Within the past few years, the city has modified rules on zoning and parking requirements, which has paved the way for the hotel, although Excelsior officials say those changes weren’t made specifically with the hotel in mind. In 2010, Excelsior also overturned a Historic Preservation Commission (HPC) decision to deny the hotel approval through design review. The seven-member HPC, which reviews projects within the historic downtown district for factors like height restrictions and paint colors, found the hotel to be too big, too tall, and out of character for quaint Excelsior.

Although Gaylord supports the Council decision to overturn the HPC, he acknowledges that city ordinances and HPC design guidelines are “at odds in some regards,” adding that “we set this conflict in play, unknowing, years ago.” For example, the hotel will be 58 feet at its tallest point, significantly higher than the 35-foot height limit that applies to the other buildings in downtown Excelsior. City ordinances don’t limit height for projects like this, but the HPC is charged with ensuring that new developments fit in, and no other downtown buildings contain underground parking, tiered levels, balconies, and other atypical structural detail.

Gaylord says that although it will take time, the city plans to work with the HPC to address the inconsistencies. “We have started the process of looking at ways to align our historic preservation with our zoning laws,” he says. “What we don’t want to have happen is [that] the next big development comes through and we have the same problem.”

Conversely, Steve Finch, an Excelsior resident who serves on the HPC and was the city’s mayor in the mid-1990s, says the city should stick to the brand it’s cultivated and maintained for decades.

“I think that the city’s brand is ‘historic Excelsior,’” says Finch. “We really don’t have very much, if any, great architecture. We just have old buildings that feel like that’s where Grandma used to live. People like that. It’s just different.”

Architect Monson, who has designed and developed several buildings in Excelsior, argues that making changes to city ordinances “is more of a slippery slope than the city wants to acknowledge.” He is involved in a website that seeks to persuade residents that the hotel doesn’t make sense for the community.

Too big to fail?

Viability is another factor that has prompted some inquiry. A video featuring former WCCO-TV anchor Don Shelby (whose Excelsior home Monson designed) interviewing Lowell Lankford, president of Minneapolis-based Woodson Hotel Equity Advisors and a former Carlson and Marriott executive, contended that the hotel won’t succeed financially or attract guests beyond the summer months.

The developers commissioned a feasibility study from Blaine-based Commercial Appraisal & Consulting Group that found that a market exists for the hotel. In fact, an income analysis of the August 2012 report projects that annual revenue will total $2.7 million, including $500,000 from the hotel’s restaurant, with net income of $859,200; those figures are based on an average daily rate of $135 with 70 percent occupancy (although Weber says room rates will start at about $110).

But in Shelby’s video, Lankford contends that the hotel will struggle during the winter and would need an average daily rate of at least $300 every night during the summer to generate the revenue needed to survive year-round. He says that an “optimistic occupancy” of 62.2 percent is more likely, and most of his income scenarios (each of which makes different assumptions) predict a net loss. In the video, he argues that the city should conduct its own economic analysis.

Gaylord says it doesn’t make sense for government to decide which projects are financially viable.

Yet former mayor Finch points out that downtown Excelsior will be left with a building whose design would only allow for condos if the hotel fails. “As we look around the city, I’m not aware of a single business building that is being used for the business it was originally built for,” he says. “If the builder is building it to be hotel . . . we, the city, are going to be stuck with a white elephant.”

Local real estate mogul Ralph Burnet, who developed and owns W Minneapolis—The Foshay and Le Méridien Chambers Minneapolis, thinks the hotel will work. “It’s good for the lake and I think it’ll be terrific for Excelsior.” But, he adds, “the question is: How’s occupancy going to be in the winter?” He sees no problem attracting guests in the summer and on weekends, when weddings and special events will drive traffic, but the hotel will need corporate business during the week at all times of the year. And a likely challenge to securing corporate travelers, Burnet says, will be persuading them to drive to and from the hotel.

Weber says that in addition to catering to Minnesota tourists and out-of-state family and friends of local residents, the hotel will attract corporate guests of major companies—companies like Cargill and General Mills, which have large offices in the western suburbs and would likely welcome a hotel that’s closer than downtown Minneapolis. Currently, the nearest hotel to Excelsior is a Holiday Inn in Chanhassen.

Burnet thinks the developer’s income projections are plausible and sees 70 percent occupancy as a realistic target. Still, “the west [metro] is not known as a hospitality area,” and Weber and James are “pioneers” for introducing a hotel there.

Back to the future

Proponents of the hotel, including Mayor Gaylord, claim that it will return the city to its roots. They’re referring a time when 161-year-old Excelsior was more of a tourist destination than it is today.

In the late 1800s, residents of Minneapolis took the train to Excelsior and spent the weekend at one of a half-dozen hotels on Lake Minnetonka. It was their getaway from the hustle and bustle of daily life, serving the same purpose that cabins up north do today. Tour boats on the lake provided a gateway to surrounding communities, allowing visitors to enjoy the outdoors and explore new territory.

In the early 1900s, streetcars began making trips to Excelsior, spurring a population increase as workers could live in Excelsior and commute to the city for their jobs. Then tourism got another boost when two lakeside amusement parks opened in succession.

By the 1950s, however, the amusement parks had closed and Excelsior was “an ordinary small town,” says Betty Peck, who has lived in Shorewood since the late 1940s and has been involved in the Excelsior-Lake Minnetonka Historical Society for 38 years. But unlike some other nearby towns, it contained everything residents needed for daily life—a grocery store, clothing retailers, a hardware store, doctor and dentist offices, salons, a butcher shop, etc.

“The town catered to its residents,” says Peck, “who were middle-class people looking for floor space and more opportunity.”

Today, Excelsior is a bedroom community whose downtown primarily supports commerce geared toward personal entertainment and lifestyle retail, much like other upscale corridors. On hot summer days, Gaylord enjoys getting an ice cream cone at Licks, where, from April to October, longtime owner Loran Lessard makes thousands of waffle cones each morning during the months his shop is open for business. Gaylord also likes to catch a flick every now and again at the 1930s-era Excelsior movie theater, located right next to the hotel lot. Finch likes to relax at Maynard’s, a popular restaurant and bar that’s been a town staple since 1998.

Today’s retail mix targets tourists and nearby residents looking for a memorable outing rather than residents looking for basic necessities.

“Everything we sell at Brightwater can be bought elsewhere for cheaper,” says merchant Bill Damberg, who owns Brightwater Clothing & Gear. “But it can’t be bought better. We offer a unique experience that customers enjoy,” an experience that includes high-quality and personalized customer service; in fact, most days, Damberg is in the store and greets customers by name.

“This is the closest I’ve ever had to a home,” says Finch. “One of the things that is really great for me is to know my neighbors and go on walks.”

It’s that historic, small-town charm that hotel opponents say the town risks losing.

Excelsior evolving

Ice cream store owner Lessard says it’s about time that something goes up on the hotel site. His shop is across the street from the vacant land, and though the hotel will obscure the lake view from just outside his entrance, it will add “one more dimension of attraction” to a town that “moves slow but usually in a positive direction.” And just what is the direction? Rumor has it that a long-awaited grocery store is about to join downtown, and Excelsior-Lake Minnetonka Chamber of Commerce Executive Director Laura Hotvet confirmed such plans are in their final stages. That would represent yet another step in returning Excelsior to its roots, when the downtown had stores that met everyday needs.

Lessard says he would venture to guess that “some residents are afraid of the hotel because it’s going to bring more activity” to an already lively community. Residents who live near downtown, often have cars are parked in front of their homes in summer, and people are constantly walking by, which limits privacy. There are two big lots near the downtown area, but Lessard says no one wants to pay for a parking ramp. Gaylord says parking is an “on- going discussion” on the City Council. “Counts clearly show that we don’t have a parking problem” at this point, he maintains, but he acknowledges that it occasionally gets tight.

For now, a city that prides itself on the past is being forced to come face-to-face with its future. For residents who still want to think of Excelsior as it was three or four or five decades ago, it will take some adjustment. For those eager to see what Excelsior can become, getting there won’t happen overnight.

As for retailer Damberg, he wants to see measured, thoughtful growth. “We need to keep the vibe alive of what is Excelsior,” but he says the city can’t reject new ideas simply because they haven’t been done before.

“I know the perils of keeping small towns cool, yet the only constant is change, so you have to embrace it and move forward.”

This article is reprinted in partnership with Twin Cities Business.