GALVESTON — Landry’s Restaurants Inc. is in talks with a potential buyer for the Flagship Hotel, again raising questions about the fate of the rare, iconic property on pilings over the Gulf of Mexico.
If the 225-room property at 25th Street and Seawall Boulevard doesn’t sell, Landry’s likely would demolish the hotel and develop a “pleasure pier” with amusement rides, officials say.
But Landry’s likely would not rebuild the seven-story Flagship, closed since Hurricane Ike caused severe damage Sept. 13.
New buyers could choose to restore the hotel, however, officials said.
Landry’s officials declined to name the potential buyer, who they characterize as “serious.”
Officials also declined to elaborate about their plans for a pleasure pier.
Landry’s is pricing demolition for the hotel, built in 1965 as a show of confidence after Hurricane Carla, Jeff Cantwell, senior vice president for development, said.
Meanwhile, Landry’s is seeking permits to repair the driveway leading from Seawall Boulevard to the hotel pier, Cantwell said.
Although the Flagship sits on prime real estate, it has languished for years as various owners, including the city of Galveston, tried to evict the hotel’s operator, The Flagship Hotel Ltd., accusing the company of letting the property fall into disrepair.
Those legal issues may soon be resolved, however.
Legal Resolution?
Landry’s paid the city $500,000 for the hotel in 2004, saying it planned to spend $15 million transforming the property into an entertainment plaza with amusement rides, including a roller coaster.
Landry’s attempted to move ahead, but was stymied by agreements that gave Daniel Yeh, head of The Flagship Hotel Ltd., control of the hotel until 2031.
Hurricane Ike brought a strange twist to the saga.
Yeh wanted out of his lease and Landry’s wanted Yeh’s management company to stay put.
Landry’s Restaurants and affiliated companies filed a lawsuit Dec. 31 in Galveston’s 405th District Court to keep Yeh from terminating the lease. Landry’s asserted the hotel operator breached its lease by failing to keep enough insurance on the property.
The Flagship Hotel Ltd., which took over the property in 1990, had only $3 million in windstorm insurance and no coverage beyond that amount for water damage or storm casualty, according to the lawsuit. The lease required $10 million in insurance coverage.
Landry’s officials at the time estimated the storm inflicted $7 million in damage.
Both Yeh’s attorney, J. Michael Fieglein, and Landry’s officials on Monday said the litigation was near resolution; neither would elaborate.
Yeh’s lease, renegotiated after Landry’s purchased the property, has expired.
Below Average Property
Yeh, 56, was sentenced in September to 30 months in federal prison for filing false claims in a Federal Emergency Management Agency lodging program for hurricanes Katrina and Rita, which struck the Gulf Coast in 2005.
Landry’s, which has invested more than $100 million in hotels, restaurants and entertainment complexes on the island and in Kemah, bought the Flagship when real estate was soaring and developers were flocking to the water. Credit markets have tightened since, making financing projects tough.
The Flagship wasn’t performing well compared to other island properties even before Ike.
It had an $80 rate with 46 percent occupancy, according to Bruce Walker, a hotel consultant with San Antonio-based Source Strategies Inc. Revenue per available room, an important metric to the hotel industry, was $36 in the months before the storm. The island average then was $68.46, Walker said.
Certain Appeal
A hotel over the Gulf of Mexico has certain appeal, Walker said.
“It’s like spending the night on a cruise ship,” he said. “It has some romance to it.”
But a buyer who wanted to restore the hotel would have to consider the costs.
“It would probably have to be gutted right up from the bottom,” Waler said. “So, it’s a real question.”
If Landry’s developed an entertainment complex, it would return the 25th Street pier to its roots. In 1943, the city built the Galveston Municipal Pleasure Pier. At 1,130 feet long, the Pleasure Pier held a dance hall, a 2,000-seat open air arena, restaurants and concessions, according to Galveston Architecture Guidebook.
