Can New Luxury Resort Thrive in Depressed Rhode Island?

In this Friday, Oct. 23, 2009 photo, the new Ocean House resort stands nearly complete in Westerly,...

In this Friday, Oct. 23, 2009 photo, the new Ocean House resort stands nearly complete in Westerly, R.I. The new resort, consisting of 23 condos and 49 hotel rooms, has been reconstructed so the exterior is a replica of the historic hotel it replaces. (AP Photo/Stew Milne)

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Between the private beach and butler service, a new resort on Rhode Island's shore promises to be among New England's most luxurious when it opens in June.

The original Ocean House was a post-Civil War resort destination for the rich. The 1916 silent movie "American Aristocracy" with Douglas Fairbanks was filmed at the towering Victorian hotel, known for its yellow facade and striking ocean views. But the 135-year old hotel, in need of extensive repairs and upgrades, was closed in 2003 and razed.

Now a group of sentimentally attached investors — led by mutual fund magnate Charles Royce — is taking a $140 million gamble, building an upscale replica of the hotel in the seaside enclave of Watch Hill. They want the new Ocean House — with its 49 rooms and 23 condos — to compete with rival destinations in places like Newport, Nantucket and the Hamptons.

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Royce, who owns a summer home in Watch Hill, said he was dismayed by the prospect of losing the hotel, where guests, socialites and local residents converged for grand celebrations or simply drinks at the bar.

He bought the property from a developer who planned to build large homes on the site.

"The world doesn't need more McMansions, especially in (place of) something that was such an important part of the community," Royce said. "The sole purpose was to make certain that this very important community asset could be preserved."

Royce, founder and president of the Royce Funds, assembled about a dozen investors with ties to Watch Hill. The investors received a short-term $60 million construction loan and expect to repay it by the time the project opens, and say the balance is their own money.

Of course it's a risky time to open a luxury boutique hotel with $600-a-night rooms, especially in Rhode Island. The state has among the highest unemployment and foreclosure rates in the country. The local economy has been hammered by the credit crisis and vanishing manufacturing jobs. Ocean House will also be competing for visitors against East Coast destinations with instant name recognition.