by Brendan M. Lynch | December 01, 2004

Sheraton Overland Park at the Convention CenterIn December 2002, when officials gathered in Overland Park, Kan., to cut the ribbon on the 412-room Sheraton Overland Park at the Convention Center (right), there was good reason for optimism. After all, the $88 million property was everything a convention headquarters hotel should be.
    First and most importantly the structure sat directly next to the city’s new 237,000-square-foot convention center and connected to that venue via an enclosed walkway. Second, the hotel featured every amenity imaginable on a meeting planner’s wish list, like the 10,800-square-foot Cottonwood Ballroom, 13 meeting rooms, a well-equipped business center, a full-service restaurant and an indoor swimming pool.
    Furthermore, studies by consultants promised not only high occupancy and room rates for the new headquarters complex, they also predicted the opening would bring many new conventions to Overland Park.
    The striking 20-story building is now the tallest man-made structure in this growing Kansas City suburb. And with Sheraton’s “S” logo boldly emblazoned on top, passersby could easily get the impression that this is a private hotel development.
    In fact, public funds made up 100 percent of the capital for Overland Park’s new headquarters hotel money that was generated from a new method for publicly financing these projects: the issuance of tax-free bonds.

The nonprofit model
In hopes of luring more conventions, communities across the United States are spending millions of dollars of public money to build and operate resplendent new headquarters hotels. In recent years, publicly financed headquarters properties have arisen next to convention centers in destinations as varied as Myrtle Beach, S.C.; Sacramento, Calif., and St. Louis.
    In the 1990s, headquarters hotels typically were built as private developments, often with public subsidies to cover about a quarter of construction costs plus cash grants to provide public spaces like parking and ballrooms. The deals were called public-private partnerships, or PPPs.
    But by the late 1990s, private investments for PPP headquarters-hotel developments were drying up. Plans languished in cities everywhere, even with millions of dollars in public funding available as a lure for private investors to step forward. The terrorist attacks of September 2001 and subsequent travel industry woes made private capital scarcer still.
    In response, cities began using nonprofit corporations (NPCs) to issue
tax-exempt municipal bonds for self-financing a majority of their hotels, with little or no private money involved. A branded hotel operator like Hyatt, Marriott or Sheraton would then be hired to run the property. But taxpayers, in the end, were the real owners.
    “If you look at the history of these projects, there were a host of efforts over the last decade to find private capital to invest, and a public alternative was chosen because private capital didn’t appear,” says Heywood Sanders, professor with the Department of Public Administration at the University of Texas at San Antonio. “Potential private investors have generally found these developments to be too risky or with too low a potential return based on possible mix of average daily rate and likely occupancy.”
    Nevertheless, with the enthusiastic encouragement of meeting planners, industry consultants and convention and visitor bureaus, local governments throughout the country have rushed in where private investors fear to tread, in hopes that new headquarters properties will bring in enough additional convention business to cover local taxpayers’ development costs.
    “That’s the general idea,” says Jeff Sachs, managing partner with the Strategic Advisory Group, a Duluth, Ga.-based hospitality consulting firm specializing in PPP and NPC deals. “You get a hotel, it pays for itself, it generates hotel taxes all along. Ultimately, the hotel can be sold by the city for a profit, and that money can be used for expanding or building a new convention center. That’s what everyone is shooting for.”