In 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.”
Four-Star Convention Centers
Fierce intercity competition for group business has given rise to an evolution of improvements in convention center design and operation. “The competitive market is driving the changes,” says Robert R. Nelson, associate professor with the University of Delaware’s Department of Hotel, Restaurant & Institutional Management and editor of Current Issues in Convention and Exhibition Facility Development (Haworth Hospitality Press). “What you’re seeing is more emphasis on meeting space for breakout sessions, more ballroom space and higher-quality space.”
New or recently expanded convention facilities in Boston, Chicago, Honolulu, Montréal, Philadelphia, Pittsburgh and Washington, D.C., reflect the fashion for high-caliber materials and forward-looking design.
“If you look at an older facility like Jacob K. Javits in New York City, the A/V is not really good right now and the walls are cinder block,” Nelson notes. “But new centers, or expansions like Philly or the McCormick in Chicago, have high-quality fixtures, custom carpets and the latest in A/V. So we’ve gone from spaces with cinder block walls with inexpensive dividers to much more lavish facilities on a par with a four-star hotel.”
Centers increasingly feature paintings, sculptures, resplendent ballrooms, high ceilings and rooftop gardens, as well as concierge services and better-than-ever catering on-site.
“Planners measure success by how well an event draws attendees,” notes Hans Detlefsen, senior manager, Chicago-based HVS Convention Sports and Entertainment Facilities Consulting. “They look for facilities with amenities that will help them bump up attendance.”
But convention center upgrades come at a price. A recent report by the Duluth, Ga.-based Strategic Advisory Group estimates center construction costs have jumped 6.1 percent over the past decade, while overall construction costs rose just 2.5. percent in the same period. Thus, a $100 million convention center built in 1990 would cost $180 million today.
Will cities making sizable investments in convention infrastructure (usually with public money) be able to recoup costs over the long term? “The next decade promises to be very challenging for those operating these centers,” says Nelson. “Right now, the market seems pretty flat.” - B.M.L.
Stylish newcomer:
Washington (D.C.)
Convention Center
Great
expectations:
Renaissance
Grand
Hotel St. Louis
Pleasing the planners
Meeting planners’ comments often have been used to bolster an
argument for spending tight tax dollars on a new hotel property.
According to the 2001 Dallas HQ Hotel Impact Study, prepared for
the Dallas CVB by Chicago-based HVS Convention, Sports &
Entertainment Facilities Consulting, “the number-one reason
potential business contacts cited for not coming to Dallas was the
lack of a headquarters hotel.” The HVS report found that two out of
every three planners who chose not to use the Dallas Convention
Center “would have been more inclined to come to Dallas if a
headquarters hotel were present.” As of yet, Dallas still lacks
such a property.
Meanwhile, planners across the country, especially those who
organize large association conventions, clearly appreciate a bounty
of guest rooms adjacent to a convention center. Indeed, the lack of
same can be a deal-breaker.
“We wouldn’t go to a hotel that isn’t attached to or across the
street from the convention center. We have too much going on during
the day,” says Diane Saxe, director of meetings and conferences
with the American Mathematical Society, based in Providence, R.I.
“We need to be attached.”
“For our members, a very important feature is the convenience
of actually staying at the same place where our meeting is
located,” says Shelley Tucker, CMP, of the Michigan Townships
Association, based in Lansing, Mich. “I’ve seen attendee comments
like, ‘We’re not going back to that city. We want to stay on site.
We don’t like the shuttles. Even if they’re free, they’re
frustrating.’”
But skeptics of public financing say anecdotal evidence from
meeting planners is insufficient grounds for moving forward with a
large-scale NPC headquarters hotel project. “If I go out and ask
meeting planners, ‘Will you come to our market if we have this huge
new facility?’ they’ll say, ‘Well, probably.’ Why wouldn’t they?”
asks Bruce H. Walker, president of Source Strategies Inc., a San
Antonio-based hotel consultancy. “It’s a conflict of interest to
ask a buyer if they’d like more choice and more supply competing
for their business. The planner’s interests are lower prices and
more supply.”
Bonds for boondoggles?
Some industry watchers doubt real demand for rooms will support the
public headquarters hotel building boom. “We don’t have a very long
track record here,” cautions Heywood Sanders. “Information about
how these properties impact the hotel market is only beginning to
surface. In many cases, local hotel owners went along with the
logic that a public headquarters hotel would be a catalyst to
increase their city’s overall convention business the tide that
lifts all boasts. If the reality is that it sinks everybody, it
won’t be evident for a while.”
What might the consequences be in case a public hotel fails to
live up to pie-in-the-sky projections? When a city funds a
headquarters hotel by issuing tax-free municipal revenue bonds
(i.e., debt obligations to be repaid with the hotel’s profit), such
bonds are increasingly guaranteed by other sources of city revenue,
like parking fees, bed taxes or restaurant taxes. A city’s general
revenue could even be offered as collateral to lenders. This means
if a publicly owned hotel loses money in operation, tax revenue
will be siphoned off to pay the hotel’s outstanding debt, rather
than going toward the public’s direct benefit. Or, the municipality
might float more bonds and go still deeper into debt. Either way, a
city might see its credit rating decline as a result, making money
more expensive to borrow in the future.
In a worst-case scenario, the result could be less money for
police, fire departments and vital public infrastructure, like
sewer lines and roads.
“The big issue is: If you build a new hotel, does it increase
demand for hotel rooms in that market?” says Source Strategies’
Bruce Walker. “The claim by the various convention consultants has
been, ‘Oh, yes, it does.’ When we did our study, none of these
hotels increased demand. They satisfy demand, but they don’t create
demand. The argument has been, ‘Well, if you have a headquarters
hotel next to the convention center, that market will be more
attractive than if you don’t.’ If it is, it’s to such a small
degree, it’s not very measurable.”
While much of the latest evidence suggests bond-financed public
headquarters hotels might bring their cities financial woes instead
of convention-winning triumphs, supporters of NPC financing say the
marketplace needs time to adjust. “These deals were underwritten
well prior to the tech bust, 9/11 and the travel slowdown,” says
consultant Jeff Sachs. “They were looked at in a different economic
situation. They were designed and constructed in a way that worked
in that model. So you have a lot of factors depressing the market.
If you look back at when the economy was on a straight line, RevPAR
and rates for competing hotels went up with construction of a
headquarters hotel.”
In the red:
Radisson Plaza
in Myrtle Beach, S.C.
Concern in Myrtle Beach
In Myrtle Beach, S.C., city leaders saw the NPC financing model as
a path to building a needed headquarters hotel. “It’s the wave of
the future right now,” says Jean Ann Brakefield, vice president of
the Myrtle Beach Area Convention Bureau. “Most destinations are
building something that attaches to the center, with cities seeing
this phenomenon of bonds as the way to make it happen.”
Local leaders assumed the new property the AAA four-diamond,
404-room Radisson Plaza Hotel Myrtle Beach Convention Center, which
opened in January 2003, backed by $64.3 million in revenue bonds
would bring about a spike in new business. However, while the MBACB
declines to give occupancy levels for the public headquarters
hotel, performance has fallen far short of projections, leading to
an April 2004 technical default on the city’s hotel bonds and an
operating loss of $1.75 million for fiscal 2004. Recently, the city
refinanced, issuing $45 million in new bonds, then dropped room
rates to bolster the Radisson’s performance.
“I would say we have not met the projections that were made in
a pre-9/11 world,” says Walt Standish, president and chairman of
Myrtle Beach’s Hotel Board Corp., the NPC in charge of the Radisson
headquarters hotel’s finances. “Whether our feasibility study said
X, Y or Z, it sort of doesn’t matter. We have what we have, and we
have to go forward. Pre-9/11, it was all rosy projections. Yet if
someone were doing a feasibility study today, I’m not sure the
projections would be any less rosy than they were prior to 9/11.
Projections can be like that.”
Despite the hotel’s financial difficulties, MBACB vice
president Brakefield says groups have booked conventions in Myrtle
Beach that could not have before the new Radisson was built,
including the Greenville, N.C.-based Southern Association of
Collegiate Registrars and Admissions Officers and the South
Carolina State Council of the International Reading Association,
based in New Zion, S.C. “For the convention center to realize its
full potential, this hotel was a necessity,” says Brakefield.
But the man in charge of paying for the Myrtle Beach project
sounds a note of caution: “Every community I go to is planning to
build a convention center or a convention center headquarters
hotel,” says Walt Standish. “But, we can’t divide the pie up too
much. If you’re in Orlando, Myrtle Beach or Atlanta, those places
have appeal that others don’t have. I’d be worried if I were in a
nontourist, small market. I would be concerned about feasibility,
even though some study says the demand is there. I don’t know where
the break point is, where the bubble bursts. But I can say the
private model is much better than the public.”
Overland Park blues
Back in Overland Park, Kan., the initial results have been
disappointing, too. Lower-than-expected occupancy and room rates
have plagued the splendid, publicly financed Sheraton headquarters
hotel. As a result, the municipality has been forced to divert the
revenue from its hotel bed taxes to cover its obligations to
bondholders.
“It’s a hotel that’s supposed to bring in $6.6 million a year
and run at $135 a night. But it made $3.7 million last year, which
is less than it spends on debt service,” says Heywood Sanders.
On the upside, occupancy has been improving, according to local
officials. “Ultimately, we’re going to get back on track with the
planned financial performance of the hotel,” says John Nachbar,
Overland Park’s city manager. “Our local market suffered after
9/11, but it has improved significantly over the last eight to 10
months. We probably won’t bring revenue up to cover debts this
year, but all signs point to that straightening itself out by next
year.”
In other cities, multimillion-dollar headquarters hotels built
with public money have been similarly troubled. In St. Louis,
income generated by the publicly financed Renaissance Grand
headquarters hotel has fallen short of goals; the Sacramento
Sheraton has not performed up to the level anticipated by
consultants and has been blamed for lowering citywide occupancy
levels.
As a result of these hard lessons, investors have become more
cautious and now demand more public guarantees on municipal hotel
bonds. “There’s been a change in the way these deals are done,”
says Jeff Sachs, who consulted on the Myrtle Beach headquarters
hotel deal, among others. “These started in Sacramento, where 100
percent of bonds were backed solely by project revenues. Then came
Myrtle Beach, Overland Park and Austin, where two-thirds were
backed by project revenues and one-third were to be paid by
secondary sources. Then comes the D.C., Omaha and Houston model,
where hotel profits will pay the debt off, but a majority of the
debt is covered by some city income stream. Fifty percent,
two-thirds, or 100 percent is covered by citywide hotel taxes or
some kind of nonproject revenue. Bondholders say they want that in
order to invest in these projects now.”
But the new caution will not stop a slew of publicly financed
headquarters hotels from coming online in future years. For
example, NPC hotel projects are moving ahead in Branson, Mo.;
Denver; Houston; Schaumburg, Ill.; Vancouver, Wash., and other
municipalities. Only time will tell if these public properties are
wise investments or a waste of taxpayers’ money.
At least one thing is certain: For meeting planners, the result
of the publicly financed building boom will be positive. “It seems
like a good time to be a meeting planner,” says Sanders. “For now,
we’ve got an increasing number of cities that are desperate to fill
their publicly owned convention centers, and now they’re even more
desperate to fill their headquarters hotels.”