The chairman of a key Baltimore City Council committee said yesterday that he has strong reservations about the city's plans to publicly finance and own a convention headquarters hotel and wants an independent commission to review proposals rejected earlier by the city's economic development agency.
Keiffer J. Mitchell Jr., chair of the taxation and finance committee, wants an independent commission to re-evaluate all three bids submitted to Baltimore Development Corp., including plans for a hotel that would not have required full public financing.
City officials say the city needs a four-star hotel adjacent to the Baltimore Convention Center to boost flagging business at the center and compete for conventions with Philadelphia, Boston and Washington.
In what would be one of the most expensive city projects ever, BDC plans to seek approval from the City Council and Board of Estimates for about $290 million in tax-exempt revenue bonds to finance construction and other costs for a 750-room Hilton. The hotel would be built on an empty parcel just north of , with a goal of opening in 2008.
"This has raised a few red flags for me," said Mitchell, whose committee would have jurisdiction over the bill. "Obviously, the main one is, should the city be in the business of running and operating its own hotel, with 100 percent public financing. We're going down a road that the city hasn't gone down before."
Mitchell said he doesn't question that the city needs a convention hotel, only whether it has to be wholly publicly financed. "There are people [developers] out there who I think would put their money into a convention center hotel," he said.
The vice chairman of the committee, Councilwoman Helen L. Holton, also raised concerns about the way the city plans to get the hotel built.
"I understand the need for us to have a headquarters hotel, but we're not developers, we're government," she said. "I'd rather be the landowner and have someone else develop the hotel and take on the responsibility of making sure the debt is repaid."
M.J. "Jay" Brodie, president of BDC, said the city has no alternative.
"If there were another way to do it, we would be proposing it. We have concluded there is no other way to do it. It's not that we've reached this conclusion lightly or by ourselves."
He noted that other cities, such as Denver, have concluded that private equity is not available for major downtown convention center hotels.
Brodie said BDC is working with the Wall Street firm Piper Jaffray to secure an investment-grade rating for the bonds and win a favorable interest rate, possibly less than 5 percent.
"The ability to achieve that rate that has driven these deals in other cities," Brodie said. "No private entity can get anything like that rate."
A spokeswoman for Mayor Martin O'Malley said Brodie was also speaking for the mayor.
The city is pushing ahead with plans for the hotel at a time when publicly financed convention hotels around the country - including hotels in Myrtle Beach, S.C.; St. Louis and Sacramento, Calif. - have failed to meet projections as cities race to expand convention facilities while convention business is static.
The 404-room Radisson Plaza Hotel Myrtle Beach Convention Center, which opened in January last year, fell far short of forecasts, leading to a technical default in April on the city's hotel bonds and an operating loss of $1.75 million for fiscal 2004.
When convention bookings in St. Louis failed to live up to projections, the 1,000-room Marriott had to dip into cash reserves to pay its debt.
A new 500-room Sacramento Grand Sheraton, built with $92.9 million in bonds backed by operating income from the hotel and an adjacent garage, has boosted convention business by less than a third of the 60,000 hotel nights a consultant projected.
More than a year ago, BDC selected a development team headed by Robert L. Johnson, the founder of Black Entertainment Television, which will have no equity stake in the hotel, to be operated by Hilton Hotel Corp.
Johnson's company, RLJ Development LLC of Bethesda, and partner Quadrangle Development Corp. of Washington, will be paid a fee based on services, such as advising city officials on negotiating a management contract with Hilton.
BDC plans to create a corporation to develop and own the hotel.
Brodie has said the hotel's operating income would more than cover the millions of dollars in annual interest and principal payments, estimated at $18 million. The city also would probably pledge the hotel's city-owned Pratt Street site, valued at $18 million, and the estimated $4.5 million in property and room tax revenue it is expected to generate.
Mitchell questioned whether the revenue would be adequate to pay the debt service on the bonds if the hotel, as planned, set aside blocks of rooms at a discount for conventioneers.
"If you're doing room blocks and you're giving a discount rates for conventioneers, how can you still make a lot of money to pay off the bonds in a short period of time?" Mitchell said. "That is a huge concern."
The councilman also said he had concerns about BDC's plan to pledge a portion of the citywide room tax, even though it would be used only if needed. The 7.5 percent room tax generated an estimated $17.6 million in fiscal 2004. All but $4 million was used for convention-related expenses.
If tourism and convention business declines and the new hotel's net revenues fall short of the projected $21 million by 2011, Mitchell said, "we put at risk the entire city hotel tax, and that's money that could go into the general fund."
Once BDC's bond legislation is introduced - possibly within a month - Mitchell said, he plans to move forward with a resolution to create an independent commission made up of representatives of the tourism and hotel industries to review all three hotel proposals submitted to BDC.
RLJ President Tom Baltimore did not return phone calls yesterday seeking comment. Members of the two losing teams welcomed the prospect of a new review.
Robert Hazard, development adviser for Portman Holdings LP of Atlanta in partnership with Treyball Development Inc., a Beverly Hills, Calif., real estate company headed by actor Will Smith and his brother, said it would be prudent for an independent group to review all the proposals.
"There's enough controversy and questions about the whole process that it really does need a third set of eyes to take a look at what was proposed and why the BDC rejected out of hand a privately financed hotel project," Hazard said.
He said the team proposed a deal that required no upfront money from the city and limited the city's exposure at $30 million. He said his team never got the chance to fully explain or explore with city officials the financial structure of its proposal.
"When we questioned how the process was going to work and how the City Council became involved, we were told the City Council wasn't going to be involved in the evaluation," Hazard said. "That suggested the BDC was going to be setting public policy, and we were concerned that the people elected to make public policy decisions were not involved."
Raymond Garfield Jr., a principal with Garfield Traub Development LLC, of Dallas, said his Believe Team's submission included a funding plan that limited the city's bond exposure.
Believe Team proposed a 750-room hotel on a site adjoining the parking garage of the Sheraton Hotel.
That site, Garfield said, would have cost $100 million less than the current estimates. The team had proposed a version of public financing and ownership in which the city would have had to back 30 percent to 40 percent of the bonds, but probably at a higher interest rate.
"We would love to be asked to come back in and discuss what was different about our proposal," Garfield said.
The , which is charged with bringing conventions to the city, is supporting BDC's efforts to develop the publicly financed hotel, said Debra Dignan, associate vice president for convention sales.