City-owned Hilton spends most of its occupancy tax set-aside on debt service

The city-owned Hilton Baltimore spent nearly all of the $2.8 million it generated in hotel occupancy taxes — money the city gave it last year to help the struggling convention center hotel make its debt payments, officials said.

The hotel did return $72,000 of the tax money to city coffers. Baltimore City Finance Director Harry E. Black called it a turning point for the hotel, which at one point last year looked as if it might need even more help.


The West Pratt Street hotel has lost more than $50 million since opening in 2008 as it struggled to make payments on the $301 million in tax-exempt municipal bonds issued to finance its construction. City officials blame the hotel's difficulties in part on the recession's impact on the hotel and convention business.

To help it make its debt payments last year, the 757-room hotel needed to retain for the first time the occupancy taxes it generated. Under the bond terms, it may have access to that tax revenue, but, in prior years, it was able to return all of that money to the city.


In addition to the hotel occupancy tax, the Baltimore Hotel Corp. used about $1 million from operating reserves to make the 2013 debt payments.

"Although it's only $72,000 that's being returned back to the city, it's a significant moment because … it's the beginning of what will be more of that," Black said.

Black said he expects the hotel to wean itself slowly from its dependence on the occupancy tax revenue in the next few years, allowing the city to receive the full amount in four to five years.

Moody's Investors Service, which downgraded the bonds below investment grade in 2011, affirmed the low ratings again in December. In the report, Moody's said the Hilton will have a hard time growing fast enough to match its mounting debt obligations and predicted it eventually will need to draw from citywide hotel occupancy tax revenue, although not before 2019.

Moody's cited the competition from other local hotels as well as the increasingly crowded convention market.

"What you saw in that write-up was an expression of disappointment, but not shock or surprise," said Dick O'Brien, who retired last summer as a bond trader for Folger Nolan Fleming Douglas in Hunt Valley.

O'Brien said the return of $72,000 is negligible when compared to the overall cost of the project, but the hotel's role in generating the occupancy tax, as well as helping secure convention center business for the city, makes it hard to do a simple evaluation of its economic cost to the city. Officials have said the hotel generated $100 million in economic impact in 2012.

"When you look at a convention center hotel, you're looking at economic development. You're looking at employment, you're looking at opportunity. There are other ingredients that you don't see on any financial statement," O'Brien said.

An investment advisory firm hired by the city last year to figure out what to do with the hotel advised against selling it, saying it could not fetch a price that would allow the city to pay off its outstanding debt.

Because of the bond deal's structure, the city won't do anything with the hotel's debt structure or ownership until 2016, at which point it might look at refinancing or other alternatives, Black said. He acknowledged that the bond ratings, which aren't likely to change soon, limit the city's options.

District 11 Councilman Bill Cole said he does not see a "right answer" for the hotel's problems right now.

"I don't know that we can do any more than we're already doing," he said, pointing to the hotel's performance even in a relatively weak market. "When you're basing your projections on numbers that are unattainable or beyond lofty at the beginning, it makes it hard."


The hotel's occupancy is up so far this year, but it has generated lower-than-expected revenue from its rates, said Michael Doyle, executive vice president of Capital Hotel Management LLC, at Friday's meeting of the Baltimore Hotel Corp. Baltimore's hotel market has not seen the price gains experienced in other comparable cities, he said.

He said the hotel, which employs more than 400 people, most of them city residents, has retooled its menus and staff management, among other strategies, as it tries to "chip away" at expenses. For example, management asked employees to use vacation days during slow periods and sent workers to other sites when they were not needed, he said.

The Hilton aims to reduce its dependency on the hotel occupancy tax, Doyle said.

"We're very pleased with the performance of the hotel and will continue to work to avoid any use beyond site-specific tax in the future," he said Monday.

Historically, the hotel has made enough to cover its operating expenses, just not to make payments on its debt.

Nationwide, the hotel market is on the upswing but could contract again in two or three years, said David Loeb, a senior hotel research analyst for financial services firm Robert W. Baird.

Still, the current market's growth may not be able to carry the Hilton through the next downswing, he said.

The city "shouldn't be surprised" by its lackluster returns, he said.

"Cities aren't private real estate developers. … If it was such terrific returns, somebody else would have built it," he said.

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