On the heels of multimillion-dollar investments in building or renewing their downtown convention centers, cities across the nation are furiously piecing together the next part of the tourism puzzle: the convention headquarters hotel.
As with convention centers, cities are increasingly prepared to help pay for the ever growing - some say overgrown - stable of hotels, which typically cost hundreds of millions of dollars and scare off today's lenders.
Baltimore currently is soliciting formal proposals for a headquarters hotel to boost its expanded convention center, which has failed to meet projections for convention bookings or economic spinoff.
Local officials put out the request after receiving a bid for a $250 million Hilton last month and made it clear that a city subsidy, yet unspecified, will be required.
"There's only one thing clear about convention hotels: Their [financing] numbers don't work, and a lot of cities are forcing these things to happen," said Jerry Earnest, a senior vice president and managing director at GMAC Commercial Mortgage, which finances hotels. "The forced nature has some in the industry thinking they are getting overbuilt. Every city seems to want one."
To be so designated, tourism officials say, a convention headquarters hotel is adjacent to or within easy walking distance of a convention center and is geared to supply rooms in large blocks and offer additional meeting spaces and food services for large gatherings.
Most Baltimore hotels that currently rent rooms to conventioneers are either farther than desirable from the convention center or their management prefers to accommodate higher paying, individual travelers.
Few large convention hotels have opened in the past couple of years. But five are expected to open by the end of 2004 and another half-dozen, including Baltimore's, could open by the end of 2006.
Still more cities have them on the drawing board.
Most of the cities have been pursuing these risky, hard-to-finance projects for five or more years. Now the recession and the downturn in travel after the Sept. 11 terrorist attacks have made lenders unwilling to put up more than half the costs - if they participate at all.
So cities must put up more, either financing them entirely or investing large amounts of cash. Some are finding new ways to put money in the hands of developers, such as special management agreements.
Baltimore officials have been tracking the methods and will consider all options, said M.J. "Jay" Brodie, president of the Baltimore Development Corp., the city's economic development arm that is seeking the hotel proposals.
Since 2000, when economic conditions worsened and lenders tightened up on funding, cities that have taken the lead in owning hotels include Houston and Austin, Texas; Overland Park, Kan.; Myrtle Beach, S.C.; and Omaha, Neb. All are open or will open soon.
Chicago, Denver and Fort Worth, Texas, plan to pay for their own hotels, and several more cities are exploring the possibility.
Washington recently said it would likely own a proposed $500 million Marriott to be built next to its new convention center, set to open in March, and would sell revenue bonds to pay for it.
Boston an exception
Before 2000, just three cities had opted to own their own hotels and pay to build them: Providence, R.I., which opened a Westin in 1994; Chicago, which opened a Hyatt in 1998; and Sacramento, which opened a Sheraton last year.
Others are using a combination of financing methods, including large public subsidies.
Boston, legally barred from subsidizing a new convention hotel after spending $800 million on a second convention center in South Boston, may be the only major U.S. city trying to build such a large facility without public aid. It's expected to cost up to $300 million - an amount that may be too much for a developer to round up on its own.
"We've hit a delay because of that issue," said Jay Russo, intergovernmental liaison and project director for Boston's economic development department.
"The developer, Starwood [Hotels & Resorts Worldwide Inc.], has had some difficulty," Russo said. "Our hands have really been tied."
The nation's newest convention hotel is due to open in Charlotte. N.C., in January. Public and private sources were tapped for a $145 million, 700-room Westin that has been in development for six years.
Officials at Portman Holdings LP, one of the nation's largest convention hotel developers, believe its Charlotte project is the last convention hotel to secure a substantial amount of private financing.
Portman obtained a $72 million traditional loan for half the cost, down from the 65 percent the developer initially believed it could secure from a lender. It also raised about $37 million from a private bond sale.
For its part, the city of Charlotte agreed up front to sell $16 million in tax-exempt revenue bonds to pay for meeting rooms and a 500-space parking garage. Charlotte also pledged food and hotel taxes to pay off the debt if parking revenue falls short.
But all that was not enough.
"We picked the developer because they asked the least amount of money from the city," said Thomas M. Flynn, Charlotte's economic development officer. "After we selected them, the markets changed and it became clear there was going to be a gap in the project due to them not being able to get as high a bank loan as they thought they could."
The city made an unusual move: Charlotte agreed to pay $2.5 million a year to the developer to manage the city's garage. The developer used that money as collateral to borrow another $20 million.
Flynn said financing convention hotels has always required public aid, but now cities are being asked for more.
The reasons are not only based on the sour economy that has made big hotels risky, said GMAC's Earnest, who has passed on financing several convention hotels recently.
Some lenders also believe there are getting to be too many of them, he said.
"Many cities feel like they need them to make their convention centers work," he said. "They have big convention spaces but nowhere to put the conventioneers. We're getting into a situation where there is too much supply [of hotels]."
According to Smith Travel Research, existing convention hotels are doing OK. Individual hotel occupancy is not available, but overall convention hotels' occupancy has averaged close to 70 percent this year - lower than in previous years but not bad considering the travel industry slump, experts say.
Looking for 'panacea'
That level is generally high enough to pay the debt and maybe make a profit, although the break-even point is different for each hotel. It's also enough to give restaurants and shops around town a boost, cities and tourism experts say. But some of those experts say that situation could change as more convention hotels come on line.
"I can't think of a primary city in the United States that doesn't have a headquarters hotel for its convention center, so now there are a lot of secondary and tertiary markets out there looking," said Warren Marr, a consultant with PricewaterhouseCoopers. "Some municipalities think headquarters hotels are the panacea of their economic woes. That isn't always the case."
But hotels can help a convention center land more meetings, said Robert C. Hazard III, of MetroVision Community Development Corp. in Pittsburgh, a consultant who has worked on several of the recent hotel developments, including Charlotte.
Hazard said cities such as Baltimore have hotels that like to fill their rooms with individual business and leisure travelers, who pay a premium, rather than with conventioneers, who demand discounts. Those existing hotels often are not willing to lock up blocks of space at convention rates.
"[Existing] hotels in Baltimore and elsewhere don't need convention business," he said. "So, the cities spend the money to bring a convention hotel and several big conventions later, they look like they've made a pretty good investment. They've expanded the tourism base, and that's the whole reason they should do it."
He said cities must subsidize convention hotels because the revenue from them often does not initially cover the construction costs of such large projects.
Not all taxpayers are convinced.
Public opposition
In Fort Worth, Texas, a group of citizens collected signatures to force the city to put $160 million of bonds it recently approved on the ballot.
The City Council, instead, voted Dec. 17 to postpone a public vote indefinitely and give a citizens' committee six months to study the hotel issue.
The money was to pay for a publicly owned 600-room Hilton in the works for seven years and scheduled to open in 2006. The proposed hotel would be near the convention center, which is undergoing an expansion.
Revolts like that in Fort Worth are not common and other cities are not deterred.
A publicly financed Sheraton Grand opened last year in Sacramento.
When Sacramento formally embarked on the hotel development in 1995, it sought a developer and pledged $8 million in cash aid.
"We did the selection process, got ready to go, and then the market fell apart," said Kristan Otto, the city's economic development manager. "We thought we lost the deal. Then we heard about this method of public financing that, at the time a couple of years ago, was not used for this sort of thing."
The city, which owns the hotel, paid the developer $5 million for the land and then hired him to manage the nearly $105 million project. Because most of the hotel revenue will go to pay bondholders, the developer, local businessman David Taylor, will not make any significant money for five or 10 years, Otto estimated.
The city also leased its adjoining garage to raise money to pay bondholders while construction continued. "We needed to save this deal because we already expanded our convention center and we couldn't book a large conference because we didn't have enough rooms," Otto said.
Economic development officials said the hotel has met its expected occupancy of about 69 percent, but room rates and taxes from such things as food and beverage sales have missed their mark.
Still, the officials said that the extra hotel rooms were helping them to compete with other convention destinations, such as higher priced San Francisco.
To help their own convention centers compete, cities are increasingly turning to revenue bonds to pay for neighboring hotels, according to Standard & Poor's, the credit rating agency.
Unlike general obligation bonds, revenue bonds are repaid with income from the hotels, garages and other money-producing operations. If the project defaults, the bondholders get the hotel, not cash from the municipal treasury.
The bonds carry a higher risk but yield potentially higher reward for bondholders, said Kenneth Gear, director of S&P;'s local and regional government group.
Cities have been pledging other sources of revenue, such as tax proceeds on car rentals or food to make sure there is enough money to pay bondholders in the early years while hotels are ramping up.
"It takes some time before they are in full swing," he said. "The cities get better bond rating if they show steady revenue stream. The higher the bond rating, the lower the interest rate when they borrow for construction."
Cities also are selling tax increment bonds to finance hotels, Gear said. Those are paid back with the increase in property taxes resulting from a major new development.
All methods are on the table for Baltimore.
"When you're talking about a major convention center hotel downtown, if you find one out there that has not been assisted in a major way by public financing, I'd be surprised," said the BDC's Brodie.
The city plans to pick a developer and a financing plan in 2003.
Developers have already expressed interest in the hotel project, in addition to the original bid for a Hilton. They include Atlanta-based Portman and Baltimore-based Giannasca Development Cos. LLC, which has also proposed a Ritz-Carlton hotel and condominium project on the waterfront.
Roger Zampell, vice president of development for Portman, said the company has done several convention hotels.
"We've been looking at Baltimore for years," Zampell said. "It and the others, they're all going to need some help."
Beds for conventioneers' weary heads
Built or planned convention hotels with public financing:
City Brand Rooms Opening
Providence, R.I. Westin 364 1994
Chicago Hyatt 800 1998
Sacramento, Calif. Sheraton 500 2001
Overland Park, Kan. Sheraton 412 2002
Houston Hilton 1,200 2003
Myrtle Beach, S.C. Radisson 404 2003
Austin, Texas Hilton 800 2004
Omaha, Neb. Hilton 450 2004
Washington Marriott 1,500 2006*
Denver, Colo. Hyatt 1,100 2006*
Fort Worth, Texas Hilton 600 2006*
* target date