Risk and reality in public headquarters hotel development.

• Author: Sanders, Heywood
• Position: Publicly financed convention center hotels - Editorial

Editor's note: In February 2002, Government Finance Review published an article entitled "Tax-Exempt Hotel Financing: A Primer for Finance Officers. This article presents a different perspective on this issue.

In recent years, a number of cities have directly financed the development of hotels intended to serve local convention centers. Many other cities are now in various stages of planning and constructing such facilities, including Baltimore, Columbia (South Carolina), Dallas, Denver, Osceola County (Florida), Phoenix. Portland, Raleigh, San Antonio, Syracuse, and Washington, D.C. These public hotel developments have moved beyond the historic public-private partnership or subsidy arrangements to direct public ownership, most commonly through a nonprofit corporation. They have been promoted with the assumption that an adjacent headquarters hotel is a virtual necessity for attracting expanded convention activity.

Public convention hotels have now been open for some time in Sacramento, Myrtle Beach, St. Louis, and Overland Park, Kansas. The experiences of these cities to date offer some preliminary yet instructive lessons on the risks involved in public hotel development. The actual performance of these hotels, and that of the convention centers they were designed to boost, can also provide a more realistic basis for assessing the consultant feasibility and market studies typically supporting their tax-exempt bond issues.

THE LOGIC OF HEADQUARTERS HOTEL DEVELOPHENT

Convention centers have become an increasingly common and presumably economically attractive local public investment. The total exhibit space in U.S. exhibit venues has increased from 40.4 million square feet in 1990 to 60.9 million in 2003, with annual state and local construction spending on convention centers totaling about $2 billion. As cities have developed new exhibit space, the competition for events has grown increasingly sharp. Industry consultants now commonly argue that an adjacent, full-service hotel is a vital necessity for sustaining and enhancing the competitive position of a convention facility.

With private investors unwilling or unable to provide the necessary financing, even with public incentives, many communities have turned to tax-exempt bond financing through a corporate entity or city department. These bond offerings have often taken the form of triple-tiered debt, secured with some combination of the hotel's direct operating income and the local government's taxing authority. Public commitment has taken the form of a pledge of citywide occupancy tax revenues (Overland Park and Houston), direct city appropriation (Omaha and Myrtle Beach), and incremental tax revenues from the hotel itself (Houston and St. Louis). In some cases, revenues from an adjacent garage have been used to supplement the revenues of the hotel (Austin and Sacramento).

The central justification for public investment in a headquarters hotel is the potential economic stimulus from a substantially increased volume of out-of-town convention attendees. The incremental convention business from the hotel also provides a revenue foundation for the hotel itself. For example, the bond offering statement for the Myrtle Beach Radisson Hotel noted that the Myrtle Beach Convention Center had generated 161,645 hotel room nights of activity in 2000 and an estimated 168,000 for 2001, with a potential future maximum of approximately 250,000. The 80,000-plus additional room nights would provide an occupancy base for the hotel, such that the market consultant could project a 65 percent occupancy rate for fiscal 2004 at an average room rate of $125.83, generating net operating income of $6.06 million.

In Sacramento, a 1996 study concluded that the city had lost some 50,000 annual hotel room nights for lack of a convenient and sufficiently...