Hunden Memorandum to Mayor Winnecke Regarding Hotel Statements

MEMORANDUM

RE: Response to Incorrect Statements

John Dunn and others have made statements that are incorrect regarding the proposed hotel deal.
Any concerned taxpayer would rightly want to know how such deals work, but some pronouncements have been incorrect and confused the public. It is a complicated project and one that is not easily summed up in sound bites or quick analysis. It has been attacked as being too expensive, not fair to other hotels and simply a bad deal for the city. None of these attacks are true.

John Dunn, in particular, has cherry picked our report and also used half-truths or misstatements to
convince people of his position on television, in newspapers and other forums.

Dunn’s most glaring misstatement is that the hotel will be creating another convention center that
will compete with the Centre. Not true. The full-service convention hotel is exactly what the Centre
needs to attract and host groups. The proposed hotel will be a full-service convention hotel, which
includes some of its own function space in order for it to bring in new meetings business, help support the convention center and support its own group business when there are no conventions at the Centre. This is the definition of a full-service hotel: a hotel with food and beverage and meeting space. Without these critical amenities, this hotel would be no different or better than the existing number of limited service “rooms-only” hotels that do nothing to generate demand. Limited service hotels like Dunn’s only absorb existing demand. So there is no new convention or conference center. There is simply, and finally, a full-service convention hotel that is required to make the (convention) Centre actually work. Without that function space, the hotel will not be able to induce as much demand and would be forced to compete more with the existing hotels in town. With the function space, it can generate much of its own, new business.

Dunn states that the HSP study says that only a 125 – 150 room hotel is called for downtown. What our study suggests is that 150 rooms is the largest size of hotel that a bank will finance (i.e. what is feasible in the private market), for all of the reasons discussed in the study. But what we also strenuously state is that in order to do its job of saving a failing convention center and revitalizing the group industry locally – the whole purpose of the project – it needs to be a larger, full-service hotel of 240-270 rooms with meeting space and food/beverage options.

The realities must be discussed in the context of the economic development challenge that the city and county have before them: a dead convention center that has been that way for years. The city isn’t simply trying to develop a hotel for sport. It’s an economic development project to help make the convention Centre function again. It will also help the arena, generate jobs, create new restaurants and bring downtown a new tower of apartments. Altogether, the project will make the downtown function at a much higher level.

Will the new hotel hurt existing hotels? No more so than if John Dunn and one other hotelier open
a limited-service hotel at about the same time. This hotel is adding 253 rooms to the market. This is the equivalent of two of Dunn’s new Courtyards. We show that just like the market will absorb his hotel in short order due to market growth, the market will absorb this hotel in a short period of time, which means a very limited effect on existing hotels. The great news about this hotel, unlike a Courtyard, is that this hotel will actually generate a significant portion of its own business right away (we estimate that 57% of its rooms nights will be new to it or other hotels in the community) and within one to two years will be absorbed 100% into the growing local market, just like Dunn’s hotel has been. If the city or HCW were proposing a 300 or 400 room hotel, one could understand his concern. We specifically recommended 240-270 rooms so that it would both grow group demand AND be absorbed easily into the market without a major oversupply event.

HSP has studied other markets where convention center hotels were added with public subsidy and the results for the competitive set ended up, in nearly every example, being better than the index for the rest of the country and compared to cities that did not invest in their hotels. Indianapolis is a great example of a city that continued to invest in their hotels and they have all, in the aggregate, improved their performance over time. Cincinnati, which did not invest in any convention hotel over the same period, saw their hotel market suffer in relation. And this was accomplished in Indianapolis, which has a tiny corporate market compared with Cincinnati. There are numerous other examples where a rising tide brought on by the convention hotel lifted all boats.

John Dunn also stated that the city did not ask him to participate in this project. On the contrary, during our initial study I met with Dunn Hospitality and asked them if they would be interested in the
project. Dunn’s reaction was that they specialized in limited service hotels, did not understand how a full-service hotel could work and was not interested in the development. The RFQ that the city issued was open to any developer who had developed full-service hotels of at least $30 million. Based on Dunn’s statements to me, the implication was they were never interested in a full-service hotel.

The public and elected officials should also understand that this is the fourth time the city has
attempted to attract a qualified developer for this project. It failed three times before because it had
unrealistic expectations of what the needed public investment would be. After scaring away strong developers the first two times, the city attracted only locals who had no previous large hotel development experience the third time. The city was smart to take a breath, study the matter and then go out to the market and, knowing that they would need to invest much more to get the right hotel, encouraged qualified developers to submit for the right project. HCW is a qualified and well capitalized developer and submitted the best bid. One of the key alternative developers in the process suggested a 100% publicly-financed hotel project, which is how half of the convention hotels in the US have been funded. This would surely not have gone over well in Evansville, but these are the choices when it comes to this type of development. The city chose the privately owned, publicly-induced financial model. The city therefore gets the product it wants and needs, but puts the operating risk on the private sector. It also gets a more vibrant downtown with more restaurants and more people working and living downtown.

Cost. Is the hotel project complicated? Yes? Is it a major public investment? Yes. The public investment is paying for all of the public assets and extra amenities necessary to create a convention hotel product that will attract groups to downtown Evansville, and is paying for things that private developers and banks will not finance because they are public amenities (parking garage, connectors, connector building, infrastructure improvements, public portions of the hotel, etc.). Will this project continue the positive transformation of downtown? Yes. Does Evansville have the funding to support this project and many others after it? Yes. Is this the best deal that Evansville can get for this project? Yes.

If this deal falls apart, the only alternative for a quality convention hotel will be a 100% publicly owned project, because no private developer will again spend the time or money to go down this road for the fifth time.

In John Friend’s recent analysis, he suggests that the city is paying for 62% of this deal and that is
much more expensive than the Fort Wayne project. He also says that the average subsidy for a convention hotel is only 25%. This is not true. As anyone who read our report knows, we profiled nearly 50 convention hotel deals across the US. About half of them were 100% bought and paid for by the public sector issuing bonds for the whole project. The other half averaged a 31 percent subsidy. In total, the average subsidy between all of them, including those 100% subsidized, is more than 60%. On the total project cost, which includes public and private elements, the City’s investment is limited to $37.5 million, which includes $20 million for the hotel (46.5% of hotel total) and $17.5 million for its own public projects. The developer’s investment is not limited and is required to be whatever it takes to get the quality of project built that they have agreed to. This continues to increase, while the city’s investment and risk remain the same. Locked into the development agreement, the city’s participation in the hotel is 46.5% ($20 million/$43.8 million total). This percentage could decrease if the project cost increases, as the developer will have to fund the difference. For the total $76.3M project, the city’s portion is now less than half as the administration has negotiated an increase in private investment since the April 2013 presentation to the City Council.

Comparing this deal to Fort Wayne’s similar project is like comparing apples and oranges. The Evansville deal includes a large garage (not counted in the Fort Wayne figures), three connectors, a connector building, a higher quality hotel and brand with more amenities and space, is a union project, is being built in a much stronger economy (Fort Wayne was bid and built at the worst part of the recession, when bidders were desperate and commodity costs were at their lows). Having the same concerns as John Dunn, we asked two different construction companies to review the HCW budget. We asked companies and professionals who built the convention hotels in Fort Wayne, Indianapolis and Louisville. In addition to the issues stated above, which they said lowered Fort Wayne’s costs, our construction estimators said the Doubletree hotel is of higher quality and it is a taller structure being built in a seismic zone. There are six primary areas they said lowered Fort Wayne’s costs, all legitimate. After their review, they state that our costs are appropriate. Even so, the city still has the ability to review and approve budgets.

As it relates to Fort Wayne’s $47 million hotel deal, the incentives were as comprehensive as
Evansville’s, although with many different components. It included a $6 million state CREED tax credit, the fullest tax abatement allowed by Indiana law (worth millions over ten years), occupancy guarantees (supported by an annual cash contribution of $250,000), a publicly-built garage, connectors and other infrastructure items. Despite the fact that their deal, for the reasons described above, was much less expensive, they still needed to throw every economic incentive at the deal that was available. When one considers the Fort Wayne hotel, White Lodging was only willing to take on $16 million in equity and debt for the 250-room project. The public provided the other $12 million on the hotel and an additional $19 million for related projects (garage, connectors, similar to Evansville). In Evansville’s case, HCW is willing to take on at least $23.8 million for the hotel. So when truly comparing the deals, Fort Wayne committed $31 million out of $47 million in public funding (66%) for their hotel project and related amenities and White only put in $16 million. Here, the developer is putting in $23.8 million on a much more compelling hotel, plus building a $15 million apartment tower at their cost. On the hotel alone, HCW is putting in 49% more ($23.8 million vs. $16 million) than White did in Fort Wayne. The city’s contributions (46.5% on the hotel), as discussed, are in line with the market and comparable deals, and the public amenities and assets being built are more comprehensive.

Based on the cost adjustments above, and assuming everything else was equal, the cost for Evansville’s hotel vs. Fort Wayne’s is justified and explained. Evansville is getting a higher quality product with more components.

The alternative to this deal, as discussed, is a 100% public bond-financed project, which is the opposite direction than most want to go, since it would cost the public twice as much while losing HCW, their apartment tower portion, and their national restaurant expertise.

Any city considering this type of deal faces the same challenges, both in the total cost, the attacks from other hoteliers and negotiating a fair deal for taxpayers. You have negotiated a fair deal. You also are creating one of the most transformative mixed-use hotel-based projects we have seen, especially in a market the size of Evansville. The benefits outweigh the costs and even the local hoteliers should see their fortunes increase due to this project.