Should Cities Be in the Mega-Hotel Business? By: Josh Goodman

The campaigns of Tom Leppert and Anne Raymond spent millions of dollars this spring wooing Dallas voters. Leppert and Raymond debated on radio and television. Both commanded a slate of city council candidates loyal to their causes.

But Leppert and Raymond weren’t running for office against one another. They weren’t running for office at all. They were arguing about a hotel.

Leppert is the mayor of Dallas. He’s also the biggest supporter of building a $500-million, 1,000-room hotel that will be adjacent to the Dallas Convention Center and will be owned by the city itself. Leppert believes the hotel will be the linchpin of Dallas’ downtown economy.

Raymond is an executive with Crow Holdings, a leading Dallas real estate firm. She was the spokesperson for a ballot campaign to block the hotel, arguing that city government should stay out of the hotel business. In that role, Raymond acted as a surrogate for hotel baron Harlan Crow, who spent an estimated $7 million of his own money to promote the measure. Ultimately, Leppert’s side won on a close vote, and construction has already begun. But the hotel debate became Dallas’ dominant political issue for months on end.

Strange as it might seem for a single hotel to command that much attention, it’s increasingly common. In the long war over government’s proper role in economic development, one of the most intense skirmishes has involved convention-center hotels paid for by cities. Today, new convention-center hotels are almost all publicly owned or heavily subsidized. In Texas alone, flagship hotels for convention centers have been approved with public help in Houston, Austin, San Antonio and Fort Worth. Elsewhere in the country, Chicago, Denver, Phoenix, St. Louis and Baltimore have done the same thing.

The elected leaders of these cities believe that by building fancy hotels connected to their convention centers, they can lure more visitors from out of state. The taxes and economic activity generated by these visitors, they wager, can make investments in hotels pay for themselves.

Critics, though, don’t merely say that hotel ownership is beyond the proper scope of government. They argue that cities have placed bets on a declining stream of revenue based on impossibly rosy forecasts. And, there is reason for caution. Some publicly funded convention-center hotels have been solid successes, but others have been colossal failures.

It’s nothing new for cities to fight desperately to attract conventions and trade shows. Conventioneers come, spend money and leave. “Visitors,” Mayor Leppert says, “don’t require schools, they rarely require our fire department. They don’t require our social services.” That appeal has prompted cities around the country to build larger and larger convention centers, even if the previous one is only a decade old.

But even the 1 million square feet of floor space that comes with the largest of the new convention centers isn’t enough for event planners. They want amenities. Chief among those are massive headquarters hotels. “Having a hotel that is literally adjacent, contiguous, connected to the convention center,” Leppert says, “is an absolute necessity.”

But while event planners are convinced they need massive hotels, private developers are less enthusiastic. Since long before the recent credit crunch, they’ve viewed new high-end hotels as a bad investment. With conventional private financing, it simply takes too long for hotel profits to pay off the massive debt that comes from construction of the building.

So cities offer non-traditional financing. They do that in either of two ways: subsidizing the hotels or, increasingly often, issuing tax-exempt bonds to fund them. The specifics of the deals vary dramatically. In some cases, the bonds are paid off exclusively from revenue brought in by the new hotel. In other cases, the city is, directly or indirectly, committing other pots of money to the project. In some cases, as in Dallas, the city actually ends up owning the hotel. Operation of the hotel is usually turned over to Hilton, Marriott, Hyatt or Omni.

The common thread, though, is that the projects wouldn’t have taken place without government intervention. But why intervene on such a massive scale to build a facility that private developers view as a bad investment? That, says Anne Raymond, was the question her side raised in Dallas. “If this was a good real estate transaction, the private sector would do it,” she says. “Dallas is filled with optimistic real estate investors, but no one would step up.” In her view, that’s because they knew more about the market than the local government did.

Of course, a city can make a better deal for itself in the bond market than a private developer can. The bonds cities issue are tax-exempt, and allow them to pay bondholders much lower interest rates. What’s more, says Mayor Leppert, cities simply have different standards of success than private hotel companies do.

For cities, the financial success of the hotel itself is secondary. The point is to have the convention center thrive and for the city to reap the benefits of increased economic activity and increased tax revenue. This, Leppert argues, isn’t some dramatic expansion of government: The hotel is really just an extension of the public convention center itself.

Heywood Sanders has heard all of this many, many times before. Sanders, a professor of public administration at the University of Texas at San Antonio, is the nation’s leading critic of publicly funded convention centers and hotels. He argues that conventions in general, not to mention the facilities that host them, are a declining business. He says that more and more meetings take place online rather than in gigantic buildings, that the recession has only accelerated this process, and that recovery is not going to bring back the old days of massive trade and professional shows with participants flying in from all over the country.

Sanders cringes as he sees cities betting on convention centers that cost hundreds of millions of dollars, then doubling down on that bet with hotels that cost hundreds of millions more. His research suggests to him that the link between new headquarters hotels and increased convention business rarely emerges. “You get to do a big project with big promises and lots of money for consultants and bond counsel and underwriters and engineers,” he says, “but you may do it at the expense of the very important things that may make a city’s future.” Sanders would prefer that cities invest in schools, roads and affordable housing.

This clash between big projects and basic services is a familiar one in municipal politics. In many ways, the current hotel debate is similar to the arguments traded back and forth over publicly funded sports stadiums. (Some of the hotels actually cost almost as much as stadiums.) But in both cases, business interests and labor unions nearly always join forces to promote the project. In Dallas, the new hotel had the backing of both the local chamber of commerce and the local AFL-CIO chapter. Opposition tends to come from a motley coalition of conservatives, who view the projects as government waste, and liberals, who view them as corporate welfare.

In Dallas, though, the clash was as much a personal struggle between two multi-millionaires, Mayor Leppert and developer Crow, as anything else. Opponents of the hotel ran ads calling Leppert arrogant. Hotel backers fired back that Crow’s intervention was mere self-interest–that he was trying to protect the fortunes of his own 1,606-room Hilton Anatole, one of the largest hotels in Dallas. Leppert’s forces carried the day, but just barely. The measure to block the hotel lost by only 2,000 votes.

Did Dallas voters make the right decision? It depends on where you choose to ask the question. Civic leaders in Denver would tell you yes, but those in St. Louis probably would disagree. The two cities illustrate the widely divergent results of past convention-center hotel projects.

By any reasonable measure, the convention-center hotel in Denver has been a success. Since it opened in 2005, the 1,100-room Hyatt Regency Denver has helped the city land major events, including the 2008 Democratic National Convention. The new hotel hasn’t hurt business at older hotels–just the opposite. Room rates and occupancy rates went up after the hotel opened, as more events attracted more visitors to town.

What’s the price tag for Denver taxpayers? “It’s cost them nothing,” insists Bill Mosher, CEO of the Denver Convention Center Hotel Authority. “There’s not a dollar of public money in the hotel.”
That might sound farfetched, given that Mosher’s public authority, a creation of the Denver government, issued $350 million in bonds to build the hotel. But Mosher’s point is that those were revenue bonds, meaning they’re being paid off from the hotel’s earnings, not out of the city’s general fund. If you don’t go to the hotel–and most locals don’t–you aren’t out anything. And since Denver didn’t exempt its hotel from city taxes, the project has been successful enough to redirect millions of dollars to the city treasury.

Given all of that, it’s no surprise that Leppert and his campaign cited Denver as a model to emulate. The
opposition, though, pointed to St. Louis.

Even before St. Louis’ 1,100-room, $265 million Renaissance Grand & Suites Hotel opened in 2003, things started going wrong. The terrorist attacks of 2001 weakened the convention industry. The home-based airline TWA ceased to exist, depriving St. Louis of its airport hub. The convention center’s developers were a little cagey in their claims of floor space: To get the total exhibit space to 500,000 square feet, they included the adjacent St. Louis Rams football stadium, which is unavailable for major events during much of the year. Underneath these problems lay the plain truth that not too many people wanted to visit St. Louis in the first place. It wasn’t Orlando, Chicago or Las Vegas. Or Denver, for that matter.

The end result was that, even with the headquarters hotel, the city’s convention business remained flat. Eventually, the hotel was able to turn a small operating profit, but it wasn’t nearly enough to pay off its debt. When the hotel went into foreclosure earlier this year, its bondholders bought it at auction, and kept it open. But that was only after St. Louis had dedicated millions of dollars of federal Community Development Block Grants to the hotel–money that could have been used to pave roads or build housing.

The failure in St. Louis wasn’t just a matter of bad luck but also wishful thinking. “There were four different consulting groups that wrote negative feasibility studies for the project,” says Gary Andreas, a St. Louis hotel consultant. “They found the one person who said that the other guys were idiots.” Andreas would know. He was one of the consultants who weighed in against the idea.

The question for Dallas–and other cities that are thinking about subsidizing convention hotels–is whether they, too, are engaged in wishful thinking. Dallas just broke ground on its controversial hotel in September. It will be years before we know how well it does.

Even the supporters of convention-center hotels say that cities should act with care. They warn that the deals to build the hotels are hugely complex and that small details come with large financial consequences. And while every city would like to be a hot convention destination, an opulent hotel next to the center doesn’t automatically make it one.