Adjoining Hotels Are Hard Sell

By Margo McCall -- Tradeshow Week, 4/26/2004

Building a headquarters hotel adjacent to a convention center isn't as easy as it sounds. On the way to making those dreams of tradeshow gold a reality, municipalities must often overcome feuding locals, complicated financing schemes and endless years of stops and starts.

Despite the enormity and complexity of such projects, countless cities still believe the payoff in added convention bookings makes the ordeal worthwhile. For instance, it took Houston nearly two decades before it had a hotel connected to the George R. Brown Convention Center.

The Greater Houston Convention & Visitors Bureau said it took having the new Hilton Americas hotel in place next door to sign nearly a dozen new events, including DEMA, the Diving Equipment & Marketing Assn.'s Tradeshow 200 event that normally draws 800 exhibitors and 14,000 attendees.

Wayne Chappell, the Houston CVB's vice president of convention sales and services, said he's received "strong tentatives" on at least 20 other pieces of business. CVB officials are also scheduled to make a presentation on "the new Houston" for Reed Exhibitions next month. "We would not be up to bat on any of that business if it wasn't for the hotel. I think it has given us a leg up on many of our competitors," he said.

But getting the hotel project off the ground was a challenge. "There were four deals that we worked on since 1986," recalled Jordy Tollett, the CVB president and CEO. "It was, how do you finance a 1,200-room hotel that did not have Mickey Mouse or gaming?"

After a failed public-private partnership, the city established a nonprofit entity that enabled construction on the $285-million project to start in the summer of 2001. Because Houston owns the hotel, money flows back to the city. The hotel operator, meanwhile, doesn't have to carry a large debt.

Hilton Americas had its first workout serving as the headquarters hotel for the 38th Super Bowl this year. "I have to hand it to our community. The hotels and operators in our city realized the bigger picture was if you have an increased amount of supply, everyone will benefit," Tollett said.

Because so many hotel projects hit temporary snags and end up stalled, Chappell said many show managers were cautious. Bookings didn't start coming in until late last year, after hardhat tours commenced. "Customers around the country have been burned; a lot of clients were reluctant to commit until they could actually walk into the facility," he said.

Chappell said having a 24-story hotel with 40,000 square foot ballrooms attached to the convention center, however, has made his job much easier. Instead of 1,800 hotel rooms downtown, Houston now has 5,000. "It's everything a headquarters hotel should be – with a spa, multiple restaurants and lots of meeting space. It's such an important factor. I feel sorry for cities that don't have one," he said.

In the current competitive environment, a nearby headquarters hotel is almost a necessity. "That seems to be the price of entry these days, particularly for the larger convention centers. You've got to have one because the city down the street has one," said Jerry McClendon, a partner with Strategic Advisory Group, an Atlanta consultancy that performs feasibility studies for headquarters hotels.

McClendon said most such hotels are public-private partnerships. Once private developers weigh high construction costs and requirements for extra meeting space with the low convention room rates they'd have to charge, such projects rarely make economic sense. "These hotels are bound by the revenues they can make, and what they can charge translates into certain levels of cash flows. Right now the construction costs are just too high for the cash flows to generate sufficient returns for a private developer," he said.

At the very least, some public subsidy is generally required. More frequently, however, cities opt to do exactly what Houston did: create a nonprofit entity to own the hotel, then bring in a hotelier to manage operations.

The nonprofits can access tax-exempt debt at favorable rates, borrow against the hotel's entire construction cost and avoid paying property taxes. On the downside, said McClendon, cities end up hotel owners, a situation some citizens find objectionable. Cities can run into problems with the hotel managers, who are usually paid fixed fees. As well, the Internal Revenue Service requirements are increasingly complicated.

"A city takes on the risk of owning a hotel. They may make a lot of money if things go well, but they may lose money," he said. "There are political risks as well. Other hotels in the community may resent it."

There's a risk to cities in relying entirely on private financing too. McClendon said private developers have the luxury of being able to pull the plug on a project (and often do) if, for instance, they lose their financing. "If you're going to trust a private developer's financing, you're rolling the dice," he said.

A headquarters hotel planned near the Los Angeles Convention Center will likely end up privately financed. Tim Leiweke, president of Anschutz Entertainment Group, said he expects to announce a hotel financing deal by mid-June. AEG plans to build a 1,200-room headquarters hotel as part of a proposed 4 million sq. ft. retail and entertainment district called L.A. Live. The project is slated for land AEG owns adjacent to both its Staples Center sports stadium and the city-owned convention center.

Carol Schatz has been with the Los Angeles Downtown Center Business Improvement District for 14 years and been involved in the campaign for a convention center hotel the entire time. "It's been a long, hard climb," said Schatz, the district's president and CEO.

Charlotte also had to turn to a private developer, since North Carolina prohibits cities from owning hotels. The 700-room Westin Charlotte, which opened in May 2003, offers more than 44,000 square feet of convention facilities.

Washington, D.C., however, plans to use a $1-billion public bond to raise money for a 1,500-room headquarters hotel, as well as refinance the new convention center at a lower interest rate. Tishman Urban Development has been selected as the developer of the $460-million hotel, which will be operated by Marriott Intl.

The proposed hotel is slated to include a 37,000 sq. ft. ballroom, a 16,000 sq. ft. junior ballroom and 38,000 sq. ft. of meeting space. A number of out-year convention bookings were made on the understanding that Washington D.C. will have a headquarters hotel by 2008. If that doesn't occur, some business could be lost, local convention officials said.

A headquarters hotel can deliver an even bigger revenue punch when it's coupled with a convention center expansion. The opening of Houston's Hilton came on the heels of a convention center expansion. In Denver, meanwhile, the opening of the 1,100-room Hyatt headquarters hotel will come about a year after the $300-million expansion of the adjacent Colorado Convention Center.

The Denver hotel project's history stretches back to 1997. The project has been delayed twice and encountered occasional financing uncertainty. The $600-million project is being publicly financed.

Between the hotel and the expansion, Denver expects about $110 million in new business. Increasing the convention center's exhibit space to about 584,000 sq. ft. will open up a number of new markets. But Rich Grant, a spokesman for the Denver CVB, said the new business isn't expected to really start flowing in until 2007.

"It's going to take a couple of years. I think it's pretty safe to say we're going after everybody," Grant said.