Trying To Get To Zero Cost

October 21, 2002
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GRAND RAPIDS — While Blue Bridge Ventures and the city try to smooth out their wrinkles on a proposed convention hotel for Calder Plaza that won’t cost taxpayers a penny, other cities have given up trying to get to zero and taken different routes to build a hotel.

According to the Strategic Advisory Group LLC, a hospitality industry-consulting firm in Georgia, partnerships between public officials and private developers have been the key to getting convention hotels built in the country for much of the past decade.

“The formation of these partnerships were driven from both a market and cost perspective,” wrote SAG in its winter 2002 newsletter.

As for the market perspective, the company said meeting planners choose cities that have enough accommodations near a convention site. Planners generally reject destinations without enough hotel rooms and a city’s convention business suffers as a result.

As for the cost perspective, SAG said that often a hotel’s cash flow isn’t strong enough to pay its development costs. If not, hotel management may be forced to discount room rates to compensate, and also offer enough space within the building to host some meetings — which, in turn, can cut the cash flow even further.

Then there is the reluctance on the part of lenders to finance convention hotels.

“Consequently, public involvement becomes necessary to enable the destination to reach its convention potential,” read the SAG newsletter.

SAG reported on 20 convention hotels that were built in the 1990s through a public-private partnership and found that the typical public subsidy ran between 20 and 30 percent of the project’s cost. These subsidies included grants, infrastructure donations, tax rebates and tax increment financing.

But the latest trend in financing a hotel involves developing it as a nonprofit corporation, which allows access to the lower-cost bond market. SAG reported this method has been the most popular in recent years, as seven convention hotels have gone up in this manner since 1999. The cost of capital is cheaper, by as much as 10 percent, and capital is easier to obtain.

Another approach being used to build a convention hotel is for a city to do it alone. For instance, Houston used a citywide occupancy tax to finance one. Myrtle Beach and Austin did similar deals.

“Actually, the latest question on this front isn’t whether subsidies are a good idea. They’re probably inevitable,” wrote William Fulton in the August issue of “Governing” magazine.

“Rather, it’s what to do when the subsidies aren’t enough — when private investors won’t build a hotel even when the city is willing to write a big check.”

This happened in Chicago, so city officials took the matter into their own hands. The Metropolitan Pier and Exposition Authority issued $108 million in tax-exempt bonds to build, and own, the Hyatt Regency McCormick Place hotel.

“A recent analysis of 21 convention hotels by C.H. Johnson Consulting Inc. found that almost half of the development money came from the public sector. In five cities — Chicago, Houston, Austin, Sacramento and Overland Park, Kan. — the public sector paid for 100 percent of the cost of the hotel,” wrote Fulton in his economic development column.

But besides trying to get to the zero that some cities have abandoned, there is another glaring issue that further complicates the deal in Grand Rapids: The city and the county have to be relocated for the hotel to go up and potential sites for those moves have been discussed.

The current local talks, however, are focusing on whether to give the developers exclusive rights to the plaza, the parking ramp and City Hall for 10 months. Once that decision is made — and if it’s in their favor — then Blue Bridge and its partner Hines Interests LP of Houston say they can seriously talk about the project’s cost and financing.

Blue Bridge Public Information Director Ed Kettle told the Business Journal last week that city staffers gave them changes to an option that city commissioners didn’t vote on last month. He didn’t disclose the changes offered by the city at an Oct. 14 meeting between the two sides.

But Kettle said their legal staff was reviewing the city’s suggestions, and added that he hoped a revised option would be before commissioners within weeks. In the meantime, construction continues on the city’s new $220 million convention center.

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