Another Downtown Hotel Needed

September 5, 2003
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GRAND RAPIDS — SMG general manager Rich MacKeigan recently told the finance committee of the Convention and Arena Authority that the new DeVos Place convention center was solidly booked for the fiscal year after it opens in early December.

While local consumer shows produced by Showspan Inc. will occupy the building from the end of January into early April, MacKeigan said dates on both sides of that period would be filled with meetings and tradeshows until the end of June.

And that has to be good news for the city’s hotel operators, who have had difficulties filling rooms for a few years.

Room occupancy has dipped by 9 percent since 2000, while room rates haven’t risen since then. Figures from the Convention and Visitors Bureau reveal that the average convention booking is worth 1,500 guest rooms on peak meeting days, so it follows that more bookings for DeVos Place mean more bookings for hotels.

That simple conclusion is especially true for the Amway Grand Plaza, the downtown Courtyard By Marriott, and the Days Inn, the three hotels closest to the convention center.

“Meeting planners want everything within walking distance,” said Bureau President Steve Wilson at a meeting of the Rotary Club in August.

The 682 rooms at the Amway, the 214 at the Courtyard, and the 175 at the Days Inn gives the CVB 1,071 rooms within a reasonable distance of DeVos Place to offer planners. Is that enough hotel rooms? For now, Wilson said it was.

But a study from Deloitte & Touche, paid for by the Grand Action Committee, called for an additional 1,000 hotel rooms downtown if the city wanted to leverage the full potential of the convention center.

Wilson, at the same Rotary meeting, said another 350 rooms would do the trick.

Blue Bridge Ventures has proposed a 400-room hotel on Calder Plaza, a few hundred feet from DeVos Place, while the DeVos family is reportedly also doing research on a new downtown hotel.

CVB Vice President of Sales George Helmstead recently told the Convention and Arena Authority that the city lost a convention bid for 2008 because there aren’t enough hotel rooms downtown to accommodate that organization.

Hotel size, however, may not matter as much as location.

And finding the money for one may be the biggest challenge of all.

According to Strategic Advisory Group LLC of Duluth, Ga., a primary reason why planners pick a city is that there are hotels near the center that can serve as a headquarters for their groups. The industry consultant reported last year that cities without enough of these hotels lost events to other cities that did have enough.

For instance, Jacksonville, Fla., offers 80,000 square feet of exhibit space at its center, an amount much smaller than the 225,000 square feet available at DeVos Place.

In a survey of 100 meeting planners the city had targeted, only 20 percent reported they would consider meeting in Jacksonville. Why?

According to Strategic Advisory, the city didn’t have what most planners considered was a headquarters hotel. But 86 percent of those planners said they would go to Jacksonville if the city had a headquarters hotel.

The Amway Grand qualifies as a headquarters hotel. It’s arguable whether the others do, the argument centering on the size of the convention.

But what if DeVos Place holds two sizeable conventions at the same time — which, by the way, the building has the capacity to do. Is another headquarters hotel needed here to fully leverage that space?

If so, funding the construction of one may not happen solely through private dollars — at least that is what other cities across the country have found out, because there may not be enough investment dollars out there.

Strategic Advisory reported that the hotel-capital market dried up in the late 1990s when investors turned to technology companies as the national economy began to slow. Since then, most hotel investment has gone into smaller hotels that don’t qualify as a headquarters address. And lenders haven’t been eager to finance more than half of the construction cost for a larger one.

Jeff Sachs, managing partner of Strategic Advisory, reported that most convention hotels get built through a public-private partnership with up to 30 percent of the cost coming from subsidies such as tax-increment financing, infrastructure donations like parking, tax rebates and cash grants.

The partnership becomes a nonprofit corporation (NPC) and that allows the entity access to lower-cost, tax-exempt bonds.

In the last two years, Pittsburgh, Sacramento, Overland Park, Kan., Cambridge, Md., Myrtle Beach, Austin and Houston have all formed NPCs to build major hotels. An NPC lowers a developer’s debt and equity costs from 15-18 percent to 5-8 percent, and also makes capital more available through the sale of bonds.

“Under this structure, an NPC would be established by the sponsoring entity to finance and own the hotel.

“The entity would hire private-sector professionals to develop, design, build and operate the project,” wrote Sachs in a newsletter.

Six years ago, the IRS gave NPCs the ability to sign a 15-year management contract and still issue tax-exempt bonds.

That gives the group a strong funding source outside of the routine one: the municipal bond market. Sachs reported the bonds for projects in Myrtle Beach, Austin, Houston and Overland Park were oversubscribed.

“Most convention center hotels that have been financed since 1999 have utilized this form of financing,” wrote Sachs.

“We have record of seven convention center hotel projects, along with several conference center and airport hotels, which have been financed through an NPC.”

Sachs knows that cities struggle with the idea of having public ownership in a hotel, as officials are concerned with what would happen to their credit rating should one fail.

But he said he also knows the conventional financing method has similar trappings and right now a major one is attracting enough investment to get a hotel built.

“We have record of six cities that are currently working on an NPC structure after attempting a private sector structure,” wrote Sachs. “Many other cities with stalled conventional financed projects are currently considering converting to the NPC structure.”

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