Should you use Public/Tax-exempt Structure or Public/Private Structure when developing a big convention center hotel? Catherine Holmes, Partner at Jeffer, Mangels, Butler & Mitchell LLP, highlighted in a previous discussion of ours on our LinkedIn group, “Public Private Developments,” about how great the City of Dallas did in getting the Omni Dallas Hotel approved and financed. We would like to branch off her discussion as a Dallasite, and thank Catherine Holmes and everyone involved in getting the Omni Hotel under construction.
Without a headquarters hotel, Dallas had lost its ability to compete for conventions. Booking activity at the convention center since the hotel groundbreaking has been at recent historic highs. But Dallas’ structure was a Public finance structure (not Public/Private) using tax-exempt bonds and Build America Bonds (no longer available) with city guarantees. Indeed, it is our opinion that to finance a 1,000 room hotel development today, it must be a publicly owned and sponsored hotel.
One notable exception is the Omni Hotel getting ready to break ground in Nashville. Why? Omni brought a “deep pocket” and a “Brand, Owner-Operator” very aggressive approach in order to capture that assignment, an assignment previously awarded to another development/design/flag team that could not get the facility financed. Omni’s approach was more aggressive than 99% of the competition has been willing to do in the past for this type of development. Even with the larger equity and debt guarantee commitments, we have it on good authority that the City of Nashville contributed to Omni the land and infrastructure approximating $25 million in value, plus a 20 year tax abatement for 2/3′s of hotels taxes, itself valued at $100 million. That’s a heck of a subsidy for municipality to provide to a private developer. One has to ask the question of whether the City would have been financially better off in the long run to “own” the hotel like Dallas, Houston, Denver, Baltimore, Sacramento, Omaha, Overland Park and the dozen or so other cities who have made that public vs. public/private comparison and chose the former.
The traditional Public/Private financing structure used for hotels that support convention centers, conference centers, university or hospital campuses or airports, brings private equity and conventional debt and combines it with a public bond to complete the capital stack. Since banks were out of the lending business for new full service hotels until just recently, lately we’ve seen bank underwriting criteria showing a Loan to Cost constraint at 50% limited by big Debt Service Coverage ratios of 1.7X to 1.8X, yielding a true loan to cost of 35% to 40% or even less!
Additionally, the amount banks will loan on any one new hotel development is still volume constrained so that getting a bank syndicate together to bring much more that $50 to 60 million in a first mortgage is problematic. Trying to raise $150 million in bank debt for a 1,000 room hotel development is, at the moment, highly unlikely. If anyone knows differently, please comment. So I think that the “sweet-spot” for Public/Private hotel developments today is for smaller communities seeking 250 to 500 keys, while the larger hotels need to trend to the Public structure.
We were also asked by another fellow member, “Do you see municipalities moving in the select service direction–targeting multiple locations using municipal properties–to reduce cost while simultaneously adding to room count?”
Municipalities considering Select Service Hotels as a magnet for more tourism and the economic development it brings, are usually smaller communities where the cost of a Full Service Hotel is prohibitive. There are some excellent examples of Marriott Courtyards, Hilton Garden Inns and Hyatt Places which are connected to conference centers in the suburbs of major municipalities. Around Dallas, Garland, Allen and Lewisville have such properties which serve a vital community purpose.
But for those major communities that require a Full Service, First Class Hotel to support their convention center, they must first insure that an adaquate number of Full Service rooms exist in order to be able to optimally recruit conventions and compete with those cities that have everything Group Planners demand. Case in point is Pittsburgh where new Select Service hotels have opened near the David L. Lawrence Convention Center but haven’t increased booking to a measurable degree. The city has, for a decade, hoped to attract a developer to finance and build a Full Service headquarters hotel, to no avail. They need to learn from your own hometown of Baltimore, just how to support that sort of development. We hope you’ll agree that the Hilton Headquarters hotel has been a major draw for the improved success at the Baltimore Convention Center.
We agree it makes sense to develop Select Service products in the shadow of a successful convention center or other event centers. Indeed, no less than 5 Select Service hotels began development once we broke ground on our Overland Park Sheraton and Convention Center outside of Kansas City, and today they provide a competitive lower price point for convention attendees. But it’s the City’s Sheraton that “seals the deal” to bring the conventions.
Our member was also correct in stating that construction lenders today are much more receptive to the Select Service model than a Full Service hotel. They’re simply more affordable and therefore less risky. But a danger point is the very fact that they are easier to finance and therefore that product can become overbuilt in an area, creating too much competition, lower rates and lower occupancy!
To see full discussion or more discussion like this one you can visit our LinkedIn group call Public Private Developments.