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Convention Center Financing � 
Public Entities / Private Entities -
Who Should Take the Risk? 

 
Jones Lang LaSalle Hotels FocusOn Convention Center Financing Report

New York, February 19, 2003� Jones Lang LaSalle Hotels recently published FocusOn Convention Center Financing � Who Should Take the Risk? FocusOn is a regular research series that addresses current issues affecting the hotel real estate
investment community. FocusOn Convention Center Financing explores the benefits and inherent risks of public versus private sector financing, public/private partnerships, public and private contributions and how to construct the deals as related to convention center projects.

According to report author Anwar Elgonemy of Jones Lang LaSalle Hotels, public sector incentives and financial vehicles for a convention center hotel can come from a variety of sources.  �The funding can be derived from contributions of land, infrastructure and parking facilities; direct subsidy payments; contingent pledges of financial support; or converting hotel ownership to a public entity and thus providing potential access to tax-exempt bond financing,� explained Elgonemy.

Just as there are different alternatives for public sector incentives for convention center hotels, there are also varieties of specific financing methods from which to choose.  The fundamental difference among the financing alternatives is the allocation of risk of the hotel operation.  The risk of the hotel�s operating profitability must be prudently allocated among the owner (city or county), the lenders (banks or bond investors) and the property manager (hotel operator). 

In today�s unpredictable economy investors are unwilling to acquire bonds without the owner (city or county) assuming a reasonable share of the inherent risks, comprised primarily of:
 

Construction Risk:
Taxable financings are often paired with significant equity investments.  In the event of construction cost overruns, the equity investor, rather than the debt provider, is expected to fund the unexpected costs.  However, the publicly owned hotel financings lack this feature, so there is a correspondingly greater priority in containing construction risk.

Horizontal Risk (Uncertain Income Streams):
As the project is yet to be built, and given the inherent uncertainty of any cash flow projections, bond investors will impose higher debt coverage levels, require strong legal protections and aggressively discount future growth of revenues.

Performance Incentives:
An investor concern in publicly owned hotel financing is the relative absence of strong performance incentives.

Rationale for the Project:
The public entity must present bond investors with evidence of a considered strategy that justifies a potentially significant public contribution to support the city or county�s meetings and lodging  industry.

Debt Service Structure:
Bond investors require a generously funded debt service reserve requirement for first-lien bonds. 

THE ROLE OF PUBLIC FINANCING

In the past two years, new full-service hotels have been extremely difficult to finance. Convention hotels, furthermore, are generally regarded as being of even higher risk -- a result of the uncertainty related to occupancies and above-average development costs. As a result, public financing can be the catalyst that makes a convention center hotel viable. 

�While tax-exempt public bond issues are subject to �private purpose� limitations, there are techniques that can blend in public funding to privately owned and operated hotel ventures,� said Arthur Adler, Managing Director and CEO-Americas, of Jones Lang LaSalle Hotels. �These include financing and leasing back the �public� areas of a hotel (or parking garage) facility.  Public revenues from hotel taxes or real property taxes may be designated for the facility through non-tax exempt issues. In addition, cities or counties may offer certain operating guarantees, such as payment of debt service, for a specified period of time.�

Miami Beach, for example, agreed to issue $52 million in bonds as its share of land and construction of the $158 million, 800-room Loews convention hotel. The hotel developer -- St. Moritz, a joint venture of Forest City and the Loews Corporation -- contributed $15 million in equity, with the balance financed with conventional debt. 

In some cases, cities have made equity investments in convention hotels. The municipality may become the junior equity partner in the hotel with �first-in� risk capital, and �last-out� return. In a broad policy sense, the city's rate of return is potentially greatly enhanced by a vitalized local economy, higher visitation and associated tax revenues. 

PUBLIC/PRIVATE PARTNERSHIPS (PPPS)

�What tools can city/county governments bring to attract private hotel investment by improving their underlying economics,� asked Elgonemy. �How can a hotel developer work with local governments to close the economic gap and make a development click?  These are critical questions that are constantly raised in the arena of public sector financing for convention center hotels.�

The 1986 Tax Reform Act pointed the way to creative forms of PPPs serving the interests of convention centers and their headquarters hotels. The City of Miami, for example, provided an array of incentives to attract hotel development in support of the James I. Knight Center. The city acquired land, provided a 45-year lease with attractive terms and furnished off-site improvements, as well as site utilities. The hotel
additionally was awarded the food and beverage concession for the convention center, and real estate property taxes were abated during construction. 

However, not all PPPs come together, despite concerted efforts on the part of both private developers and public entities. In Tampa, Florida, studies had indicated a strong need for a convention hotel to support the city�s new convention center. A city commission then approved a proposed 900-room Marriott hotel, estimated to cost more than $140 million, and to be owned by a private �not for profit� corporation.  Public financing for the hotel, however, was rejected by the Tampa City Council in 2001. 

�At their best, PPPs make it possible to reduce hotel development costs, set the stage for more profitable hotel operations, and allow a government jurisdiction to safeguard public investment and achieve local economic development goals,� noted Adler.

PUBLIC AND PRIVATE CONTRIBUTIONS

Generally, public contributions that can drive development of a hotel may include land at favorable lease terms, off-street parking facilities, construction/use rights of public space and marketing support. Hotel developers may also be granted the convention center�s food and beverage service concession; this ancillary revenue can be an important step to offset the lower room rates often associated with associations business. Among the contributions made by the hotel developer are equity funding, the track record of team members, a superior product development plan, strong management and strategic marketing. 

�In addition, the public and private entities must have controls in place to ensure that relationship objectives are maintained,� said Elgonemy. �A convention headquarters hotel, for example, must commit room nights to the convention center, even at the cost of displacing higher rated business. Conversely, the convention center must book events, which generate room nights, perhaps foregoing higher revenue-generating consumer shows that tend to be oriented to a local audience.�

PUTTING THE DEAL TOGETHER

From a development and operational standpoint, there are a number of challenges facing hotel companies as they consider convention headquarters hotels. In addition, many deals have failed because a city has insufficient resources to close a transaction, or lacks an understanding of the dynamics needed to support these developments. 

�What is fundamentally at stake is swaying a portion of the risk from the developer to public entities, since the public jurisdiction stands to benefit economically if the hotel is a success.  There are many ways to structure a convention center hotel deal, and the strategic advice of a hotel real estate investment bank is paramount,� concluded Adler.

Sample of Major City-Backed Convention Center Hotel Projects and Status
 

City - Project
Status
Denver, CO - 1,100-room, $347-million Starwood hotel. Under construction. City of Denver has set up a nonprofit corporation that will own the hotel on behalf of Denver taxpayers.
Washington, D.C. - Proposed 1,500-room, $500-million  Marriott headquarters hotel. Hotel will be attached to the new 2.3-million sq. ft. Washington Convention Center due to open in March 2003.  The hotel should be completed in 2004.
Fort Lauderdale, Florida - Initially proposed 500-room headquarters hotel. On-hold.  Likely to be built by 2005.
West Palm Beach, Florida - Yet to be determined. The $80-million Palm Beach County is scheduled to open in 2003.  Plans for a  scaled-down 350-room hotel have been postponed.  County is in negotiations with the developer (The Related Group).
Boston, Massachusetts -  Proposed, $170-million, 1,120-room convention center hotel. Project was delayed  for 3 years, but only recently a lease was signed between the Massachusetts Convention Center Authority (MCCA) and Starwood to develop the hotel. 
Charlotte, North Carolina -   700-room convention center Westin hotel � opening 12/2002. The project was subsidized with $16 million from taxpayers.  The cost of the hotel totals $143.7 million, of which, $75 million is in the form of construction loans by Wachovia Bank, Bank of Nova Scotia, BB&T, and First Union Bank.  An additional $25 million was obtained through a bond issue supported through parking payments from the city, with the remainder of the financing being arranged by Portman Holdings and a grant from the City of Charlotte.
Pittsburgh, Pennsylvania -  Proposed, $100-million, 550-room convention center hotel. City is looking into the possibility of floating tax-free bonds to fund the project.
Austin, Texas - Proposed, $110-million, 800-room convention center hotel. The city selected H.L. Hotels LLC in 1999 to develop the project, but has been unable to find a buyer for the revenue bonds that would back the project.  H.L. Hotels has agreed to buy $15 million in subordinate bonds. HL Hotels is a venture of Hilton Hotels Corp. and Austin based Landmark Organization Inc. 
Dallas, Texas - Proposed 1,200-room convention center hotel. $130-million expansion of the Dallas Convention Center completed in 09/2002.
Fort Worth, Texas - Proposed, $130-million, 600-room convention center Hilton hotel. Fort Worth City Council agreed to proceed with plans to finance the deal through the sale of Certificates of Obligations (COs).  COs are similar to bonds and are sold by cities and other government agencies, typically to finance large public projects. They do not require voter approval.  The IRS has determined that municipalities can issue debt for a hotel that is tax-exempt only if the project serves a �public purpose.�
Houston, Texas - 1,200-room, $300-million Hilton hotel. City-backed convention center opening in mid-2003.  Financing via tax-exempt bonds issued through a nonprofit corporation created by the City of Houston.
Irving, (Las Colinas) Texas - City officials hope to lure a major hotel with the promise of land adjacent to its planned convention center, and other incentives. A plan to establish a $100-million hotel by creating a city-backed, nonprofit entity to hold the bonds for a hotel venture met with strong opposition from representatives of the city's hotel industry, who disliked the idea of competing with a city-backed facility.  A recent attempt to finance the hotel via a bank loan has failed, but other financing mechanisms are being explored.  The hotel-motel tax was already raised 2 cents to help fund the project.
San Antonio, Texas - Proposed, $300-million, 1,300-room convention center hotel. Hotel would be built on city-owned garage site; city is investigating whether they want the financing to be all public, all private or a mixture of public and private funds.
Source: Jones Lang LaSalle Hotels


Jones Lang LaSalle Hotels, the world�s leading hotel investment services group, provides clients with value-added investment opportunities and advice. In 2002, its success story includes the sale of 6,747 hotel rooms to the value of US$862 million in 36 cities and advisory expertise on 116,877 rooms to the value of US$17.8 billion across 170 cities. Jones Lang LaSalle Hotels� services include transactions, mergers and acquisitions, financial advice and capital raising, valuation and appraisal, asset management, strategic planning, operator assessment and selection and industry research.  Jones Lang LaSalle (NYSE: JLL) is the world�s leading real estate services and investment management firm, operating across more than 100 key markets on five continents. 


 
 
Contact:

Leah Davis
+1 480 219 8690
[email protected]
www.joneslanglasallehotels.com
Also See: Unable to Lure Private Developers, City of Fort Worth Considers Certificates of Obligations to Finance $130 million Convention Center Hotel / Oct 2002
Some Average Room Rate Scenarios for Proposed Denver Convention Hotel As High as $300 per Night for Break Even / Nov 2002
Developer FaulknerUSA Tops Off the 800 room Hilton Austin; Will Elevate Austin to a Higher Playing Field in the Convention Market / Jan 2003
City of Austin, TX Successfully Markets $262.5 million in Bonds for the new 802 Room Hilton Austin
Convention Center Hotel / June 2001
Pittsburgh Officials May Create Nonprofit Agency to Float Tax-free Bonds for a 600 room $100 million Hotel Adjacent to Convention Center / October 2002


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