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Public Entities / Private Entities - Who Should Take the Risk? |
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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
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:
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
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
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 |