Dec. 8, 2003 - The federal Department of Housing and Urban Development says its Community Development Block Grant loan guarantee program is "one of the most potent and important" tools it can give cities to jump-start "distressed areas" where private investors are loath to go. 

Boston, however, has found another use for the program: luxury hotels. 

Three big hotel deals announced recently by the city -- in tony Back Bay, the North End's waterfront, and in South Boston near the new convention center -- are being financed with $40 million backed by Boston's HUD community development funds. 

The Mandarin Oriental Hotel is being billed as the finest hotel Boston has ever seen, set in the "sophisticated panache" of the Back Bay. The Regent Boston Hotel on Battery Wharf is being described as a "spectacular" five-star experience in a parklike setting, with beautiful harbor views and "every conceivable amenity." The third is a 790-room Westin Hotel designed to accommodate convention guests near the South Boston Waterfront. 

City development officials said the deals are consistent with HUD's intent of doing projects that "renew entire neighborhoods" because the hotels will provide tax revenue for the city and jobs for low- and moderate-income people. Some neighborhood activists and city councilors, however, think the money would be better used in poorer parts of the city, rather than for service jobs in well-to-do areas. 

"To see our [Community Development Block Grant] money being used to strengthen the position of the wealthy in our city should be a matter of great concern to those who believe in economic justice," said Boston City Councilor Chuck Turner, who represents Roxbury. 

The City Council passed the measure without discussion and without a hearing when it came up for a vote in March. Several councilors said they did not fully comprehend the implications of the measure. 

Councilor at Large Maura Hennigan, the sole "no" vote, said: "I felt very uncomfortable taking a vote on a matter that would be allowing wealthy developers to benefit from windfall gap financing at the expense of local neighborhood development initiatives." 

Under the program, called Section 108, HUD issues bonds in the city's name. The city then loans the money to the developers. Three developers were selected out of seven who applied: Joseph Fallon, Robin Brown, and Harold Theran. 

Fallon, a longtime friend of Mayor Thomas M. Menino, is developing the Westin Hotel in South Boston. Brown and partners Julian Cohen and Stephen Weiner are building the Mandarin Oriental Hotel in front of the Prudential Center. Theran is developing the Regent Boston, overlooking Boston Harbor at the end of Hanover Street in the North End. 

The Mandarin and the Regent will also offer condominium residences. At the Regent, condo prices will start at $700,000 for an 800-square-foot unit with no view, according to Theran. The Mandarin condos will start at $2 million. 

The city will provide partial financing for the projects, which have been stalled because conventional lenders have balked at financing hotels since the Sept. 11, 2001, terrorist attacks. 

The developers will pay hefty interest on the loan -- 12 percent -- which city officials say is another reason the deal is good for the city. If a developer should default on the loan, however, the city's $28.5 million in annual Community Development Block Grants -- grants that are used for such programs as the city's Fair Housing Commission and housing for people with AIDS -- could be jeopardized. 

The city would be responsible for the loan payments the hotel developers should have made. The money would be deducted from the city's Community Development Block Grant allotment for the next year, unless the city tried to recoup its investment by foreclosing on the hotel. That would place the city in the awkward position of being a hotel developer/operator. 

"If it came to that, the city wouldn't be in a position to manage or run [the hotel]," said Samuel Tyler, president of the Boston Municipal Research Bureau, stressing that a default is unlikely. "The city would have to try to sell it, or contract it out to experts -- the city doesn't have the capacity to run a hotel. It's not a business they should be in." 

City officials downplayed the risk and said the loans are a good investment in the city's future. "Our whole focus is to generate jobs and additional construction," said Mark Maloney, director of the Boston Redevelopment Authority. He added that, as a condition of loan approval, the hotel operators must agree to hire a fixed number of low- and moderate-income applicants. The hotel developers are required to pledge one job for every $35,000 in money loaned. 

The Mandarin Oriental, for example, must generate 429 jobs for the $15 million loan it will receive. 

Susan Ellsbree, spokeswoman for BRA, said the projects create "economic opportunity for Boston -- jobs and tax revenue and housing." 

Whether the developer receiving the city loans is wealthy is irrelevant, she said. 

Although the hotel occupancy rate is now 71 percent, tourism officials say that if the new convention center is to be successful, the city needs more hotel rooms. 

Should the convention center fail, said Hennigan, the extra hotel rooms will strain the entire industry. 

"If the convention center is a bust," she said, "you'll have all these hotels which will further burden the existing hotels, which are struggling as it is." 

Neither Brown nor Fallon could be reached for comment. Theran said the city will be handsomely rewarded for helping him and Brown build hotel-condo complexes. 

"Mandarin and Regent have other elements that dwarf the hotel -- residential and retail and, in my case, a parking element," he said. "They get many more construction jobs and many more permanent jobs, and much more in taxes. In two or three years, we'll bring in as much taxes as the amount of my loan," he said. 

Risk of default, he said, is minimal, in part because the developers have already staked millions of their own money in the projects. In a foreclosure, he said, the city would recover its money before the equity investors. 

HUD officials also defended use of the loans to build hotels, saying it's been done here and elsewhere around the country. The Seaport Hotel, developed by Edward C. Johnson III, chairman of Fidelity Investments, was financed in part using such loans. 

The law that created block grants in 1974 allowed HUD to provide money to for-profit businesses "when the assistance is appropriate to carry out an economic development project that creates or retains jobs for low- and moderate-income persons," said Cedric Kam, HUD economic development specialist. 

According to Kam, the loan guarantee program has also been used to finance more traditional projects such as the development of a shopping center in Roxbury and a printing company on a contaminated site in Savin Hill. "There have been a lot of neighborhood projects developed with these funds," he said. 

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