Dec. 29, 2003 - Vancouver is about to get into the hotel business, joining cities nationwide that think tax-exempt financing doesn't have to be limited to roads, sewer lines and other infrastructure. 

In spring 2005, Vancouver is to open a 226-room downtown hotel and an attached 30,000-square-foot conference center, both managed by Hilton Hotels. 

The project is one of many nationwide to take advantage of a 1997 tweak in the federal tax code that eases the formation of partnerships between governments and hotel operators. The cities face an extended post-Sept. 11 downturn in the hospitality market, but they think investing in a hotel is necessary to support money-losing convention centers, often in the heart of their downtowns. 

Portland is in a similar position. The city's development commission early next year plans to look at proposals for building a long-awaited and much-desired headquarters hotel near the Oregon Convention Center on the city's central eastside. 

Planners have said they would prefer that the hotel be built with private funds. But it is possible, even likely, that Portland, like many cities before it, will find that private money will not materialize. Portland Development Commission officials concede other options might be explored. 

"I can't exclude the possibility of public financing at some point in the future," said Don Mazziotti, PDC executive director. But "there is a very strong preference on the commission for a less-than-public financial solution, unless that becomes absolutely necessary." 

Other cities have found it is necessary. 

"Maybe in Las Vegas they don't need tax-exempt bonds," said Bob Hodge, director of Austin Convention Enterprises, a nonprofit public facility corporation the Texas city created to own the 800-room Hilton Austin, which opened this month. The nonprofit issued $278 million in tax-exempt bonds to build the hotel. 

Tax-exempt financing also was needed to build a downtown Denver convention center headquarters hotel, said Bill Mosher, chief executive officer of the Denver Convention Center Hotel Authority. 

The City Council created the authority to develop and build the hotel after a private developer tried and failed for two years. 

"No one else was willing to step up and get it done, so that's why (the city) got involved," Mosher said. 

Construction started in July on a 1,100-room Hyatt Denver Convention Center Hotel across from the recently expanded Colorado Convention Center. The hotel will be built with $367.5 million in tax-exempt revenue bonds issued by the hotel authority. Completion is expected in December 2005. 

Many of the cities and their private-development partners are choosing tax-exempt bonds because the interest rates are lower than taxable revenue bonds, which are generally available to private developers. The lower interest rates mean the cost of the project is less, said Bob Swerdling, a managing director with U.S. Bancorp Piper Jaffray, which markets the bonds. 

The interest rate for the tax-free Denver bonds, for example, was 4.6 percent. At the time of the issuance, the taxable revenue bond rate was 8 percent to 9 percent. 

Cities "can get a lower rate and more money for the project," said Paul Kratz, city attorney for Omaha, Neb., which is building the $71 million Hilton Omaha, a 450-room convention center headquarters hotel. The city issued $103.5 million of tax-exempt revenue bonds. 

Three years wasn't enough 

The 1997 tax-code change has enticed governments and hotel operators to look to each other for cooperative ventures. Previously, governments could enter a management agreement with a private party for no more than three years, said Mark Tobin, president of Hospitality Real Estate Counselors of Englewood, Colo. The tax change extended the limit to 15 years. 

"Hotel companies did not have interest in doing a project where they could be fired after three years," said Tobin, who often works as a consultant for cities, including Vancouver, as they assemble hotel deals. 

Tobin said he knows of 44 cities considering convention center hotels, although he would not share the list for competitive reasons. 

News articles show these projects also are in the works or planned: Baltimore; Bay City, Mich.; Charlotte, N.C.; Chesapeake Bay, Md.; Chicago; Columbia, S.C.; Dallas, Texas; Fort Worth, Texas; Houston; Jackson, Miss.; Knoxville, Tenn.; Los Angeles; Macon, Ga.; Myrtle Beach, S.C.; Naperville, Ill.; New York; Overland Park, Kan.; Phoenix; Pittsburgh; Providence, R.I.; Raleigh, N.C.; Sacramento, Calif.; San Antonio, Texas; Schaumberg, Ill.; St. Louis; Trenton, N.J.; Washington, D.C.; and West Palm Beach, Fla. 

Hotel operators in some cities, including Vancouver, have said the public-private partnerships amount to unfair competition. 

The Clark County Lodging Association planned to sue the city earlier this year over its use of a 2 percent lodging tax and other sales tax money to pay bonded debt. The hoteliers dropped the idea after a Seattle attorney representing the city threatened in August to sue the hoteliers if they blocked the city-owned hotel. 

Vancouver launched its request for proposals last year, looking for a private hotel developer. 

"We would use our funds to build a conference center if somebody would come in and build a privately financed hotel," said Steve Burdick, the city's economic development director who has guided the project, recounting the initial plan. 

Instead, the city received four proposals calling for tax-exempt financing to pay for the hotel and conference center. The city and Hilton, based in Beverly Hills, Calif., on Tuesday are expected to sign a management agreement. 

Earlier this year, Portland's development commission issued a request for qualifications from developers for a convention center headquarters hotel, with the stipulation the project be privately funded. 

Eight proposals were submitted in November. One featured a private-funding scenario. 

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(c) 2003, The Oregonian, Portland, Ore. Distributed by Knight Ridder/Tribune Business News. HLT,