|By Lorraine Mirabella, The Baltimore Sun|
Knight Ridder/Tribune Business News
Nov. 25, 2004 - Baltimore development officials plan to seek an estimated $290 million in public financing for the proposed convention headquarters hotel, making it one of the costliest projects ever undertaken by the city government.
The amount of the financing substantially exceeds the $200 million cost put on the project just over a year ago when city officials selected a development team headed by Robert L. Johnson, the founder of Black Entertainment Television.
M.J. "Jay" Brodie, president of the Baltimore Development Corp., said yesterday that the additional $90 million -- still an estimate -- would cover items such as bond insurance, fees, a reserve fund and interest payments during construction as well as construction costs. Brodie said the latest financial projections indicate that the hotel's operating income would more than cover the millions of dollars in interest and principal payments that would be due on the bonds each year. But to secure a favorable interest rate, he said the city would likely pledge the hotel's city-owned Pratt Street site, valued at $18 million, as well as the estimated $4.5 million in property and room tax revenue it is expected to generate.
Yesterday, BDC officials revealed new details on how they hope to finance and build the 750-room Hilton, which is designed to boost Baltimore Convention Center's flagging business and allow the city to compete for conventions with Philadelphia, Boston and Washington.
"We are doing this to improve the performance of the convention center," which now has no commitment from any hotel in the city to provide a block of rooms, Brodie said. "It is certainly our intention to make this as close to self-financed as it can be."
Main points in the plan outlined by Brodie include:
--The city will issue roughly $290 million in tax-exempt revenue bonds, which require approval of the City Council and Board of Estimates. Officials are working with Wall Street firm Piper Jaffray to complete the underwriting and hopes to secure an interest rate under 5 percent.
--The city will create a corporation to develop, own and operate the hotel, to be built on an empty parcel just north of Oriole Park at Camden Yards, with a goal of opening in 2008. The corporation will be required to pay property taxes currently estimated at $2.5 million a year, which in turn will be used to back the bonds.
--Johnson's firm, RLJ Development LLC of Bethesda, and partner Quadrangle Development Corp. of Washington will have no equity stake in the project, but will be paid a fee based on services they provide, including advising city officials on negotiating a management contract with Hilton Hotel Corp. The hotel will be built by team member Whiting-Turner Contracting Co., headed by Willard J. Hackerman, with a construction cost of about $195 million. Architecture firm RTKL Associates, which is now being paid by the city for design work, will subsequently be paid by Whiting-Turner. The BDC plans to negotiate and sign separate contracts with each member of the development team.
--The city plans to sign a management contract with Hilton that is expected to include an equity investment by the hotel operator as well as a commitment to reserve a block of 600 rooms for conventioneers. Hilton's investment, according to estimates given to City Comptroller Joan Pratt, is expected to be around $7.1 million. Brodie would say only that negotiations are not final. Pratt said she was told that Hilton would be paid an estimated 3 percent of gross hotel revenue and 1.5 percent after the debt is paid. She said she was given revenue projections for the hotel of $60 million by 2011.
The unprecedented plan would represent a departure for the city, which has relied on the Maryland Stadium Authority to oversee other large, publicly funded projects, including the $151 million Baltimore Convention Center expansion and the $62-million Hippodrome Theatre renovation. Brodie said the project is the largest the city has undertaken.
Brodie and Irene Van Sant, a BDC project analysis director, said the BDC had already issued a request for proposals when it decided public financing would be needed and asked the bidders to revise their proposals to include that.
"We had three proposals in front of us," Van Sant said. "We liked RTKL as the architect, we liked Whiting-Turner as the builder, and Hilton as the hotel."
City development and convention officials have said that the city's sagging convention business can be boosted only with the addition of a new four-star hotel with a guaranteed block of convention-rate hotel rooms and easy access via a skywalk to the adjacent convention center.
But Heywood Sanders, a professor of public administration at the University of Texas, San Antonio, said that convention hotels built by other cities have failed to meet many rosy projections.
St. Louis's projections for this year have fallen short of the projected 50 or more major conventions and the 1,000-room Marriott is now dipping into its cash reserves to pay its debt. A new 500-room Sacramento Grand Sheraton in Sacramento, Calif., built with $92.9 million in bonds backed by operating income from the hotel and an adjacent garage, has boosted convention business by less than a third of the 60,000 hotel nights a consultant initially projected. And a convention center in Overland Park, Kan., developed with a publicly owned 412-room Sheraton hotel, has hosted five conventions rather than the projected 14, receiving only 40 percent of the anticipated room bookings, Sanders said.
As a result, said Sanders, investors have become leery of bond issues that are backed only by hotel revenue and now tend to demand some form of public sector backup, usually a pledge of some larger revenue source, such as citywide hotel occupancy taxes.
"With a number of these hotels opening and performing for a while, it's clear there are some performance problems with these hotels," Sanders said. "In the best of them, the hotel has managed all right, but does not appear to generate substantial continuing new business for the convention center. In the worse of cases, the hotel doesn't operate particularly well."
Yesterday Brodie and Van Sant said none of the hotel proposals submitted to the city offered 100 percent private financing. Two of the proposals asked the city to contribute from $50 million to $80 million, money the city simply doesn't have available, she said.
"We did not believe from the beginning we were going to get a privately financed deal, and we did not," Van Sant said. "The experience across the country in every other city shows that private equity is not available for large, convention-oriented hotels."
But a member of one of the competing development teams disputes that. Robert Hazard, the development adviser for Portman Holdings LP of Atlanta in partnership with Treyball Development Inc., a Beverly Hills, Calif., a real estate company headed by actor Will Smith and his brother Harry, said the team proposed a deal that required no up-front money from the city and capped the city's exposure at $30 million.
"The proposal we made to the BDC basically said we need some subsidy dollars, like the Marriott (Baltimore Marriott Waterfront hotel in Inner Harbor East), but we're willing to fund this thing privately, and we'll take all the risk. and subsidies we're looking for are not 'hey, write us a check,' but take the taxes this facility generates and let us plow them back into the facility, if we need them."
"BDC took our proposal, and to the best of our knowledge, no one in the city ever got a chance to look at it," Hazard said. "BDC said the city would not approve this."
Several elected officials also raised questions about the BDC's plan.
City Council President Sheila Dixon said she is scheduled to be briefed by the BDC on the project next week. But she said she is concerned about the extent of the public financing.
"It wasn't presented before that it'd be 100 percent funded by public funds," Dixon said. "I really would have some concerns with it being fully publicly financed."
City Comptroller Joan Pratt, who also is due for a BDC briefing next week, said she supported a convention hotel but was concerned that the city was shouldering all the risk.
"The liability the city faces is if there is a downturn in tourism and convention industry, and that would mean the city would have to put in more because of a shortfall," she said.
Brodie said the city is working to complete the underwriting for the bond issue, with the help of Wall Street firm Piper Jaffray. Once that is completed, the city will submit the deal for approval to the City Council and Board of Estimates. At that time, the city also hopes to finalize fees and sign the final contracts with members of the development team.
The city hopes to close on the sale of bonds by mid-2005, after which time construction could begin.
The city won't know its final costs until it structures and closes on its bond deal, finalizing the interest rate, or yield.
Dick O'Brien, senior vice president and director for the Hunt Valley office of Folger Nolan Fleming Douglas, said insuring the bonds against default, though an added cost, would not only lower the interest rate but likely ensure that the bonds would find buyers.
"You might have some investor in San Diego, who when he saw that there was a hotel bond that was uninsured...wouldn't even bother to read the official statement,'" said O'Brien, who oversees all fixed-income investments for the local office of Folger Nolan. All they would see is a hotel bond financed out of fees and revenue. But, if you put a layer of insurance on top of that, well, I think he's more likely to buy it."
Sun staff writers Doug Donovan and William Patalon III contributed to this article.
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