|By Douglas Hanks, The Miami
HeraldMcClatchy-Tribune Regional News
Feb. 23, 2008 -Hopes were high in 2000 when St. Louis raised nearly $200 million to build a new headquarters hotel for the city's convention center.
"St. Louis has accomplished something that has eluded most other cities for years," tourism director Bob Bedell said after final approval of the plan. The 1,100-room hotel "will put our hospitality industry into the first tier of convention cities."
Eight years later, the Gateway City is still waiting for that status upgrade. Meanwhile, the headquarters hotel is flirting with bankruptcy and not expected to cover the debt payments until 2012.
"The picture wasn't as rosy as everybody thought," said Gary Andreas, a partner at H&H Consulting, which tracks the St. Louis hotel industry. "Just about everything that could go wrong, did."
The St. Louis saga offers a cautionary tale as Broward County pursues its own 1,000-room headquarters hotel on the Fort Lauderdale waterfront by the county convention center.
A tentative proposal endorsed by county commissioners last month called for Broward to borrow the $415 million needed to build it, with the assumption that the hotel would generate enough profits to pay off the debt.
Should the plan go through -- and it was dealt a major blow last week when county attorneys ruled out using hotel taxes to back the bonds -- Broward would join a growing list of governments financing their own convention hotels.
Critics say the track record of cities like St. Louis reveal more risks than advantages when governments commit tens of millions in tax dollars to build hotels for their convention centers.
But supporters point to successful publicly financed hotels as proof the formula works. They say by borrowing money for the projects, governments can secure the kind of long-term investment that not only produces a profitable hotel but boosts the tourism industry with an influx of new conventions.
Consider Denver's convention hotel, financed by $354 million in city bonds.
"Our gross operating profits way exceeded what was projected," said William Mosher, a commercial real estate executive who heads up the authority that runs Denver's 1,110-room Hyatt.
The hotel generates enough profit to cover debt payments, freeing the city from its obligation to pay roughly $6 million a year to bondholders to cover shortfalls, according to Mosher and a January report from Moody's Investors Services.
The plan proposed by Broward negotiators calls for a series of debt reserves as the hotel is built and then ramps up operations. Those short-term backstops include as much as $7 million a year from Hilton, which would earn about $3 million annually as the hotel's operator, according to preliminary financial forecasts.
Once the initial guarantees and reserves expire, Broward could be responsible for covering the yearly $25 million in debt payments on the bonds. But forecasts prepared for Broward by JP Morgan predicts the Hilton will hardly need the help, generating enough profits to cover debt service and pay roughly $3 million to the county each year.
Hilton executives and county officials, including tourism director Nicki Grossman, either declined or did not respond to interview requests for this story.
Wall Street so far hasn't embraced the proposed Hilton as a business venture. Bond agencies and lenders told Broward officials in December that the county would need to set aside government revenues to pay the bonds as a guarantee against shortfalls at the hotel.
Heywood Sanders, the leading critic of subsidies for convention centers, said the bullish forecast for the Broward Hilton mirrors advice given other governments considering hotel deals.
'In almost all of these cases, these cities were told: 'Don't worry. You have to put the pledge there, but you're not going to have to use it,' " said Sanders, a political science professor at the University of Texas at San Antonio.
The trouble comes when reality falls short of projections.
After borrowing $64 million on the bond market, city officials in Myrtle Beach, S.C., counted on their 402-room hotel to pay the debt service out of profits.
When the hotel opened in 2003, the forecast proved too optimistic: occupancy topped out at 45 percent, 20 points lower than planned. A $1.7 million loss forced, Myrtle Beach to refinance the bonds and take over $4 million in yearly debt payments, according to Sanders and City Manager Thomas Leath.
Leath said the hotel now generates enough money to cover the debt payments, but he sees the experience as a lesson for other cities contemplating hotel deals.
"They should look to Myrtle Beach with the idea that things can go as you don't plan on them going," Leath said. "You may be hearing you'll never hit those reserves or you'll never have to come up with those secondary pledges. But you better be planning that you will have to use those."
Houston hasn't so far. The city borrowed more than $300 million to build the 1,200-room Hilton Americas, which is partially subsidized by tax rebates.
The hotel's 2006 financial statement showed a $3 million profit after paying more than $14 million in debt service.
"If the hotel corporation didn't make money, the city would be on the hook," said Peter McStravick, chief operating officer of the city-chartered board that runs the Hilton. That "never happened."
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