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Dallas Poised to Make a $500 - $600 million Jump Into the Convention Center Hotel Business;
Wants to Duplicate Other Cities' Success Sicj as Houston, Austin, Denver and Chicago
By Rudolph Bush and Dave Levinthal, The Dallas Morning NewsMcClatchy-Tribune Regional News

Jun. 1, 2008 - --If Dallas residents are nervous that the city is poised for a $500 million to $600 million jump into the convention center hotel business, they might take comfort in knowing it isn't taking the plunge alone.

From Houston and Austin to Denver and Phoenix, major cities across the U.S. have decided that the best and cheapest route to build a convention center hotel is to foot the bill themselves, usually with hundreds of millions of dollars in public debt and over the concerns of those who feel the projects are too big and too risky.

And while some privately owned convention center hotels have struggled, a review of publicly owned convention center hotels in comparable markets shows that, at least to this point, they have been successful.

Hotels in operation in Houston, Austin, Denver and Chicago have produced enough revenue to pay their annual debt service and in some cases have realized millions of dollars in annual profit.

And hotels under construction in Phoenix and Baltimore have advance bookings that show they will be able to meet their debt obligations in the short term.

Meeting those obligations with hotel revenue is a key indicator of success, and the major protection against a hotel becoming a taxpayer burden.

"We're doing well. So far, we're very happy. We're doing a little better than where we thought we would be in our study," said Jay Brodie, president of the Baltimore Development Corp., which will open the Hilton Baltimore in late summer.

In Phoenix, where the Sheraton Phoenix Downtown is scheduled to open in October, the hotel has already met its revenue goal for this year because of advance business. The hotel has reservations through 2013, said Jerry Harper of the Phoenix Downtown Development Office.

"We're actually above projections right now," Mr. Harper said.

In Denver and Chicago, the convention center hotels are not only paying their debt service but producing excess revenue.

Austin's convention hotel, which opened in December 2003, initially failed to make projections for occupancy levels or room rates. But city officials say the Hilton Austin performed well enough to prevent the city from dipping into reserves to pay debt service on bonds. They now consider it a success.

And in Houston, city officials are preparing to seek offers in the next 30 to 60 days for the sale of the Hilton Americas, a $289 million, publicly owned hotel near the George R. Brown Convention Center.

The reason for the sale: The hotel has been so profitable that city officials think they can sell it for a good price, then turn around and finance the construction of yet another hotel near the convention center.

"This kind of development is being seen all over the country because municipalities view conventions as an opportunity to attract outside sources of income. It's a part of the evolution process" for convention centers, said Peter McStravick, chief operating officer of the Houston Convention Center Hotel Corp.

Dallas officials said they studied how other cities structured the funding of their hotels before deciding to recommend that taxpayers here follow the ownership route.

"Under public ownership, there are risks. At the end of the day, it's a publicly owned entity. But on par, these cities have assessed it is worth those risks," said Frank Poe, director of Dallas' Convention and Event Services.

In terms of sheer numbers, however, Dallas' risk is the most significant.

The city has exercised an option to purchase land adjacent to the Convention Center for about $42 million. And the anticipated debt issue for the hotel ranges north of $500 million. Four developers are competing for the project, and though final numbers are not public, some estimates put the total cost as high as $600 million.

The next most expensive publicly owned hotel project is in Denver, where that city issued $367 million in tax-exempt bonds to cover the cost of construction and reserves for the Hyatt Regency Denver.

Dallas Assistant City Manager A.C. Gonzalez said that because of inflation and rising construction costs, Dallas will have to pay more to build its hotel than Denver did four years ago.

"We should have done this years ago," Mr. Gonzalez said.

In Denver, the city has had no problem meeting the hotel's debt payments since it opened in 2005, said John Schafer, general manager of the Denver Hyatt.

"We have exceeded expectations for the first two years from what the pro forma and the city projected," Mr. Schafer said.

Though he did not cite exact figures, he said the 1,100-room hotel has surpassed an average daily occupancy rate of 70 percent.

Dallas city officials project that a convention center hotel here will be able to meet its debt obligations with an average occupancy rate in the 55 percent range. According to a key feasibility study, the Dallas convention center hotel's occupancy rates are expected to climb steadily from the mid-50 percent range and stabilize in the high 60 percent range.

Critics have called that study flawed and said an occupancy rate above 60 percent is wildly optimistic for Dallas.

But even at a higher cost and lower occupancy rate, and assuming conservative daily room rate figures, the hotel will generate enough revenue to cover its debt, according to studies by city staff.

Hotel backers have also had to answer criticism that downtown Dallas isn't really comparable to more mature downtowns in Houston, Denver and Chicago.

Mr. Brodie noted that his city, Baltimore, worked for years to create a "menu" of activities downtown before issuing $300 million in debt for a hotel.

"It's not just, 'Oh, we built a hotel and they will come.' It's the hotel. It's the convention center. It's the whole Baltimore package," he said.

Dallas' Mr. Poe answered that development in downtowns doesn't happen in some specific pattern.

"Private investments that have occurred have occurred over time. This is an undergirding of the government that we value downtown."

Dallas planners also point out significant advantages that Dallas enjoys over its competitors, such as two airports, a spot in the Central time zone and a generally agreeable climate year-round.

And Denver -- the city Dallas considers a major convention market competitor -- isn't so far ahead in terms of downtown development, even though it was chosen to host the Democratic National Convention in August, Dallas Mayor Tom Leppert said.

And in some ways, Dallas is ahead of Phoenix, another major competitor. Downtown light rail service in Phoenix isn't going to come online until late this year. And much of that city's downtown is still in a nascent stage.

"It's in the process of becoming developed," Mr. Harper said.

Still, the $350 million, 1,000-room Sheraton Phoenix Downtown met its revenue goal for this year two months early and is on track to stabilize at a 70 percent occupancy rate, he said.

Of course, no city is perfectly comparable to another. And not every convention center hotel has been successful. In St. Louis, the publicly backed but privately owned Sheraton St. Louis City Center Hotel is under the control of a trustee and has struggled to meet its debt payments.

But as they look around at other cities reaping profits and enjoying the often intangible benefit of ancillary downtown development, Dallas officials wonder: If now isn't the right time to build a hotel here, when will be?

"Of all of the major markets that have built a publicly owned hotel, none of them are experiencing any difficulties that I've been made aware of. And they've all chosen this particular route to follow," Mr. Gonzalez said.

PUBLICLY OWNED HOTELS

During this decade, major cities across the U.S. have begun building publicly owned convention center hotels, largely because municipalities can borrow money at a much lower rate than private firms.
City Hotel Number of rooms Opening date Project cost Debt issued
Houston Hilton Americas 1,100 rooms December 2003 $289 million $310 million
Denver Hyatt Regency Denver at the Colorado Convention Center 1,000 rooms December 2005 $285.5 million $367.5 million
Chicago Hyatt Regency

McCormick Place

800 rooms (but

under expansion)

June 1998 $108 million $127.4 million
Phoenix Phoenix Sheraton Downtown 1,000 rooms October 2008 (scheduled) Undetermined $350 million
Baltimore Hilton Baltimore 757 rooms August 2008 (scheduled) Undetermined;

not to exceed

$230 million

$300.9 million


To see more of The Dallas Morning News, or to subscribe to the newspaper, go to http://www.dallasnews.com.

Copyright (c) 2008, The Dallas Morning News

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