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The HVS Study Used as Main Justification for City of Dallas Owned Convention Center Hotel
Comes Under Scrutiny from the Owner of the Anatole Hotel, Cites Flawed Methodology
By Rudolph Bush, The Dallas Morning NewsMcClatchy-Tribune Regional News

May 12, 2008 - Behind closed doors, Dallas city officials have reviewed reams of documents that they say show a city-owned convention center hotel will produce enough revenue to pay for itself.

But those documents -- largely produced by developers who want to build the hotel as well as city staff -- remain secret as part of ongoing negotiations.

So for now, the assurances of city staff and a 207-page study produced by HVS Consulting and Valuation Services that concludes the Dallas market is ripe to build are the only information available to the public in support of the hotel.

Commissioned by the city, that study has been used as the main independent justification for the hotel, even as critics insist it is a flawed document based on faulty methodology.

The study's primary conclusion is this: Dallas' downtown hotel market is ready to grow but "remains crippled due to the limited salability of the Dallas Convention Center, which lacks an adjacent headquarters hotel."

Such a hotel would operate at well above the average occupancy rates of similarly sized hotels in the city, the study states.

That conclusion has been critical to the city's push to float bonds for the construction of the hotel at a price of about $500 million, and for an expected vote next week to purchase a $40 million tract at Young and Market streets as its location.

"It's an important piece ... and our financial underwriters are using it as a key piece of information," council member Ron Natinsky said of the HVS study.

But even as it has become integral to the justification and financing of the hotel, the HVS study has become a target.

"In their analysis, they completely ignore the fact that we are in a recession. We're in a different world," said Anne Raymond of Crow Holdings.

Ms. Raymond's boss, Harlan Crow, owns the Hilton Anatole and has become the city's most vocal opponent of the plan to build a competing hotel.

As part of their effort to get City Hall to rethink its plans, Ms. Raymond and Mr. Crow have sent City Council members the work of Heywood Sanders, a University of Texas at San Antonio professor who has become HVS' foremost national critic.

Mr. Sanders has produced a series of articles over a career spent chipping away at publicly financed projects like this one.

"The market is telling you loud and clear, and has been over a series of years, that no private investor is willing to take the risks entailed in this project," he said.

So to justify the push for a publicly financed hotel, cities like Dallas frequently commission studies by a very small number of firms, including HVS, to justify the construction, Mr. Sanders said.

"The apparent specificity and certitude of these market studies convey a sense of predictability and limited risk," he wrote in a 2005 article in the Economic Development Journal.

"But if the studies rely on flawed assumptions, or apply untested methodologies, their value in predicting hotel performance and their relevance to the decision making process is sharply reduced, if not fully useless."

Ms. Raymond has seized on the question of methodology.

HVS' most recent study, updated March 18, draws its conclusions based on comparisons to other convention center hotels around the country.

But in a 2004 study for the city, HVS concluded that the city shouldn't build the hotel after comparing its prospects to other hotels in this market.

"I think because the numbers haven't improved any from the last time, they completely changed their methodology. They are now comparing this potential hotel to hotels around the country and saying if San Diego can be this strong, Dallas can be this strong," Ms. Raymond said.

Changing results

HVS marketing director Rod Clough, who produced the report for the city, said that's not right.

"The methodology that we chose to use in the report didn't cause our results to change. What caused our results to change was the evolving market and the fact that convention center hotels do well and have proven to do well," he said.

Assistant City Manager A.C. Gonzalez, who is leading the city's planning and negotiations for the hotel, said that the scrutiny of underwriters shows that HVS' conclusions are correct.

In these economic times, the underwriters of municipal bonds must closely examine the projects those bonds pay for and the conclusions of consultants who green-light them, he said.

"At every level there's even more scrutiny and increased pressure to be conservative," he said.

Mayor Tom Leppert echoed that, saying that underwriters Citigroup and UBS have vetted the report.

Without citing specifics, Mr. Gonzalez added that studies reviewed by the council in executive session show that prospective developers have drawn similar conclusions about the hotel's projected revenues.

He allowed, however, that those studies do show that developers anticipate lower occupancy rates and lower average prices per room.

"Those have trended lower at this point, but you need to understand the dynamics of the negotiations," he said.

In other words, developers low-balled their projections in hopes of increasing the city's subsidy -- something that's no longer an issue with the city now planning to finance the whole project.

Projections

But Ms. Raymond said that the developers' private projections might be closer to reality than HVS' public projection.

Starting with the assumption that the hotel will open in 2012 and have 1,200 rooms, HVS projected a steady, year-to-year growth in occupancy rates. In 2012, occupancy would average 52 percent. By 2015, the number would grow to 68 percent, and the hotel would maintain that average occupancy through 2021, the study concludes.

Ms. Raymond called that wildly optimistic.

Occupancy rates at the 1,600-room Anatole have averaged 58 percent since 2002, she said. Last year, the rate was 57 percent.

Mr. Gonzalez said that city staff members have run their own analyses that show the hotel would still cover its debt even if occupancy rates dropped into the high 40 percent range.

But council members Angela Hunt and Mitchell Rasansky, the only council members who have sharply questioned the hotel project, said the figures they have relied on thus far have come largely from the HVS study.

"The conclusion that the city has been relying solely on the HVS report appears to me to be accurate," Ms. Hunt said.

While city council members have been given access to other information in private, there hasn't been time to adequately review it, she said.

"It's very challenging to parse out all of this information. ... The city staff provided the council with a very lengthy and complete analysis of why it makes sense for the city to own this hotel. The frustration I have is, because it's in executive session, we can only look at it for an hour," she said.

Mr. Natinksy, the council's main backer of the hotel, acknowledged that makes things more difficult.

But Mr. Gonzalez said you don't need detailed studies or developer proposals to understand Dallas' need.

"It doesn't take a very scientific or a very intense look to see that Dallas has a number of challenges in terms of being able to attract citywide conventions," he said.

Phillip Jones, chief executive of the Dallas Convention and Visitors Bureau, said his office keeps a list of more than 120 large conventions that have turned down Dallas as a destination because of the lack of a convention center hotel.

Mr. Leppert acknowledged that, as with any major project, there is risk to taxpayers in building the hotel, although he noted the debt is guarded with tens of millions of dollars in reserves.

He encouraged residents to think of the project along the same lines as American Airlines Center and Victory Plaza, as an investment in the whole city.

"We're looking at the risk of doing nothing," he said.

Ms. Hunt wondered, though, if this is the right investment.

"Anytime you are going to bring debt, at the end of the day the city places its full faith and credit behind it. And like anyone who is encumbered in debt, you are allocating resources toward one project that you can't allocate to another," she said.

Convention hotel -- right or wrong?

Dallas officials have used a study by HVS Consulting and Valuation Services as the primary support for construction of a convention center hotel.

HVS CONCLUSIONS

-- Downtown Dallas' hotel industry "remains crippled" because the Dallas Convention Center isn't salable.

-- A hotel adjacent to the convention center would increase use of the city facility.

-- A convention center hotel would enjoy higher occupancy rates and a higher room price than the average rates of comparable hotels in Dallas.

-- Assuming the hotel opens in 2012, its annual net income and the total taxes it collects -- prior to any debt payments -- will steadily rise.

-- From the time of opening through 2015, the hotel's average occupancy rate will steadily rise to 68 percent. It will stabilize at 68 percent through 2021.

The most vocal criticism of the HVS study has come from Anne Raymond, whose company, Crow Holdings, controls the Hilton Anatole in Dallas and is loath to see the city finance competition.

CRITICISMS OF HVS

-- The study gives too much weight to the performance of convention center hotels in other cities, vs. comparing its projected performance to hotels in Dallas.

-- It inflates room occupancy rates and average prices at levels well above comparable hotels in Dallas.

-- The operating expenses it accounts for are lower than the average of comparable hotels in Dallas.

-- It assumes the hotel will attract business despite projecting that its average daily rates will be higher than comparable hotels.

Convention center hotel chronology

Over two decades, Dallas City Hall has pursued a convention center hotel:

1993: An expanded convention center section opens. Discussions begin about the need for an attached convention center hotel.

1995: Key city leaders declare the need for a 1,000-room or larger convention center hotel. 1996: A Utah developer's plans for a 1,000-room, privately owned hotel at 1301 Young St., subsidized with $1.2 million in city tax abatements, are scaled back to a 500-room facility. Ultimately, the hotel is never built.

2001: Houston solidifies plans to build a convention center hotel. Dallas city leaders say they must follow suit.

2002: The Inside the Loop Committee, a task force of business people commissioned by City Hall to brainstorm methods of downtown revitalization, declares that a convention center hotel is the center city's most notable need.

2003: Led by Mayor Laura Miller, Dallas politicos petition a state House committee to allow the city to build and own a $265 million convention center hotel and use new occupancy taxes to finance construction. A private company would manage the facility. The deal goes nowhere.

Late 2003: Marriott suggests it may build a hotel atop the Reunion Arena parking garage. Hilton, meanwhile, proposes building a hotel on an 8.34-acre tract bounded by Young, Market and Lamar streets -- the same site city officials are today considering for a convention hotel. Neither plan materializes.

2004: City staff backs building a privately owned convention center hotel along Griffin Street, next to the A. Maceo Smith Federal Building. Ms. Miller calls the hotel a "No. 1 priority for downtown."

2005-07: Dallas enters exclusive negotiations with Dallas-based Woodbine Development Corp. to build the latest convention center hotel concept. But negotiations stall when the two sides can't agree on finances. A deal is never reached.

2007: Mayor Tom Leppert declares upon taking office that the city center "will further come alive as we encourage mixed-use development, shopping, entertainment, restaurants, sports venues and, very importantly, put in place a convention center hotel."

2008: Dallas officials release the latest plan to build a 1,000-room or larger convention hotel, optioning the 8.34-acre plot of land along Young Street previously considered. Staff solicits proposals from various developers, of which four remain in the running, including the Woodbine Development Corp.

Dave Levinthal

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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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