Dec. 8, 2008 - --For nearly 30 years, politicians have poured more than $65 million into downtown Buffalo hotels -- an average of more than $50,000 per room. The strategy produced five hotels -- and a lot of red ink.

Some of downtown's largest hotel operators say the last thing they need is more competition, especially subsidized competitors.

But that's exactly the course City Hall is pursuing.

One heavily subsidized hotel is under construction, and development agencies in the last month have approved two others that would involve significant tax breaks. The new projects would increase the inventory of downtown hotel rooms by 22 percent.

"I don't see where the business is coming from; I just don't," said Rudi Rainer, general manager of Adam's Mark, downtown's biggest hotel. "The industry as a whole is not doing well, certainly not when everyone is looking for government handouts."

At play is a disconnect between those in the trenches of the hospitality industry and the politicians dangling the subsidies, along with the developers who would benefit from them.

"We need more hotel rooms in downtown Buffalo," Mayor Byron W. Brown said last month at a meeting of the Erie County Industrial Development Agency.

"The market is screaming and hollering for a quality project," said Mark E. Hamister, who was in the running to build a waterfront hotel at Erie Basin Marina.

Those already operating downtown see things differently.

"Buffalo does not need another hotel in this market," said Paul L. Snyder, owner of the Hyatt Regency Buffalo.

Richard Geiger, president of the Buffalo Niagara Convention & Visitors Bureau, said that more rooms would not help bolster the convention and tourism business.

"Based on current market demand, we have a sufficient number of rooms in the downtown core," he said.

David Hart, downtown's longest-tenured hotel operator, said it's time the industry stood on its own two feet.

"Isn't it time for the subsidies to stop?" said Hart, who operates the Holiday Inn on Delaware Avenue. "Should we be subsidizing a market that hasn't seen real growth?"

Losing money

The heart of downtown hadn't seen a new hotel go up in more than a generation, when the administration of Mayor James D. Griffin got the city into the business of subsidizing hotels in the early 1980s. His successors, Anthony M. Masiello and Brown, followed suit.

No precise figures are available, but The Buffalo News -- using data obtained from city and county development agencies -- calculated the public's investment over the years at $65 million, or an average of about $52,000 per room for subsidized projects.

The money comes from a mix of city loans -- most have been paid late or defaulted on-- state grants, property tax abatements and sales tax waivers granted through the state's Empire Zone program and the ECIDA.

Snyder's Hyatt has gotten the most help, accounting for more than one-third of the $65 million of public assistance. The Embassy Suites going up in the refurbished Dulski Building on Delaware Avenue will rank second when it cashes in on all of its benefits.

While downtown hotel operators are reluctant to discuss their bottom lines, most are struggling, said Hart, the largest hotel operator in Erie County.

"The large business-and convention-oriented hotels that have been subsidized are significant failures," he said. "They're all money losers."

How are they surviving?

An uptick in business in the last couple of years -- because of more Canadians visiting to spend their stronger dollar -- has provided some relief. Over the long term, some struggling hotels have cut their overhead by defaulting on or restructuring their government loans and/or seeking tax relief. Two changed ownership earlier this year.

Taxpayer support

Two of the three hotel projects undertaken during the Griffin era have struggled financially, most notably Snyder's Hyatt, on Main Street next to the Buffalo Niagara Convention Center.

The Hyatt, located in what had been the historic Genesee Building, has never made money since opening in 1984. It defaulted on $11.6 million in loans and has been paying reduced property taxes since opening. This year, its payment in lieu of taxes is $187,000 on what otherwise would have been an $800,000 bill.

Taxpayers continue to sink money into the hotel.

Earlier this year, the state gave the hotel a $5.1 million grant to help pay for $13.5 million in renovations. The hotel also applied for tax breaks under the Empire Zone program. Earlier this year, it also recived approval for $1.1 million in tax breaks from the ECIDA.

The News calculated that public assistance for the Hyatt over the years comes to about $70,000 a room.

A second hotel, opened in 1980 at Chippewa and Main streets in the Theater District, has aligned with four different chains over the years. Now the Comfort Inn & Suites, the project was frequently late in repaying an original loan of $4.3 million and defaulted on a second loan of $2.2 million.

The hotel also received tax breaks that saved its owner well over $1 million.

Unlike the two other Griffin-era hotel projects, the Buffalo Hilton on Church Street -- now Adam's Mark -- repaid its $4 million loan. It later received about $3.7 million in tax breaks through the Empire Zone program. Nevertheless, the property is losing value.

The original owner invested about $33 million in the hotel and sold it earlier this year for $18.6 million. The hotel may be about to change hands again, for significantly less money than the new owner paid.

The Masiello administration sank money into two additional hotel projects.

In the late 1990s, the city lent $8.9 million to the developers of what is now the Doubletree Club near the Buffalo Niagara Medical Campus.

The developer failed to make payments on its loans, prompting the city to restructure the deal. The hotel owner is again in arrears.

The Hampton Inn & Suites opened in 2001 at Chippewa Street and Delaware Avenue without any city loans. But the hotel has received about $1.8 million in tax breaks.

Two other hotels built in the 1960s -- the Holiday Inn and the Best Western -- are located at the fringe of downtown on Delaware Avenue. A 28-room boutique hotel -- The Mansion on Delaware Avenue -- opened in 2001 and received about $90,000 in Empire Zone benefits.

More on the way

More hotels are in the pipeline -- all subsidized.

Three additional hotels are in various stages of development.

Furthest along is the 150-room Embassy Suites, which will occupy seven of 15 floors in the former Dulski Building on Delaware Avenue and is now under reconstruction. The balance of the building will house law offices and condominiums selling for $350,000 to $1 million.

Uniland is in the midst of this rehab project just blocks from both the Hampton Inn and Comfort Inn.

The state has given the project a $7 million grant. The developer submitted a $19.2 million package of property, sales and mortgage tax waivers to the county IDA. There's also an application pending with the Empire Zone program for an unknown amount of benefits.

Assuming that half the public aid helps the hotel, which will occupy nearly half the building's floor space, the grants and tax breaks will top $100,000 per room, The News calculated.

Uniland officials did not return telephone calls seeking comment.

The Buffalo Urban Renewal Agency on Thursday designated a development team headed by James W. Pitts, the former Common Council president, to build a 100-room waterfront hotel on a parcel in Erie Basin Marina. The hotel would be be linked to Shanghai Red's, an upscale restaurant whose corporate parent is Pitts' partner.

Pitt's hotel site is located within shouting distance of 305 condos and townhouses in Waterfront Village that typically sell in the range of $400,000 to $500,000.

Despite that prime location, the city designated the hotel parcel as an Empire Zone site even though the program's original intent was to help promote investment and job growth in economically distressed urban areas. That means the hotel developer will likely enjoy a raft of benefits.

Restaurateur Mark Croce last month unveiled plans for a 72-room boutique hotel in the Curtiss Building at Franklin and West Huron streets. The property is designated as an Empire Zone. The ECIDA has already approved $5.7 million in accelerated depreciation federal tax credits.

Investments defended

Why did most of the hotels built in the 1980s and 1990s with government help struggle?

Too much supply, not enough demand, said Hart, the largest hotel operator in Western New York with more than 1,000 rooms at five facilities.

"You can give incentives to get a project financed, but if you build something and the market isn't there, you're going to lose money and waste tax dollars, and that's exactly what's happened," Hart said.

David A. Stebbins, a longtime city development official, justified the public investment in part because the hotels were projected to serve multiple purposes.

"From a public policy perspective, there are other objectives you want to meet," said Stebbins, vice president of Buffalo Urban Development Corp., affiliated with the ECIDA.

"It's unfortunately necessary to help develop hotel properties in a weak market. Hotels are an important part of the infrastructure. You want to stimulate the reuse of dormant buildings, and you want to encourage new investment, especially in the downtown area."

The city invested heavily in the Doubletree because a hotel is regarded as an important component of a medical campus, he added.

Canadian impact

Some who are advocating the construction of more rooms point to an increased occupancy rate for downtown hotels.

"We think there's pent-up demand," said Hamister, who was in the running to develop a hotel at Erie Basin Marina. "We have a lot of tired inventory that has not been maintained to the level that the customers desire."

The downtown occupancy rate has increased in recent years. Last year, it was 65 percent, compared to the national average of 63 percent.

Downtown hoteliers attribute the increase largely to the strength of the Canadian dollar in the last few years before it dropped in recent months. A strong Canadian dollar prompted a growing number of Canadians to visit Buffalo, for both day trips and overnight stays.

But in the past, when their dollar drops, so does occupancy here.

"What has helped us over the last few years is the Canadian market, but with the exchange rate not being favorable anymore, I'm not sure that will continue," Rainer said.

What's more, increased occupancy rates have come at a price.

While the price for rooms increased in recent years, it has been at a slower pace than the nationwide average. In 2004, rooms in downtown went for $3.94 a night less than the national average. That gap has grown steadily, to $12.56 in 2007.

That's one reason why Geiger, head of the Convention & Visitors Bureau, said that adding rooms now would not help the market. The priority, he said, should be raising room rates to make the current hotels more economically viable and creating more demand for rooms by giving visitors more reasons, such improved attractions, to come downtown.

"It's not more rooms that will allow us to book more and larger conventions," he said.

The mayor, however, has expressed the belief in public comments that more rooms would help the convention business. Brian A. Reilly, the city's economic development chief, has said little in public and has steadfastly refused interview requests from The News since August.

Intense competition

Hart, who has not taken subsidies to build any of five local hotels he owns, was among the downtown operators who noted that new hotels do not generate additional business.

"Most hotels, 99 percent, do not create demand unless less you are the Atlantis in the Bahamas; they absorb the demand that's already in the marketplace," Hart said.

Thus, in a market that's not growing, one hotel's success comes at the expense of another. Hart said that this is what happened with the Hampton Inn, downtown's newest hotel, whose general manager did not return telephone calls seeking comment.

"It ramped up on the backs of the other hotels," Hart said.

That's commonplace in the industry, said a national hospitality consultant based in Philadelphia.

"What typically happens is new staff takes from the old, there's a kind of cannibalization, particularly if there's not a lot of new demand," said Lawrence Henry, a vice president of PKF Consulting.

Snyder said the existing hotels here take turns poaching from their rivals.

"We just had a fairly good year, but it's because we took a lot of business from the other hotels," he said.

Said Hart: "If the market is really there, you don't need public assistance. And if it's not there, don't build.

"All you do is hurt the hotels already in the market, and that's what's been happening for 20 years."

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