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Despite High Interest Rates, Nasty Recession and a Lack of Political Support -
Portland, Oregon's Plans for a $227 million Convention Center Hotel Live On

By Ryan Frank, The Oregonian, Portland, Ore.McClatchy-Tribune Regional News

December 17, 2008 --Even in a city that loves government process, the convention center hotel sets a new standard for talk, not action.

The city declared the hotel Goal 1, when it started an urban renewal district in the Lloyd District -- in 1989.

Nearly 20 years later, Mayor-elect Sam Adams emerged from a closed-door City Hall meeting Tuesday with other politicos and developers to proclaim plans for the $227 million hotel would live on.

That's saying something.

Less than two weeks ago, executives at Metro, the regional government, tried to kill the taxpayer-supported hotel. They worried about high interest rates, a nasty recession and a lack of political support from City Hall and Multnomah County.

Adams, though, wants to make his own run at building the hotel. "No question it's troubled," Adams said after Tuesday's meeting. "But we haven't exhausted all the possibilities."

The convention center hotel is one of the more complex public-private deals in a city that adores them. Here's your reader's guide to a 20-year effort.

It's been 20 years. The hotel wasn't built in Portland's real estate Gilded Age. Why are we still talking about it in a historic recession?

Because politicians, such as Adams, don't want to let go.

They want to fall in love with the hotel's benefits but can't get over its risk. If it worked out, the hotel would boost the regional economy and revive the worn-out Lloyd District.

The anti-hotel side says it would flood the market and drive down room rates citywide.

The pro-hotel side says it would draw new and bigger conventions. The new visitors would spend money at shops and restaurants and leave town without draining public services.

Why does the hotel need taxpayers' support? Private developers are building hotels across downtown.

Convention supporters say they need a 31/2-star with 600 rooms and 34,000 square feet of ballroom and meeting space. Private investors would require a 20 to 25 percent return on a hotel of that size and quality. Portland's model, though, wouldn't generate anything close to those returns.

So, to get the hotel they want, the government must build it.

The government building a hotel?

Yep.

Under the current proposal, the city would sell bonds to pay for the hotel construction, then pay off the debt with the hotel's income. Metro, which owns the convention center, also would own the hotel. Other cities have done it this way.

The Portland Development Commission, the city's urban renewal agency, would put up about $16 million in land and cash contributions raised through property taxes in the urban renewal district.

The problem: Even with the most upbeat assumptions, the hotel's net incomes alone can't cover the debt payments in the early years. The hope is that taxes and fees paid by hotel guests would cover that gap.

What's the risk to taxpayers?

That depends on the economy, the convention industry, bond markets and the travel business. Now you can see why the hotel makes politicians wilt.

What's the worst-case scenario?

Carol Samuels, senior vice president at Seattle Northwest Securities Corp., looked at that question for Metro.

That so-called shock scenario assumes the city sold bonds at 6.1 percent, the going rate for municipal bonds in the depths of the financial crisis. It also assumes the city's hotels suffered like San Francisco's after the Sept. 11, 2001, terrorist attacks.

In that case, the hotel's net operating income wouldn't be enough to cover the debt payments at any point in the life of the 30-year bonds.

In the hotel's third year, for example, the debt payment ($19 million) would be more than double the hotel's net income ($8 million).

The current financing proposal has a series of backstops to plug that $11 million gap. Those start with a tourism fund fueled by hotel and rental car taxes. The gap would be filled roughly in this order by the tourism fund:

1. Taxes generated by the convention center hotel.

2. A new fee surcharge created specifically at the convention center hotel.

3. Cash created by re-financing existing bonds used to expand the convention center and for the Portland Center for the Performing Arts.

4. Excess hotel and rental car tax revenues generated.

In this worst-case scenario, those backstops still wouldn't be enough. The proposal has still more backstops, none of them good. The ultimate backstops are the city's and Metro's general funds.

What's the best-case scenario?

Samuels also looked at a scenario that makes more positive assumptions based on recent history and hotel consultants' forecasts.

She used an interest rate of 4.6 percent that would have been offered in February 2007 and consultants' forecasts for growth generally in the tourism industry and specifically in the hotel's room rates and occupancy.

In that scenario, the hotel would nearly generate enough net income ($14 million) to cover the debt payment ($14.6 million) in the hotel's third year. Taxes and fees paid by hotel guests would generate enough to cover the $600,000 gap that year.

The only public money required to make the hotel work in this scenario is $4 million in taxes and fees paid by the hotel guests over the first seven years.

After seven years, the hotel's income alone is enough to pay the debt. The bonds would be paid off in 2041 and the project would have a $260 million reserve fund.

If the talks go on, what happens next?

The Metro Council likely will vote Thursday to extend the project beyond its current Dec. 19 deadline with hotel developers. From there, Adams wants to update a hotel feasibility study done before the recession. But most importantly, the city, Multnomah County and Metro must agree to change the tourism fund to provide the financial backstop. There's no promise that it won't take another 20 years.

Ryan Frank: 503-221-8519; ryanfrank@news.oregonian.com; blog.oregonlive.com/frontporch

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To see more of The Oregonian, or to subscribe the newspaper, go to http://www.oregonian.com.

Copyright (c) 2008, The Oregonian, Portland, Ore.

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