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Baltimore City Officials Less Certain the City-owned 757-room
 Hilton Baltimore Convention Center Hotel Will Turn a
 Profit in the Time Frame Originally Projected

By Lorraine Mirabella, The Baltimore SunMcClatchy-Tribune Regional News

August 21, 2009 - Baltimore's city-owned convention hotel opened to much fanfare and high expectations last August, with white-gloved waiters serving champagne in the blue and rust lobby; a jazz ensemble playing and the first guests marveling at the ballpark views. Tourism and government leaders praised the $301 million, publicly financed project as the much-needed ingredient to bolster the city's convention business and elevate its status as a destination.

But within months, the bottom fell out of the economy, weakening demand in the lodging and convention industries.

Faced with the worst economy in decades as it completes its first year, the Hilton Baltimore Convention Center Hotel has failed to live up to rosy predictions made in more robust times. The 757-room hotel, a block north of Camden Yards, has fallen short in a key measure of a hotel's performance -- revenue earned per room. And city officials are less certain the hotel will turn a profit in the three- to five year time frame originally projected.

Despite the struggling lodging and convention industry, the West Pratt Street hotel has succeeded in meeting other goals, city officials say. It has persuaded convention groups who would have gone elsewhere to come to Baltimore. And it has paid its bills and met its debt payments without dipping into reserves.

"We wanted to pay our bills without having to go outside what the hotel brings in," said Irene Van Sant, hotel project manager for Baltimore Development Corp., the city's economic development arm.

During the first annual reporting period, which ended Dec. 31, 2008 and includes only 132 days of operation, the hotel reported a $17.1 million loss, with $18.1 in revenue and $35 million in expenses, according to financial statements prepared by Clifton Gunderson LLP. Van Sant notes that much of the expenses were funded not with revenue but with bond proceeds designed to cover one-time opening costs, which must be charged as expenses under accounting rules.

But the hotel falls short in revenue per available room, which is average daily room rate multiplied by occupancy rate. City and hotel officials won't disclose the Hilton's revenue per room, occupancy or average room rates. But a calculation using the hotel's reported room revenue of $6.8 million for 2008 and the number of days open last year shows revenue per available room of $68.46. That's well below the $112.57 projected for the Hilton for 2008 by consultants, based on projected occupancy levels of 62 percent and an average rate of $181.56. It's also below Baltimore City's average hotel revenue per available room of $82.55 as of mid-year, according to Smith Travel Research.

City officials, who planned for a hotel at a time when the top downtown hotels enjoyed some of the highest occupancy rates around, say they couldn't have anticipated how much demand would wane for business and leisure travel. City leaders long advocated for a large hotel connected to the city's convention center that would reserve room blocks for conventioneers. It would allow Baltimore to compete regionally and nationally by pulling in larger convention groups, boosting center business and spreading bookings among downtown hotels.

"We built the right asset at the right location," said M.J. "Jay" Brodie, development corporation president. Now, "We all wish the recession would end."

The downturn has taken its toll on hotel occupancy, which has plummeted in Baltimore and elsewhere through mid-year. Baltimore's average hotel occupancy fell 7.1 percent to 58 percent, while average daily rates fell 8.5 percent, to $142.34, compared to mid-2008, according to Smith Travel Research. Hoteliers and convention center operators across the country have been left to scramble for business, cut rates and offer deals.

"The hotel industry is in the worst downturn in the last 20 years," said Rod Petrik, a managing director at Stifel Nicolaus & Co., who follows the lodging industry. "Obviously, it closely tracks the economy. You're seeing all segments, whether leisure, business, groups and conventions, weak across the board." The Hilton also has had to contend with the ramp up time typical for any new hotel during a year when the city added more than 1,200 rooms within a one-mile radius of Pratt and Light streets, according to data from Downtown Partnership of Baltimore.

Officials say they are heartened by the hotel's ability to pay its bills and meet its debt payments. The city sold $301.7 million worth of revenue bonds to finance the project, including $230 million in construction costs, and set up a series of back-up sources to pay debt service in case hotel revenue and tax increment financing falls short. Reserves include a $9 million fund, Hilton's hotel occupancy tax, citywide hotel occupancy taxes and a pledge of up to $25 million from Hilton's corporate office.

The city will make its debt service payment in September without dipping into reserves and expects to do so when the March payment comes due, Van Sant said.

Beyond that, it might be difficult to meet projections, even without a recession, one convention expert said.

In the cities that have financed convention hotels, "The projections are with regularity above the actual performance," said Heywood Sanders, a convention industry expert and professor at University of Texas, San Antonio. "The reality of these hotels, with only the rarest of exceptions, is that the fundamental logic that building a headquarters hotel will substantially boost convention business and let that new hotel generate sufficient revenue to pay off its bonds and more business for the other hotels simply doesn't work."

He blames faulty assumptions by local governments, "one of which is there will never be, in the life of those bonds, any economic downturn that will impact the hotel business."

City Councilwoman Mary Pat Clarke, one of the six of 15 council members who opposed the city owning and financing the hotel, said she believed the city was unnecessarily risking resources when it seemed private developers could have stepped in.

"You always worry about getting to that level of reserves where you're tapping into the general hotel tax of the city," she said. "That's when we've got trouble. We would really be cutting into revenue the city expects to use for other uses. We're not there yet, to the best of my knowledge."

A 16 percent increase in hotel bookings by convention or business groups for dates through 2019 bodes well for the hotel's future, said Tom Noonan, chief executive and president of Visit Baltimore, the city's tourism and convention agency.

"The guests that are in town, the VIPs, they want to be in a headquarters hotel and walk across the sky bridge and go to the convention center," Noonan said.

The Hilton was the deciding factor for the National Sheriffs' Association in choosing Baltimore for a large, weeklong convention in 2015, said Scott Lindley, vice president of marketing for Arlington, Va.,-based IMN Solutions, which helps book conventions for associations. The event will generate 5,500 room nights and use about four downtown hotels, with the Hilton accommodating more than half the attendees.

"The remainder can be placed at hotels within walking distance," Lindley said. "You don't have to provide shuttling for your attendees. That makes Baltimore a more attractive destination."

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To see more of The Baltimore Sun, or to subscribe to the newspaper, go to http://www.baltimoresun.com.

Copyright (c) 2009, The Baltimore Sun

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