May 29–Sondra Eoff says it's "a huge risk," for her and her husband, Toby Eoff, but one they say they believe will pay off for Odessa.

The Eoffs are finalizing a deal with the city to take on about 60 percent of the cost of a $77 million downtown hotel and convention center in hopes it will act as a catalyst for the revitalization of Odessa's downtown.

Since Mayor David Turner's recent announcement that the couple will be the private investors in the city-backed project, a better picture has emerged of who will be responsible for what and who is on the hook for the ongoing costs.

The short answer, for most of it, is the Eoffs, Odessa natives who sold their company Odessa Pumps in July 2015.

"Our primary reason for doing this project is philanthropic," Sondra Eoff said. "We wanted to be the catalyst for downtown revitalization."

And that is also the vision of city officials for the project.

The project is interrelated with a broader downtown revitalization project with costs that are less clear. And the hotel and conference center represents an investment city officials said the city would need to protect.

Hotel and convention center rendering Hotel and convention center rendering looking north/northwest. Courtesy image

For now, city officials declined to release a draft agreement, citing ongoing negotiations and changes. But the Eoff's accountant, Peggy Dean, and City Manager Richard Morton said almost all of the major points are already agreed upon.

The City of Odessa stands to invest about $30.8 million in the project, cobbled together from about $16.6 million in hotel/motel tax money, $6 million in general fund sales tax revenues and $8 million in Odessa Development Corporation 4A sales tax funds. That would pay for a 78,000-square-foot convention center, an open air plaza, a 300-car parking garage and a remodeled Ector Theatre.

The hotel will be 150,000 square feet franchised under the Marriott brand with 219 rooms.

The Eoffs' share in funding that portion of the project is about $7 million up front and another $40 million financed through a Prosperity Bank loan that they would have to pay if the hotel business were to fail. That doesn't include ongoing operating costs such as paying a management company, Aimbridge Hospitality, to run both the hotel and convention center.

For now, plans call for the city to lease the conference center and half the parking garage to the Eoffs for as little as $1 under terms of a 50 year lease.

The Eoffs would have the ability to sell the hotel, Morton said, with some protections baked into the agreement for the city. The hotel and conference center, for example, would have to operate as one. And in no scenario, Morton said, would the conference center revert to the city.

Morton said one unresolved issue is who will manage the city-owned Ector Theatre, which would be used for events. But he said he will likely recommend that city council approves leasing that property to the Eoffs, too, so they can manage it in conjunction with the convention center.

The city would be responsible for ongoing maintenance of the parking garage, the open air plaza and possibly the Ector Theatre. And Morton said the city hasn't calculated those costs yet, but expects them to be "minimal."

Morton said that tax revenue from the hotel and conference center would "more than pay for any costs that we have."

The Eoffs take on the remaining ongoing costs of the hotel and conference center and, again, possibly the theater.

Morton said it is "almost impossible" that the new city-backed downtown business would fail, based on city-commissioned market studies. And even if it did, the city's top administrator said there is no scenario in which the city would have to bear the ongoing costs associated with either property.

Sondra Eoff and Dean said the couple has the means and crunched their own numbers that show the project is viable even if today's oil bust lasts for more than another five years.

Despite the ongoing oil bust and a city-funded market study that shows plunging hotel occupancies and rates, Sondra Eoff said the couple knows how to run a business in a volatile economy like Odessa's.

"Toby and I are used to working hard to make our business successful," she said. "And I'll be taking the lead on this project, so I'll be making sure I do everything I can to make it successful."

Sondra Eoff said she expects the hotel and conference center to turn a modest profit eventually. Once the hotel becomes profitable, she said the couple would donate some of those profits toward further downtown development through donations to groups like Downtown Odessa or through grants.

Sondra Eoff said the soon-to-be first-time hoteliers feel confident it will work, after performing their own study based on a more conservative forecast, which has not been made public.

The investment also reflects a belief in the city's broader downtown plans, Sondra Eoff said. And she said she sees the success of the hotel and conference center as related to that effort.

"I think it's important that Odessa's downtown be revitalized," she said. "Because people will have to come down. We'll need other businesses to support the hotel."

The Eoffs would get the earnings from the hotel, the conference center and the remodeled Ector Theatre, if they end up managing it.

And the city would get sales and property taxes, along with state and local hotel occupancy taxes that city officials said would ideally go into more downtown investment.

At 64 percent occupancy and an average daily rate of $156 would mean more than $1 million in hotel and motel tax money for the city. That is the rate and occupancy the city-backed market study projected for the first year.

But if the hotel and conference center faced a shortfall in the first three startup years, Morton and Dean said the agreement calls for those taxes to be used to offset that loss.

Turner said he expects city officials and the Eoffs to sign on the dotted line of the hotel and conference center agreement within the next 30 days. Then, the Odessa City Council would have to approve the agreement.

Next, the design phase of the project would begin, lasting up to nine months. Then construction would begin, and take about two years for completion, with a targeted opening in early 2019.

"It's a large project, so all the parties involved need to make sure they are completely comfortable with it," Morton said. "It's a fantastic project for our downtown and community and the City of Odessa.

"But it's a large project. And it involves public dollars and private dollars, so it needs to be vetted properly. And I think it is."

Hotel and convention center rendering Hotel and convention center rendering looking east. The Ector Theatre is shown on the corner. Courtesy image

THE CITY PROJECTION

Turner said the project brings decades of civic leaders' hopes of revitalizing downtown closer to materializing.

Turner said it will expand the tax base by adding a major development, and it will increase the taxable value of downtown properties.

"The exciting thing about it is the way we funded it with the public-private partnership, having someone else invest and giving them a reasonable return," Turner said. "And it's going to benefit the taxpayers. It's not going to cost them anything. We are not raising taxes. We are not doing anything like that and it's very exciting.

"You look at what some of the other cities do where they issue debt or they are borrowing against something, and we are not doing that. We are being very fiscally responsible and I'm very proud of that."

The firm the City of Odessa contracted with to develop the proposed hotel and convention center project, Gatehouse Capital, predicted in November that the hotel would turn an operating profit of $5.6 million on $13.3 million in total sales its first year. In the second year, those earnings would increase to $6.1 million on $14.3 million in total sales, the developer consulted by the city to put together the project estimated.

But in February, city officials sought an updated market assessment to better reflect the decline in the economy amid the slumping oil industry. They turned to the firm CBRE hotels. That firm looked at the city-owned properties including the conference center and the privately-owned hotel as one unit rather than as stand-alone properties.

That study projected a net income of $3.08 million in the first year and steadily increasing to about $4.23 million in 2023.

The study shows the trouble faced in the hotel market, which has just two hotels similar to the size of the city-backed project — the MCM Grande Hotel Fun Dome and the DoubleTree Midland Plaza.

Notably, it made some "Key Assumptions:" that the oil and gas industry would recover in Odessa and Midland and that the drop in oil prices does not have a long-term impact on the area. The study assumed an oil price recovery in 2019, the year the hotel and conference center is scheduled to open.

As it stands, the study found occupancy in the hotel market has dropped from a high of 82.6 percent in 2011 to 65.9 percent in 2015. Meanwhile, average daily rates that reached a peak of $183.29 in 2013 fell to about $146.6 in 2015.

The city's study predicted no demand growth among individual business travelers this year and tepid growth in the next few years before a more significant demand increase that dovetails with an uptick in oil activity 2019.

Meanwhile, the firm projected leisure demand to climb by just 1 percent through 2021, the entire projection period. This demand has been historically weak in the area because of "the lack of major tourist attractions" and oil industry-driven demand that competes for rooms, the study indicated.

Lastly, the firm predicted modest but steady growth in group demand for hotel rooms in the coming years: 1 percent growth this year, 2 percent in 2017, 3 percent in 2018 and 6 percent the first year the hotel and conference center opens.

The firm also assessed something called "induced demand," which is essentially the people who would not otherwise stay in local hotels but come to the downtown hotel and conference center because of its specific attractions.

They projected in the study that demand would result in about 18,000 room nights by the second year of operation, or about 2.85 percent of all the total demand in Midland and Odessa.

The number of actual individuals that figure represents could be smaller, because one guest staying for multiple days would count as multiple room nights.

But the study found the conference center would also help the hotel outperform competitors, especially in attracting groups and individual businesspeople.

Morton said the city is expecting an updated study of operational and construction costs in the coming week or so that could show savings of up to $2 million that would likely benefit the Eoffs' portion of the project.

If the hotel and conference center failed, and the Eoff's management company, Eofficial Enterprises, failed to make debt payment or otherwise went belly up, then Morton said the city would work with the local bank financing the project to sell the property to another investor. He described that scenario as "highly unlikely to happen."

"The lease is a long-term lease," Morton said. "If there is a failure, you have a $77 million facility there that will be used no matter what."

Hotel and Convention Center Rendering courtesy of Gateway Planning Group

THE MORE CONSERVATIVE APPROACH

The Eoffs wanted to take a more conservative look at how the hotel and conference center would perform before investing.

"This is a huge commitment on their part, and we wanted to get a really good feeling going in about what the worst-case scenario would be as opposed to the optimistic ones that were done by the group the city contracted with," Dean said. "After looking at the most conservative (estimates), the Eoffs were still committed to doing this, which I think says a lot about their commitment to Odessa."

Dean said her analysis for the Eoffs showed break-even cash flow the first year and positive cash flow the second year. In the third year, the hotel and conference center would also turn a profit, Dean estimated. The accountant based her study off the presumption that oil prices would not recover and the bust would continue through all of those years.

For example, Dean said they shaved about 20 percent off the city's induced demand estimates, consistent with their approach to the city's other projections.

Dean described it as a cautionary approach, rather than her or the Eoffs' belief of how the next five years would actually play out.

And Dean said she does not see "any risk" that the city would back away from broader downtown plans that support the project

"The city is delivering a $30 million conference center and parking garage," Dean said. "If they didn't do these things to revitalize downtown, it would be a much slower process (before the hotel becomes a profitable venture). I can't tell you if a hotel and conference center would still work or not. I assume that it would, but it would be a much slower process. This is jumpstarting all of downtown at the same time."

Hotel and convention center rendering looking east Hotel and convention center rendering looking east. The Ector Theatre can be seen on the right. Courtesy image

ON CONVENTION CENTERS

The city-backed study did not project conference center attendance or identify groups it could attract.

It is unclear, at least publicly, whether the conference center would turn a profit as a stand-alone entity.

But Morton said the city did not study the profitability of a stand-alone conference center because it's irrelevant.

"It's serving its purpose as it's beneficial to the hotel because they can sell conference and meeting space and generate heads in beds and make money, make a profit that way, versus just being a hotel without it," Morton said.

The conference center and hotel "are dependent on one another," Morton said. He said the city and the Eoffs' studies found the conference center would make the overall project more, not less, profitable.

Plans call for the city and Aimbridge working together to bring groups to the conference center.

Turner identified some targets such as medical and sports groups and said the Odessa Convention and Visitors Bureau would also seek to recruit events.

"One of the keys is oil and gas," Turner said. "We are the king of oil and gas. We can draw people in for that. We can draw people in for sports. But the key is we have to be able to market ourselves."

Sondra Eoff said that in addition to out-of-town groups, the center would host local events in industries such as the medical sector and private parties such as weddings.

Yet it's also true that stand-along conference centers often lose money, University of Texas at San Antonio Prof. Heywood Sanders said, a regular critic of such deals that rely on public money who has followed the local development. Sanders authored a book on the topic and said public-private partnerships like the one in Odessa are common throughout the country and so is the method cities rely on to evaluate them.

"It's very often done this way because the folks who want a hotel want a hotel and this is a means of justifying the performance of a hotel," Sanders said.

Rival Odessa hotelier John Bushman, who evaluated the city's proposed project and declined to invest, said he also thinks the city-owned conference center will lose money on its own.

Research by Bushman's company ICA Properties found several examples where consultants projected greater attendance at conference centers than the facilities ultimately realized, falling short by up to 50 percent. And many of them lost money — in major cities that already draw tourists and business groups, including Chicago, Washington, D.C., San Diego and Austin.

"The demand for convention center space has continued to decline year after year for many years now, while the building of them — the supply — has continued to grow exponentially almost as a result of consultants who are paid to paint a picture, which has proven over time to be generally about two times what the annual use will be," Bushman said.

But Bushman said he generally supports the idea of a revitalized downtown and said that as a major downtown business owner, he would benefit from a successful effort. Bushman also said he would offer a memorial for the conference center, possibly the Ten Commandments.

"I opposed the convention center," Bushman said, adding that he will back it, though, because he believes the city's approval is inevitable. "I don't think it's a good idea. But I'm on board since our representatives have approved it. I'm not going to sit there and fight it after they've approved it, and we will contribute some money to the welfare of downtown."

Sanders argues that a better approach for a community trying to revitalize its downtown would be to tackle small scale projects, watch as some fail and build on what works. He described the local partnership as a "means of deeply subsidizing a hotel."

"The problem here becomes one in which you've created a circumstance in which this project can become the justification for doing ever more in public investment terms," Sanders said. "And that's part of the slippery slope of having broad downtown revitalization goals. If it doesn't work, then the likelihood is you are going to do more. And you should be aware that that is where the city is conceivably going."

Potential new look of downtown Odessa Rendering courtesy of Gateway Planning Group

THE BROADER EFFORT

None of that is to say the hotel and conference center will fail or that city officials see the project as a silver-bullet for the broader downtown revitalization.

The city for more than a year has invested in planning for downtown and in property, apart from those acquired to make way for the hotel and convention center.

But unknowns remain relating to the overall downtown revitalization, including funding mechanisms, the scope and the timeline. The city is still planning that effort, which would seek to change the market dynamics of downtown and bring residents to the area.

In December, the city awarded Gateway Planning Group a $165,000 contract for a Downtown Master Plan to develop a strategy for attracting business, along with tools such as design standards and incentives.

The firm is set to finish a design overlay and a more refined incentive policy by the end of the summer as part the master plan effort.

In terms of future public investment in the revitalization, Morton said "we have to be fairly flexible there." And the goal is to spend a lot of additional public funds beyond what the hotel generates, Morton said.

The city has a list of 14 remaining downtown properties, which have not been publicly identified and with no estimated cost for what it would require to purchase all of them and no firm plans to do so.

In March, the Council voted to buy the dilapidated former J.C. Penney at 500 N. Grant Ave., for $334,000, plus about $6,000 set aside for a survey and other costs. That money came from the general fund, as did the funding for properties bought to make way for the hotel and convention center.

Some properties on the list are cheaper, like the former Odessa Home Furniture building at 417 N. Grant Ave. A federal bankruptcy judge in April cleared the sale of the building to the City of Odessa for $85,805.

Morton said the goal is not to buy all 14 properties. Instead, he said city officials hope private developers will decide to buy them and use city incentives such as fa?ade and infrastructure grants.

Properties the city does buy could be used as other incentives for private developers, Morton said.

"If we need to get things kick-started we may have land that they say 'Oh we'd love to build a facility there,'" Morton said. "Maybe we can provide that as an incentive. Maybe we can sell it to them because we've got a bunch of interest. Some of that's unknown."

In June, Assistant City Manager Michael Marrero said he plans to present options to the City Council for establishing a Tax Increment Finance Zone downtown. Basically, a TIRZ freezes property tax values before development begins. As property values increase during the development effort, the extra money goes into a fund, which is used for further development.

The TIRZ money and the occupancy tax money from the hotel and convention center, could be sources for more downtown projects, city officials said.

"We'd like to do it as soon as possible," Morton said.

As it stands, the city manager said city officials have talked to local developers and builders interested in coming in and building "mixed-use type facilities," with excitement building.

"It doesn't have to wait until the hotel is built and finished," Morton said.

Contact Corey Paul on Twitter @OAcrude on Facebook at OA Corey Paul or call 432-333-7768.