Nov. 17, 2002 - Denver's proposed convention-center hotel would require higher-than-average room rates -- as much as $300 a night -- to pay for its construction and operation, based on an industry formula that determines hotel project costs. 

Rates would be $100 more than -- in some cases, double -- the nightly charges at comparable downtown hotels, prompting concern that Denver taxpayers will foot the bill if steep prices scare away convention business. 

The hotel is the missing piece in Mayor Wellington Webb's effort to establish Denver as a major national convention hub. 

Voters already approved a $268 million expansion of the convention center, but Webb is still chasing a hotel deal during his final year in office. The cost has emerged as the primary stumbling block. 

Some City Council members said they're worried the hotel won't be able to pay its bills, and that the city hasn't done enough to encourage private development. 

But city officials working on the hotel project and their consultants say the industry formula is an outdated approach to hotel financing. They contend that the hotel will have lower costs to borrow money and will earn extra profits from food and parking. 

Based on current estimates, the city expects to spend $250 million to build a hotel across 14th Street from the Colorado Convention Center. The total bill, including financing charges, would be $347.3 million. 

"For this hotel you'd need $250 to $300 per night," said Robert Benton, a hotel consultant based in Parker. "That's never going to happen. At least that's not going to happen in our lifetime." 

Several hotel experts use a simple calculation to determine how much a hotel needs to charge to break even or make a profit. 

"For every $1,000 you spend, you should get $1.10 to $1.25 in the average daily rate," Benton said. 

Greg Hartmann, managing director with HVS International's Boulder office, and John Montgomery, director of the Denver office of Horwath Horizon Hospitality Advisors, said developers should expect to charge $1 to $1.15 per $1,000. 

Currently, the city expects to spend $225,000 per room to build the hotel. At that price, room rates would need to be $225 to $281 per night, hotel consultants said. 

Cheryl Cohen-Vader, Denver's manager of revenue and a top official on the project, said rates would not have to be that high for the hotel to cover its costs. 

"We do not see a scenario where city funds would be tapped," Cohen-Vader said. "But obviously we don't have a crystal ball." 

She said the city cannot set exact rates for a hotel that has not been built yet. 

"Do we have rates yet?" Cohen-Vader said. "No. Do we have a model for rates? Yes. It's a generic model, and we have to take that next step." 

That next step is further study, including comparing the city's expectations to projections by Hyatt Corp., the city's choice to run the hotel. 

Mark Tobin, president of HREC Asset Management and the city's hotel consultant, dismissed the formula used by other consultants as too simple, calling it a "back-of- the-cocktail-napkin" calculation. 

That approach is more appropriate for "stick buildings," such as motels constructed along the highway, not convention-center hotels, Tobin said. 

"Every hotel deal needs to be reviewed on its own merits," he said. 

The city's hotel should be evaluated by considering how it compares to the rest of the market, Tobin said. 

The hotel would fill more of its rooms than other hotels because it is newer and closer to the convention center, Cohen-Vader said. The city expects it to have an average annual occupancy of 75 percent by 2009. Occupancy in other downtown hotels is expected to hover at 70 percent. 

In addition, the city's hotel will charge a mix of nightly rates, with business and leisure travelers paying higher-than-average rates, compared to the lower charges for convention delegates. 

The city is using a market study prepared by HVS International to estimate room rates. HVS said the hotel could expect to charge an average $163 per night when it opens in 2006, rising to $180 by 2009 in inflation-adjusted dollars. 

"We didn't recommend whether they should build the hotel," Hartmann said. "We only looked at what they could expect room rates to be based on the competition in the market." 

Hartmann said his study found that the hotel would generate higher revenues than other downtown hotels, but the hotel's ultimate success or failure depends on how much money the city spends to build and finance it. 

Cohen-Vader said the city's hotel will pay its bills and make a profit at the room rates identified in the HVS study because the hotel will have other sources of revenue. 

City officials expect the hotel to earn extra money by selling catering services, renting meeting rooms and collecting parking fees. Revenues from those services will reduce the average nightly room rates, Cohen-Vader said. 

In addition, the city's cost of borrowing money is lower than the bank loans and private investment partnerships used by developers. 

Still, some studies show that the initial nightly rate of $163 per night is too optimistic, said consultants not working for the city. Average rates have been stagnant for more than a year, and, in some cases, they have fallen. 

A 1999 study by Thornton-based Hospitality Real Estate Counselors Inc. estimated that average downtown hotel rates would be an inflation-adjusted $149 in 2006, the same year the city hotel is expected to open. 

The HVS International market study, completed in August, told city officials that competitor hotels would charge an average rate of $134 in 2006, rising to $148 in 2009, adjusted for inflation. 

Hartmann said rates have fallen during the past year as companies cut back on business travel due to the sluggish economy and impact of terrorist attacks in 2001. He said it will take several years for rates to climb back. 

The city's projected room rates are similar to the rates private developer Bruce Berger Realty expected to collect in its failed, but lower-priced, hotel project. 

Berger expected to spend $192,000 per room to build a 1,100-room hotel, according to documents submitted to the city. Average nightly room rates were set at $135 in 2003 for the first year of operations, rising to $164 in 2006, adjusted for inflation. 

Berger's $220 million project depended on $55 million in financial assistance from the city. 

Webb said he withdrew the city's support because Berger refused to give the city an exact opening date for the hotel. 

But the city's need for a hotel did not disappear. 

The convention center will double in size by December 2004, but the city won't have enough hotel rooms to keep the bigger center busy. 

City officials said the existing hotels in downtown, including the 1,225-room Adam's Mark, which previously received city assistance, do not provide sufficient rooms for the expanded center. 

Since spring, Denver officials have hired investment bankers, lawyers and architects, interviewed construction companies, agreed to buy a site and selected Hyatt to run the hotel. 

Denver is joining the latest fad in hotel financing. 

Several cities became do-it-yourself hotel developers in the late 1990s. Austin, Texas; Chicago; Houston; Omaha; and Overland Park, Kan., approved publicly financed hotels. Washington, D.C., is considering a $500 million city-owned hotel. 

None has been open long enough to test whether their income will pay the bills. 

Those projects sprouted amid heated competition between cities to lure conventioneers. Each city claimed it needed bigger and better hotels to keep up with other cities chasing conventions. 

The Denver plan calls for setting up a city-owned nonprofit company that would issue tax-exempt bonds next spring to pay for the construction of the hotel. The bonds would be repaid over the next 30 years with proceeds from the hotel. 

To protect taxpayers, the city would establish reserve funds with some of the bond money. To reassure investors buying the bonds, the city would also agree to set aside about $9 million from the city's general fund to support the hotel. 

That $9 million is less than the amount of new taxes the hotel is expected to generate annually. Cohen-Vader said the city doesn't expect that it would need any of that set-aside money. 

If the hotel falls short and the city taps out its reserve funds and the other money set aside for the hotel, taxpayers would be asked to subsidize the operations to prevent a takeover by the bondholders. 

Councilman Ted Hackworth said he's still studying the terms of the deal. 

"The bottom line is where I look," Hackworth said. "When I'm gambling with somebody else's money, I'm more conservative than I normally am." 

The city expects the hotel to make a profit, based on presentations Hackworth has received from city officials and their consultants. 

"It's not a sweet deal, but it may be a deal we can live with," Hackworth said. "Maybe." 

But other council members aren't so sure. 

"I think we're building a much higher-quality, more highly designed product than what we ought to be building," said Councilwoman Susan Barnes-Gelt. "The Berger hotel was a much boxier design, which was cheaper. 

"We don't want a bunch of dead walls, but I think you can create a positive pedestrian experience without building a gold-plated Cadillac," she said. 

Besides, the city should keep searching for private developers to build a hotel, Barnes-Gelt said. 

-----To see more of The Denver Post, or to subscribe to the newspaper, go to http://www.denverpost.com 

(c) 2002, The Denver Post. Distributed by Knight Ridder/Tribune Business News.