|By Lorraine Mirabella, The Baltimore Sun|
Knight Ridder/Tribune Business News
Apr. 12, 2005 - Baltimore officials plan to introduce legislation Monday seeking City Council approval to issue up to $305 million in revenue bonds for a convention headquarters hotel that would be developed and owned by the city.
In a lengthy briefing with council members yesterday, a phalanx of city development, tourism and finance officials as well as financial advisers and consultants defended the plan to publicly finance the proposed 752-room Hilton, which they said was essential to boost the Baltimore Convention Center's sagging bookings amid stiff national competition. They said revenues would more than cover debt service on the bonds.
"There was no other way," said M.J. "Jay" Brodie, president of the Baltimore Development Corp., the city's economic development arm. "The only way hotels like this could be developed is by cities stepping forward with tax-exempt financing." He said cities such as Austin, Houston and Denver have all turned to public financing as a way to get convention headquarters hotels built.
Robert Swerdling, managing director of public finance at Piper Jaffray & Co., underwriter for the bonds, said that the city guarantees mean the interest rate will be much lower than what a private developer would be able to get, most likely around 4.75 percent rather than about 7.5 percent
Projections released yesterday show that the hotel is expected to generate $15.7 million in net revenue in its first year of operation, 2008, when debt service would be an estimated $13.7 million. More than half that first-year interest would be paid by proceeds from the bonds.
The hotel's income, which includes property tax and room tax, is forecast to grow to $25.4 million by 2010, with debt service of $15.7 million, and to $31.5 million by 2015, with debt service of $17.5 million.
Officials insist they have minimized any risk to the city. The financing structure builds in reserve funds of up to $40 million, pledges up to 25 percent of the city-wide room occupancy tax and requires hotel operator Hilton Hotels Corp. to guarantee up to $25 million in the event that Baltimore's now-healthy hotel market suffers a downturn and the hotel fails to meet projections.
"If occupancy goes down, there is a cushion here to help pay the debt service, so no one will say we need an appropriation from the general fund," said Irene E. Van Sant, a project analyst director for the Baltimore Development Corp., which is leading the project for the city.
The proposed ordinances would create the non-profit Baltimore Hotel Corp., which would own, develop and operate the hotel, to be built on vacant land just north of Oriole Park at Camden Yards, and authorize the city to float the bonds. Another ordinance would create a tax increment district, which would require the hotel to pay property taxes that would range from $3.2 million to $3.7 million annually through 2015. If the taxes were not needed to cover the debt service, the revenue would be turned over to the city.
"The reason we have the money to do this is because the end-user is paying for it," said Stanley Milesky, chief of the bureau of treasury management for Baltimore. "It's our intention that the hotel will pay for itself."
Leslie Doggett, president and chief executive of Baltimore Area Conference and Visitors Association, said the city has lost about 120,000 room bookings over the past three years -- or $100 million in economic impact -- because of the lack of a convention hotel connected to the city's convention center that can set aside room blocks for convention-goers. The Hilton has agreed to reserve 600 of its 752 rooms for convention-generated business.
The city is pushing ahead with plans for the hotel at a time when publicly financed convention hotels around the country -- including hotels in Myrtle Beach, S.C.; St. Louis and Sacramento, Calif. -- have failed to meet projections as cities race to expand convention facilities while convention business is static.
Council President Shelia Dixon, who attended yesterday's briefing, along with eight other council members or their representatives, said she believes strong support exists for developing the hotel with bond financing, but that questions remain regarding the risk to the city and the role the new hotel corporation will play.
Others questioned the need to publicly finance the project.
"Is there no private financing that can be found?" said Councilman Bernard "Jack" Young, who represents the city's 12th District. "I would not like to see the city putting all its resources in this hotel in light of the schools around the city...The citizens are jumping up and down saying 'you can support a publicly financing hotel but you can't fine the money to upgrade textbooks?' There needs to be a balance of private financing to go with it."
Councilwoman Helen Holton said she is not yet convinced that private investors could not make a go of a hotel or a public/private partnership.
Development officials say they were unable to attract a private developer who did not require a hefty subsidy from the city.
The BDC's Brodie told council members yesterday that if the city doesn't soon build a convention hotel, "Baltimore will become less and less competitive.. and it will have an effect on existing hotels if the city is less competitive. Their business goes down. You're either keeping up or falling back."
The city had selected a development team out of three proposals, but last month issued a request for proposals to replace builder Whiting-Turner Contracting Co. after construction estimates soared beyond projections. Five national builders responded, including Whiting-Turner, and will compete to construct the hotel with bids due May 9.
The city had been working with Whiting Turner as part of a team led by Robert L. Johnson, the founder of Black Entertainment Television. Though it is seeking new proposals from builders, BDC has kept the rest of the team intact, including Johnson's company, RJL Development LLC, and Quadrangle Development Corp., architecture firm RTKL Associates and hotel operator Hilton Hotel Corp.
Yesterday, executives of Hilton said they had agreed to make available the $25 million guarantee toward the debt service -- which far exceeds the hotel chain's contribution toward any other publicly funded project -- because of the strength of Baltimore's market.
"You've got everything going for you," in terms of a strong convention business city, including the expanded convention center and a desirable destination, said William Edwards, an area vice president for Hilton. "But you don't have the product."
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