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Checking out the risks of a convention center hotel

By now it's pretty much a given that a headquarters hotel is vital to the ultimate success of the Tampa Convention Center.

The convention center, which is looking at a $500,000 operating deficit this year, has been told by nearly 200 groups that they would love to book their events here _ if only there was a headquarters hotel nearby.

Now, the city, which has been dabbling with the dilemma for several years, is negotiating with a development group to construct a 900-room hotel across the street from the convention center.

In selecting the group, which is led by Kilroy Industries, the city tentatively agreed to either issue or guarantee $127-million in bonds to finance the project. That means taxpayers, already on the hook for the $156-million in bonds used to finance the convention center, could end up footing the bill for the hotel as well.

The deal, as proposed, contains many buffers designed to protect the city _ read: taxpayers _ from financial liability for at least 12 years.

Nevertheless, it's still a potentially risky venture.

"There are not too many successful convention center hotels around," said Thomas O'Neill, managing director of the Miami Office of Hospitality Valuation Services, which specializes in hotel appraisals and consulting.

While it may be true that the ultimate success of the convention center rests on the existence of a headquarters hotel, the convention center does not ensure the hotel's success.

"There are too many valley periods between events," O'Neill said. Even a fully booked convention center (which Tampa's is not) cannot generate enough overnight guests to sustain a hotel, O'Neill said.

In the end, the hotel's success will depend on whether it draws enough non-convention business to fill in the "valleys" between events.

Even if that happens, it will be a struggle. Although hotel occupancy rates around the country have remained consistent at about 62 percent, room prices have not risen for the last two years. But expenses have.

Darryl Hartley-Leonard, president of Hyatt Hotel Corp., which owns a downtown hotel close to the Tampa Convention Center, said on a recent visit that "there has not been a profitable, four-star hotel built in this country since 1983. And hotels today do not just lose money; they hemorrhage."

Because hotels are so unprofitable, private financing to build them is virtually impossible to come by, said O'Neill. Hotels are selling these days for half of what it cost to build them, he said.

Nevertheless, Tampa is not alone in its eagerness to build a convention center hotel _ although it is perhaps the only city that has signaled a willingness to take on so much of the cost and risk.

Other U.S. cities are grappling with the same issue. Some, such as Portland and St. Louis, already have convention centers and are looking to build hotels. Others, such as Providence, R.I. and Hartford, Conn., are striving to build convention centers and hotels at the same time.

In Minneapolis, the situation is somewhat similar to Tampa's. Both cities opened their convention centers in 1990. Unlike Tampa, however, Minneapolis will have a headquarters hotel next month.

But it wasn't easy, according to Phil Handy, supervisor of downtown development. Original plans called for the hotel and convention center to open concurrently _ in recognition of the fact that one would not work without the other.

But private financing for the first hotel development never materialized and the city had to go through two more rounds of developer selections before a final deal was struck. Each time, the city had to contribute additional subsidies to the project, Handy said.

Ultimately, the city picked the most suitable proposal that offered the city the best chance of recapturing its investment, he said.

The final cost to the city for building the hotel: $40-million of the total $94-million. The city, which floated $200-million in bonds to pay for the convention center and related facilities, will issue additional bonds to cover the hotel costs.

The bonds will be repaid with city sales taxes (a 0.5 percent sales tax was added on sales within the city) and taxes from the convention center, hotel and other businesses in that designated redevelopment area.

Minneapolis remains the owner of the land on which the hotel is built and the 1,200-car municipal parking garage located under the hotel.

There are provisions to ensure the debt service is covered and rewards to the city if the hotel does particularly well.

"I doubt we could do this deal now because of changes in the law and the lending climate," Handy said.

The experiences of other cities _ including Tampa _ would indicate that is true:

St. Louis: Unable to find a developer willing to construct a hotel without government subsidies, the city is considering providing $40-million through tax increment financing.

In a tax increment financing program, a district's tax base is frozen. As values increase, the taxes collected above the frozen rate are applied to the debt of the project financed with bonds. Tax increments are being used to pay down the Tampa Convention Center debt, but flat and declining property values in the downtown area have resulted in less revenue than anticipated.

In St. Louis, there is considerable debate over whether the tax district could produce sufficient revenues.

Hartford: The state of Connecticut created an authority to issue bonds for a convention center in Hartford, but did not authorize it to oversee a hotel, too. Now, the city is trying to drum up a hotel.

So far, no developers have offered to finance the project.

"Some developers are interested in building on a fee basis and turning it over to someone else," said William J. Cochran, director of finance for the city. "There is no private financing. We have some big insurance companies here and they've told us they're not interested.

"It may be that the only way is for the public sector to step up to the plate and take a risk."

Portland: The city, which opened its convention center last year, has put its headquarters hotel "on the back burner," according to Harry Linhart, spokesman for the Portland Development Council. "The city is not really ready to subsidize this."

One hope is that a planned $180-million arena/entertainment complex near the convention center, to be largely financed by the Portland Trailblazers basketball team, will attract a private developer.

Providence: A state-created authority may issue up to $290-million in bonds to build a convention center/hotel complex. Since the project was started well after Tampa's, in a completely different economic environment, state and local officials had no illusions about where the money would come from.

"We knew before we started the convention center that there was no private money for the hotel and (adjacent) office building," said John Conway, executive director of the Rhode Island Convention Center Authority.

"But we felt the hotel was so important to the success of the convention center that we told the state legislature we shouldn't start the convention center unless we were sure we could get the hotel."