Government gets into the hotel-building business - Mayor Wants D.C. to Build, Own Hotel - Borrowed $460 Million Would Pay for 1,500-Room Marriott

By Neil Irwin
Washington Post Staff Writer
Wednesday, December 17, 2003; Page E01

Washington, D.C. - The District would borrow $460 million to build and own the biggest hotel in the city, next to the new Washington Convention Center, under a Williams administration plan for financing the project.

Supporters of the project say that building and owning a 1,500-room hotel is the best way to ensure that the city receives the maximum return from the $800 million it paid to build the convention center across the street. Skeptics question whether the city should get into the hotel business.

The administration's financing plan would require approval by the D.C. Council and assumes the attractive market for municipal bonds will last until the new debt can be issued a year from now.

The hotel, to be operated by Marriott International, would be very difficult to finance if the city relied on private investment, Stephen M. Green, a special assistant to the mayor, said yesterday at a briefing on the plan. He and advisers to the District said efforts in other cities to finance big convention center hotels have stalled because few investors want the risks of such a large project and because private investors expect a greater financial return than the city would.

Instead, Green said, a special city-backed entity would issue tax-exempt bonds, which carry a lower interest rate than corporate bonds, to fund the project. The city would simultaneously refinance existing convention center debt, at currently lower interest rates. In total, the refinancing of the convention center debt and the new hotel debt would be wrapped into a new $1 billion bond issue. City officials believe lumping together the convention center and hotel bonds would make the debt more attractive to investors because revenue to pay the interest would come from two properties instead of one.

The city-chartered organization would pay the interest costs on the debt mainly with the new hotel's profits. Revenue from hotel and restaurant taxes would also go toward servicing the debt.

City officials hope to issue the debt about a year from now, and the hotel likely would not be finished until late 2007.

Marriott International has been picked to operate the hotel, which would be on Massachusetts Avenue NW between Ninth and 10th streets. Tishman Urban Development Corp. is set to build it on land owned by local developer Kingdon Gould. The city would own the hotel and buy or lease the land underneath the hotel from Gould. Tishman would be paid fees for its work and would be overseen by the city-owned organization.

Advocates of the city's approach say a large "headquarters" hotel is crucial to the success of the convention center. About half of the groups that have booked space in the convention center after 2008 have the right to cancel if there is no headquarters hotel by the time their event is scheduled. Although some in the hotel industry have had reservations about the plan -- after all, tax dollars generated from their receipts will essentially be funding a major new competitor -- Washington Convention and Tourism Corp. President William A. Hanbury said yesterday the major hotels have endorsed the plan to make sure big conventions keep coming to town.

Some people question whether the city should subsidize -- and own -- the biggest hotel in town (the largest existing one, the Marriott Wardman Park, has 1,348 rooms).

"I'm not opposed to public money being used to sweeten the pot to spur development where you don't have it, like H Street Northeast or New York Avenue or Anacostia," said Charles W. McMillion, chief economist of MBG Information Services in the District. "But in an area where we have the convention center and an enormous amount of development already going on, I think it's really time to let the market decide what we need."

Furthermore, he said, the city's goal should be to get visitors to conventions to visit and spend money in all D.C. neighborhoods -- and a big hotel close to the convention center might keep them in one place.

Few things are certain once the D.C. Council begins considering the plan, but members are said to generally back the idea of a large hotel near the convention center.

"Everything faces real hurdles in the council, from the minuscule to the significant," said member Harold Brazil (D-At Large). "But I haven't heard a lot of people saying, 'We shouldn't have it,' only, 'How are we going to finance it?' "


Government gets into the hotel building business

Phoenix ready to build downtown hotel - Phoenix council won't need voters' OK

Ginger D. Richardson
The Arizona Republic

Dec. 17, 2003 12:00 AM

The Phoenix City Council today will take a step toward building a luxury downtown hotel that would add $300 million to the city's debt and not require voter approval.

Council members are expected to green-light negotiations with Hilton, Marriott and Starwood/Sheraton to operate a 1,000-room venture that backers say is crucial to the success of an expanded Phoenix Civic Plaza.

The vote isn't a final endorsement of publicly financing the project but is a signal of support for the idea.

"All of us in the business community would prefer a private-sector option, but we know realistically what our options are," Mayor Skip Rimsza said. "Doing nothing is a decision that has grave, long-term consequences."

Officials said the deal is being structured so revenues from the hotel, not taxpayer dollars, will repay the debt.

The project does not have unanimous support.

Councilman Tom Simplot said he worries about the cost, especially since voters only recently approved spending $300 million on Civic Plaza renovations. He said he has "a philosophical issue" with the city getting into the hotel business.

"I don't support the concept of a taxpayer-financed hotel," Simplot said. "It is very important that we have a downtown hotel. I just wish we could find alternative financing."

If the plan proceeds, Phoenix would join a small but growing group of cities that have taken the plunge into the hotel business. City-owned hotels are operating or under construction in Sacramento, Chicago, Houston, Austin, Denver, Overland Park, Kan., and Myrtle Beach, S.C.

Cities are constructing hotels when it has been difficult to find developers who can make such a project economically feasible.

Municipalities, using tax-exempt financing, can get lower interest rates, which means the hotels don't have to make as much money to break even or turn a profit.

A study found the hotel would have to have an occupancy rate of 64 to 68 percent to pay for itself, assuming its average room rates were $167 to $185.

Plans call for Phoenix to pay for the hotel using project-financed revenue bonds issued by a non-profit agency that acts as an arm of the city.

Officials hope to pay back the bonds with hotel revenues.

City officials solicited proposals from private companies to see if any could make a hotel project work without public subsidies or cash gifts. Five companies responded, but all indicated they would need some public support.

Assistant City Manager Sheryl Sculley said, in some cases, the city was asked to subsidize the projects with $60 million or $70 million.

Phoenix officials say that they don't have the cash to do that and further add that they have been legally barred from participating in such ventures.

About three years ago, Phoenix officials were moving ahead with a plan to help a private developer build a large hotel on the Collier Center site and a smaller hotel at Arizona Center when they were sued by Steve Cohn, owner of the Wyndham Phoenix, formerly known as the Crowne Plaza.

A judge ruled in favor of Cohn, saying the city's deals to finance the hotels were unconstitutional because they would make the city a joint owner in a private business.

City officials said the ruling does not prohibit them from being the sole owner of a hotel.

City Attorney Peter VanHaren said he also does not believe that the hotel plan runs afoul of Proposition 200, which states that a city wishing to spend more than $3 million on a convention facility or sports facility must get voter approval before moving ahead.

Though a location for the hotel has not been decided, it would not be located at the convention center, VanHaren said. It also would not rely solely on convention and tourism business, he said, and therefore is not subject to the law.

If the project is endorsed, the hotel could open by the time the Civic Plaza work is complete, likely in fall 2008.


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