Charlotte convention hotel likely to need hefty taxpayer subsidy

In the spring of 2013, just as a new convention center was about to open in Cleveland, local government and tourism boosters began rallying for a major hotel to boost the project. They had their eyes on recruiting more events, including what became a successful bid to host the Republican National Convention last summer.

By the time the RNC arrived last year, the political convention’s headquarters hotel just happened to be a newly opened 600-room, $275 million Hilton connected to the convention center. Cuyahoga County taxpayers are footing the entire construction bill — and counting on future conventions and other events to make the hotel a financial success.

As the Cleveland example shows, the convention business continues to be a high-stakes affair not just for cities, but often for taxpayers, too. Convention centers almost always require subsidies and are viewed as loss leaders for hotels, restaurants and other tourism industry businesses. Critics contend the investments too often fail to yield a return and, because of national arms races similar to sports stadiums and arenas, require additional taxpayer money to fund renovations and upgrades. And, in many cases, companion hotels.

Charlotte City Council this week heard the beginning of a similar debate likely to gain momentum in the months ahead. In August, council is expected to vote to spend $100 million, using a portion of existing tourism taxes, to pay for renovations and expansion at the 21-year-old convention center. The taxpayer-funded convention center cost $150 million to build.

The Charlotte Regional Visitors Authority listed a convention hotel among its funding priorities for the next six years during a presentation to council. Council member James Mitchell, a Democrat who leads the economic development committee, told CBJ a convention hotel is needed sooner rather than later to take advantage of the convention center upgrades as soon as possible.

Ron Kimble, who is advising the visitors authority as a special assistant to the city manager, listed a convention hotel as a potential target for existing tourism taxes along with more NFL stadium upgrades, an amateur sports complex and the convention center expansion.

So far, reaction has been muted. Mohammad Jenatian, head of the Greater Charlotte Hospitality & Tourism Alliance, a prominent industry trade and lobbying group, told me had heard little about the latest talks to build a convention hotel. Mostly, he said, the emphasis needs to be on any types of projects that can help bring in events and promote visitor spending, a middle-of-the-road statement from a group that usually is entrenched in such negotiations.

A high-profile Charlotte hotel executive who spoke on background said more detail is needed on how much public funding might be involved before determining whether such an investment makes sense. There are roughly 1,000 hotel rooms being added this year in the uptown area and another 2,000 under construction or in the planning stages.

In 2003, The Westin Charlotte opened next to the convention center. The 700-room hotel cost $143 million, including $16 million from the public sector. Tourism executives have said the city needs another major hotel, in the range of 800 rooms or more, so that large-scale conventions can concentrate attendees at one or two hotels rather than being forced to book rooms at smaller, scattered hotels.

“It is a draw if you have a large block of rooms,” Vince Chelena, Charlotte Area Hotel Association executive director, told me. “If meeting planners can utilize one or two hotels, it keeps everybody under a couple of roofs. ... We’ve got a lot of hotels coming online right now — we’re absorbing growth pretty well.”

Occupancy rates have ticked downward in recent months, but average room rates and revenue generated by each available room — two benchmark measures — have held steady.

One of the architects of the Cleveland convention hotel told me this week that it’s all but impossible to lure a convention hotel without providing some public investment.

In Cleveland’s case, the hotel is currently forecast to generate in the range of $43 million annually. Beyond operating expenses such as labor and equipment, and the cost of maintaining and repairing the hotel, $9 million per year will be dedicated to paying back the construction cost, said Jeff Appelbaum, a Cleveland lawyer, who has worked with a number of city and county governments to build sports venues, convention hotels and other projects.

Appelbaum told CBJ it’s possible the county could reap $1 million to $2 million in profit shares if the hotel stays on its present course. Cleveland enjoyed a strong tourism season as the convention hotel opened. In addition to the RNC, the NBA’s Cavaliers won the 2016 championship, an extended playoff run that brought media and other visitors, and baseball's Indians reached the seventh game of the World Series in the fall.

Industry consultant John Kelley cited visitor trends in several cities that have recently opened convention hotels as proof that such investments can generate a return for local tourism.

Appelbaum, the attorney, said one of the first things Charlotte tourism and government executives will need to do is determine what kind of deal they hope to negotiate. In some cases, including Cleveland, the city or county develops the hotel and then hires an operator. Appelbaum estimated Cuyahoga County saved $12 million by not using an outside developer. Other models include hiring a developer to build the hotel and then turning it back over to the public entity to hire an operator or having a developer who owns the hotel and hires an operator.

Subsidies on convention hotels usually add up to 30% of the cost or more, Appelbaum told me. Almost every convention center hotel is publicly owned or subsidized, he added.

Examples abound. In Kansas City, a $310 million, 800-room convention hotel scheduled to open by 2020 includes $35 million in public money as well as free land for the developer. Public money accounts for $74 million, or 31%, of the $240 million, 600-room convention hotel planned in Portland. Nashville taxpayers pumped $128 million into an 800-room Omni convention hotel completed in 2013. And so on.

Risks range from the competition among cities to land conventions and conferences to the volatility of the overall economy. And, of course, convention hotels always require extensive trade-offs, starting with a commitment to block off large chunks of rooms for conventions and meetings — and often at discounted rates.

Baltimore taxpayers paid the entire cost for a $300 million, 750-room Hilton convention hotel that opened in 2008. Since then, according to sister paper Baltimore Business Journal, the city-owned hotel has lost $80 million. The losses prompted the head of the Baltimore council to recommend selling the hotel two years ago, but, as of now, it is still owned by local government.

 

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