City Hotel a Good Thing for Private Hotels says Downtown hotel developer Larry Hamilton

What follows is an Op-Ed essay written by Larry Hamilton of Hamilton Properties. Larry is a Downtown hotel developer. His insights are very helpful.

City Hotel a Good Thing for Private Hotels
By Larry Hamilton

The barrage of TV commercials opposed to the City owned Convention Hotel might lead one to believe it constitutes unfair competition with nearby private sector hotels but the opposite is true, at least in this investor’s opinion.

My partners and I are constructing a 193 room privately financed hotel virtually across the street from the proposed 1,000 room convention hotel and we see the City owned hotel as revitalizing convention and group meeting business that will bring more City-wide events to fill up hotel rooms throughout DFW.

I saw this happen in Denver which had a convention center about half the size of Dallas’s and built an adjacent City owned 1,100 room Hyatt in 2005 and saw business mushroom that raised room rates and occupancy levels of all the privately owned downtown hotels.

In contrast, Dallas has a 1.5 million sq. ft. convention center that is dying on the vine and not competitive with Denver even though it’s twice the size. Dallas which once was a top tier convention destination has descended to the minor leagues compared to cities like Denver, San Diego, and Houston.

The claim by the other side that if the hotel would make money the private sector would do it is demagoguery of the worst sort. A city financed hotel can raise funds issuing tax exempt revenue bonds that might bear an interest rate of say 6%. On the other hand a private hotel would get maybe a 60% conventional loan at 8% interest with say a 15% second mezzanine loan at 13% interest and 25% of the funds in equity that would demand a return of perhaps 25%.

Under that scenario the all in cost of funds for the private hotel would average 14% or 233% higher cost of capital than the 6% tax exempt City financed hotel. Thus the private model would have to get returns that were 233% higher which is not likely to happen.

Other cities have wrestled with this dilemma and decided to finance their hotels with tax exempt revenue bonds that pledge the revenues from the hotel for payment of the debt as opposed to general obligation bonds which would obligate tax payers to come up with the funds. This is another canard that has been widely advertised and is false – that the taxpayers will have to eat the hotel’s losses.

The bond holders will bear that risk and finance the hotel if they are convinced revenues will be sufficient to meet debt service. Because of the favorable financing the hotel is highly likely to generate a profit which is what has happened in Denver. The excess revenues have gone into the City’s general fund.

So if Dallas wants to be a player in the convention market it needs to compete on a level playing field with all the other cities that have used public financing vehicles to build their convention hotels.

Dallas needs a revitalized downtown and our firm has been active in that effort. Our new 193 room aloft hotel in partnership with Sava Group will open in September across Young Street and a block to the east of the site for the Convention Hotel. In recent years we rehabilitated the Davis Building, Dallas Power & Light, and Mosaic into hip urban loft residential projects with ground floor retail to attract residents and 24 hour activity to a formerly forlorn and empty downtown that shut down at the end of each business day.

The City’s aggressive attitude has helped to secure the modest gains we have made to date, but to have a really world class downtown we need convention delegates walking around in great numbers like our peer cities’ downtowns.

The irony is we do have a world class convention center, one of America’s largest, but it is dying on the vine because we don’t have the attached headquarters hotel that our competitor cities now all have. Dallas used to be a top five convention destination by most measures. Now we are barely in the top five in Texas since Houston, San Antonio, Austin and Ft. Worth all have publicly financed convention center hotels and we don’t.

That’s why all the private hotel owners I have talked to are ardent advocates of the hotel and would encourage a no vote on both the propositions before Dallas voters on Saturday. It seems the opposition is mostly one hotel owner of the Anatole Hilton that hasn’t seemed to grasp that a rising tide raises all the ships. Too bad for him but what is he doing to our City?