Value of city-owned hotel must be viewed in context

 

By Donald C. Fry

The 757-room Hilton Baltimore has been the subject of a recent flurry of media coverage that has cultivated a residual impression among some that the “money-losing” city-owned hotel is about to become a major fiscal drag on Baltimore City and its taxpayers.

The stories stem from an annual audit presented to city leaders in early July that reported a fifth consecutive loss – $11.2 million in 2012 – by the five-year-old convention headquarters hotel on Pratt Street adjacent to Oriole Park at Camden Yards.

The hotel’s operating revenues exceed its operating expenses, but are not yet at a level sufficient to cover its required debt-service payments.

As a result, proceeds in a more than $20 million reserve fund established as a safety net for meeting debt payments were drawn upon this year to make the payment on a $300.9 million revenue bond that was issued to fund hotel construction.

The news was hardly surprising, given that the hotel’s early operating years have occurred during the worst recession in more than seven decades. But city officials are rightly taking prudent steps, such as holding hearings and engaging consultants to examine the city’s options, including potentially selling the hotel.

Media coverage has generated published responses from industry experts and readers ranging from a local hospitality manager’s suggestion the hotel be awarded a slots license to calls it be torn down from Orioles fans who don’t like the way it looks from the ballpark.

It is, after all, the slow-news summer season.

However, before saving up for that blowout gambling weekend at the Hilton or gassing up the bulldozers and renting a wrecking ball, allow me to offer some perspective as to why the Hilton Baltimore is there in the first place and why it is owned by the city.

The hotel exists because of the long-standing need for a convention headquarters hotel adjacent to the Baltimore Convention Center. For years, the lack of such a hotel was a significant issue that hurt the center’s ability to lure conventions to the city.

Everyone agrees the preferred arrangement for getting that essential convention headquarters hotel would have been to attract a private owner.

But the city had spent eight years unsuccessfully looking for a private-sector “angel” to finance the hotel, only to find itself considering proposals for private ownership that generally called for a large chunk of public financing for construction anyway.

Meanwhile, the city’s convention business continued to lose ground against competitors. The lack of a large, headquarters hotel connected to the convention center had cost the city 120,000 room bookings and tens of millions in revenue over a three-year period, city convention executives estimated in early 2005.

In the end, city leaders opted for public ownership, reasoning that if taxpayers were to assume risk, they should benefit, as owners, from the financial rewards that would be derived from a successful hotel.

The hotel was approved in September 2005 by a 9-5 vote of the City Council, which ultimately concluded that the risks of the city owning a hotel were outweighed by the potential benefits. The hotel opened in August 2008.

The plan was for the hotel to eventually pay for itself with sufficient operating revenues to cover debt service. That has not yet happened, but it is way too premature for “I-told-you-so” critics to leap to pronouncements that the hotel is a failure. Here are some things to consider.

The Hilton Baltimore has its fiscal challenges, but by most industry measurements the hotel’s operations are, in fact, performing well. Its occupancy rate, average room rate and revenue per room exceed most city hotels, industry data show.

Contrary to some published speculation that the hotel is being hampered by convention bookings that are “well-below” pre-recession levels, convention bookings of almost 342,000 room-nights in 2012 were 25 percent greater than bookings in 2007, according to Visit Baltimore data.

Lastly, consider the tourism industry’s critical importance to the city and the region and the hotel’s positive impact on that industry.

Baltimore City has more than 9 million leisure and business overnight visitors annually, according to data from Visit Baltimore. The city’s hospitality industry generated more than 26,000 jobs in 2012, making it the city’s fourth largest industry employer.

More than $47 million in state sales taxes are derived from tourism in the city, according to state data.

More importantly, the Hilton Baltimore has succeeded in accomplishing its strategic purpose.

“The hotel has made significant contributions to the growth of the convention business to Baltimore since it opened,” said Tom Noonan, president and CEO of Visit Baltimore. “It is critical in attracting major conventions and meetings that would not have come to Baltimore without a headquarters hotel.”

Even if it is sold, which could not happen before 2016 under the financing agreements, it’s important that the hotel continue to operate, whether owned by the city or not, said Noonan.

You get the point. The issue of measuring the value of Baltimore’s still-new convention headquarters hotel is much broader than you might think at first glance on a slow mid-summer news day.

The basic culprit driving the hotel’s fiscal challenge is pre-recession math.

The hotel is competitive. But because of rate-compression that has challenged the industry since 2008, its room rates have not achieved projected levels calculated before the recession, notes Brenda McKenzie, president and CEO of the Baltimore Development Corporation.

This is not to downplay the need to creatively and prudently explore options and address the fiscal challenges related to the hotel’s current debt structure.

But it’s way too early to panic.

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