June 21, 2005 -- Baltimore Convention Center Headquarters Hotel

Baltimore Convention Center Headquarters Hotel
City Council Bills 05-0092, 05-0093, 05-0106, 05-0159, 05-0160,
05-0163, 05-0164, 05-0165, and 05-0166

Submitted by
Donald C. Fry
President
Greater Baltimore Committee

The Greater Baltimore Committee (GBC) supports Baltimore City’s proposal for a publicly owned and financed convention center headquarters hotel.

The support for this proposal has evolved after considerable deliberation and debate. The GBC has had the opportunity to hear from representatives of the Baltimore Development Corporation and Baltimore Area Convention and Visitors Association on multiple occasions. Additionally, the organization’s Planning and Project Development Committee heard presentations from representatives including BDC’s bond counsel, convention center hotel consultant, financing consultant, and corporate representatives from Hilton Hotel. Additionally, GBC staff conducted research on similar projects across the country. After hearing and analyzing the information provided, the GBC Board of Directors overwhelmingly voted to endorse this important economic development and tourism project.

The importance and strength of the regional tourism and hospitality market and the demonstrated need for a headquarters hotel coupled with minimal financial risk to the City of Baltimore drive the GBC’s support for the project. However, the support of the GBC hinges on the mitigation of certain concerns regarding financial exposure to Baltimore City and the convention center’s competitiveness in the marketplace.

The Importance of Tourism

Hospitality and tourism and the convention industry are vital components of the region’s economy. According to the Baltimore Area Convention and Visitors Association (BACVA), spending from domestic travelers in 2002 was $8.476 billion statewide; $2.8 billion in Baltimore alone. This spending supported $719 million in state and local taxes while providing over 44,000 regional jobs.

The Greater Baltimore Committee was a leading supporter and advocate for the construction of the Baltimore Convention Center and its expansion. The convention center serves as a valuable asset to the tourism industry in the region. In 2002, the Baltimore Convention Center attracted over 415,000 attendees and spurred $183 million of tourism spending. This is an especially noteworthy achievement when reviewing comparable sized convention centers in competing cities. Despite this success and the attractiveness of Baltimore as a convention destination, it is clear that increasing national and regional competition compels Baltimore’s convention resources to evolve to keep pace.

Currently, Baltimore ranks behind other competing convention cities in terms of hotel room inventory. In the immediate market area, Baltimore claims 25,967 rooms, while Washington and Philadelphia boast 87,874 and 41,116 rooms respectively. This lack of hotel room inventory contributes to one significant competitive disadvantage: higher room prices. While adding more hotel rooms will be helpful, the proposed convention center headquarters hotel will not effectively address higher room prices and that market challenge will remain.

However, the construction of a convention center headquarters hotel will adequately address another major impediment to the attraction of convention business – the lack of a guaranteed block of hotel rooms in a single venue. The availability of suitable hotel rooms is a top factor in choosing where to hold a convention, with 83 percent of event planners identifying it as their main consideration. Two recent studies confirm that the majority of event planners consider a headquarters hotel an important component in their decision making. Surveys indicate that room block agreements (“committable rooms”), the kind only available at headquarters hotels, are increasingly important to event planners.

According to BACVA, the combined forces of pricing, lack of room inventory, and the lack of a convention headquarters hotel contributed to the loss of 136 convention center events in 2004. The economic impact attributable to that loss of convention business, when coupled with the significance of the local tourism industry and the desire to keep pace with competing cities for convention business, highlights the need to address one of the factors negatively impacting Baltimore’s stake in the convention market – the need for a convention center headquarters hotel with a significant room block agreement.

Public Ownership and Financing of Convention Center Headquarters Hotel

The fact that the proposed convention center headquarters hotel is to be publicly owned and operated has been a significant concern of the Greater Baltimore Committee. The ownership and operation of a hotel is not the typical function best suited for a municipal government. Private financing and management is clearly the preferable method.

However, in recent years the trend for funding headquarters hotels has moved away from private financing and even private financing with a limited government subsidy. Since 1999, no convention center headquarters hotel has been privately financed, without public tax, loan or grant incentives, except in New York City and at resort locations, usually associated with gaming.

The Request for Proposal (RFP) issued by the Baltimore Development Corporation allowed for the submission of both privately financed proposals and publicly financed or publicly assisted proposals. Despite claims and reports to the contrary, our review reveals that no entirely privately financed proposal was submitted to BDC. Each proposal relied heavily on public funding or public subsidies.

Based upon the current financing trends and the lack of a legitimate privately financed option, it is evident that without the type of publicly owned and financed structure being proposed it is highly unlikely that a convention center headquarters hotel project would be developed and the city’s need for the hotel and growth of convention business would go unmet. The Baltimore Convention Center and the convention industry can not be expected to grow and succeed in this highly competitive market without the appropriate tools and resources.

From a financial point of view, the GBC has expressed concern and raised questions as to whether the development of a publicly owned and financed convention center hotel might negatively impact the city’s financial stature. Recently the City received news from Fitch’s, a major bond rating agency, of its positive outlook for the financial stability and management of Baltimore City’s government. It is imperative that no harm be done to that positive report.

Equally important, the GBC has expressed a strong position that the City finances are held as harmless as possible and that risk is kept to a minimum. There is a distinction between public subsidies and public ownership of a profit generating project. Public ownership of a project of this magnitude can result in a relatively unpredictable impact on city finances based upon the revenue generating capacity of the project; whereas other public incentives, such as grants, have a defined and finite exposure. However, after review and analysis of the documents provided to the GBC in connection with this project, it is apparent that the Baltimore Development Corporation and the City of Baltimore have taken great pains to minimize the city’s exposure by structuring the financing so that the majority of the debt service is guaranteed by hotel profits and by incremental tax revenues from the hotel itself.

The only risk to the City’s current fiscal resources is the citywide hotel occupancy tax pledge against 25 percent of the annual debt service. Further, this resource would only be tapped in the unlikely event that hotel revenues and site specific taxes were not sufficient to cover that expense and until the Hilton’s pledge of $25 million in guarantees is exhausted. Our review concludes that the maximum exposure to the City coffers ranges from $1.7 million in 2008 to $5.9 million in 2036. The potential benefits to the city and its related convention industry outweigh the maximum risk involved. The expected financial benefits for the city’s general fund can in turn, be utilized to address other public needs.

Also, it cannot be ignored that public ownership of this project, and the risk to the city’s general fund that it entails, albeit minimal, will be perceived by some as diverting funds from more pressing societal public needs.

It is important to note that the funding proposal calls for tax-exempt revenue bonds and that the full faith and credit of the City of Baltimore is not being called on as in the case of general obligation bonds. It is also important to highlight that the issuance of these bonds does not negatively impact the issuance of general obligation bonds that provide for schools, infrastructure, parks and parkland, and other important government responsibilities. Some will argue that rather than building a convention center headquarters hotel that the monies should be utilized instead for schools, infrastucture, and the like. The financing plan proposed, i.e.- the issuance of revenue bonds, are not conducive for those non-revenue generating public projects.

In addressing the significant needs that do exist within the city on non-revenue generating public projects, the GBC does strongly encourage the Mayor and City Council to examine the current debt limit imposed on general obligation bonds and to conduct an examination of innovative financing alternatives to address the significant needs of schools, infrastructure, and other capital expenditures for public purposes.

BACVA and Convention Center Funding and Performance

Another GBC concern focuses on the funding for, and the past performance of, the convention center and BACVA.

Currently, the appropriation to BACVA for funding marketing and tourism promotion is tied to the amount of proceeds from the hotel occupancy tax. Representatives of the hospitality and tourism industry have expressed concern that the statutory funding for marketing area tourism, including convention center business, will be reduced to pay for the convention center headquarters hotel.

This concern exists because, under some circumstances, a portion of the debt service of the new hotel is guaranteed by the citywide hotel occupancy tax.

A review of the current law assures that BACVA’s funding would be held harmless. But while reviewing the law, it was noted that Article II, Section 40 (e) of the Baltimore City Charter provides for a sunset of this funding requirement as of June 30, 2007. The GBC strongly believes that it is in the best interest of the city, region, and state to take necessary legislative and budgetary steps to ensure a dedicated funding source to maintain BACVA’s marketing efforts.

As mentioned above, the convention business is becoming increasingly competitive. It is incumbent on BACVA to take the commensurate steps to keep pace with this competitive environment. According to a 2004 Task Force on Baltimore Convention Center Financing, BACVA has devoted insufficient resources to conventions sales and marketing. It is clear that BACVA’s future marketing efforts cannot rely solely on the draw of the new hotel. More strategic and aggressive efforts to attract and book conventions is needed from the leadership of BACVA. The expansion of convention business should be the top priority of BACVA in light of this significant public investment.

The GBC is confident that with a renewed and aggressive marketing effort, a sustainable funding source, and the lure of Baltimore’s tourist attractions, the convention center will remain competitive.

Project Development and Review

Another very critical concern to the GBC that has received little attention throughout the review process is the hotel’s design and architectural elements. Recognizing the unprecedented level of public funding associated with the project, it is important that the hotel’s design and architectural features are compatible and complement its neighborhood. It should possess design and architectural features that command a stature worthy of the public’s investment. Located on one of the city’s premier locations, at the foot of the downtown’s revitalized West Side and immediately adjacent to the Oriole Park at Camden Yards and M & T Bank Stadium, the convention center headquarters hotel must be a world-class, architecturally appealing building. Anything less would squander the site’s natural assets and public value and do a disservice to Baltimore’s famed Inner Harbor and skyline.

Public review and comment must be a vital component of public development projects. The GBC submits that this type of public financing brings with it a heightened obligation to ensure the project’s profitability and compatibility with its environs. It is critical that the City, the hotel corporation, and the hotel management contracted to operate and manage the facility be cognizant and mindful of this fiduciary obligation and maintain an open and transparent relationship with the business community and public throughout the life of the hotel project. It should be noted that until recently, comprehensive information regarding this project was difficult to obtain.

It is also imperative that the hotel corporation’s board be comprised of a mix of public officials and non-elected officials who represent the best interests of the public and who have expertise that would complement the needs of running a profitable hotel.

To minimize the likelihood of City financial exposure, the hotel’s profitability must be paramount. It is recommended that the management contracts be subject to full disclosure and public review to the extent feasible. Some would argue that since a portion of the hotelier’s fee is subordinate to debt service and that Hilton is providing a $25 million debt service guarantee the incentive already exists to ensure hotel profitability. However, the availability of these documents for public review would ensure that these incentives remain and are providing the necessary inducements to run a profitable hotel.

As the leading business organization in the central Maryland region, it is incumbent on the GBC to comment upon major development projects that impact the regional business climate. The input of the GBC is especially important for projects that include substantial public investment. The convention center hotel project not only meets these criteria, but will it also greatly affect an industry critical to the region and will dramatically alter the downtown landscape. As such, the GBC committed much time and analysis to the understanding of this project. It is similarly recommended that the City Council utilize its full legislative prerogative to undergo a full and deliberative review of this proposal.

Conclusion

The Greater Baltimore region is experiencing new and varied growth. One needs only to look at the Baltimore skyline dotted with new buildings under construction, the emergence of a strong demand for residential properties and increased market values throughout the city, as well as a resurgence of the city’s spirit for evidence of this growth.

With diligence properly paid to the issues and concerns addressed above, the Greater Baltimore Committee believes that the construction of a new publicly owned and financed convention center headquarters hotel will be another integral part of the urban renaissance of Baltimore.

GREATER BALTIMORE COMMITTEE

Copyright © 2005 by GBC. All rights reserved.

The Greater Baltimore Committee (GBC) supports Baltimore City’s proposal for a publicly owned and financed convention center headquarters hotel.

The support for this proposal has evolved after considerable deliberation and debate. The GBC has had the opportunity to hear from representatives of the Baltimore Development Corporation and Baltimore Area Convention and Visitors Association on multiple occasions. Additionally, the organization’s Planning and Project Development Committee heard presentations from representatives including BDC’s bond counsel, convention center hotel consultant, financing consultant, and corporate representatives from Hilton Hotel. Additionally, GBC staff conducted research on similar projects across the country. After hearing and analyzing the information provided, the GBC Board of Directors overwhelmingly voted to endorse this important economic development and tourism project.

The importance and strength of the regional tourism and hospitality market and the demonstrated need for a headquarters hotel coupled with minimal financial risk to the City of Baltimore drive the GBC’s support for the project. However, the support of the GBC hinges on the mitigation of certain concerns regarding financial exposure to Baltimore City and the convention center’s competitiveness in the marketplace.

The Importance of Tourism

Hospitality and tourism and the convention industry are vital components of the region’s economy. According to the Baltimore Area Convention and Visitors Association (BACVA), spending from domestic travelers in 2002 was $8.476 billion statewide; $2.8 billion in Baltimore alone. This spending supported $719 million in state and local taxes while providing over 44,000 regional jobs.

The Greater Baltimore Committee was a leading supporter and advocate for the construction of the Baltimore Convention Center and its expansion. The convention center serves as a valuable asset to the tourism industry in the region. In 2002, the Baltimore Convention Center attracted over 415,000 attendees and spurred $183 million of tourism spending. This is an especially noteworthy achievement when reviewing comparable sized convention centers in competing cities. Despite this success and the attractiveness of Baltimore as a convention destination, it is clear that increasing national and regional competition compels Baltimore’s convention resources to evolve to keep pace.

Currently, Baltimore ranks behind other competing convention cities in terms of hotel room inventory. In the immediate market area, Baltimore claims 25,967 rooms, while Washington and Philadelphia boast 87,874 and 41,116 rooms respectively. This lack of hotel room inventory contributes to one significant competitive disadvantage: higher room prices. While adding more hotel rooms will be helpful, the proposed convention center headquarters hotel will not effectively address higher room prices and that market challenge will remain.

However, the construction of a convention center headquarters hotel will adequately address another major impediment to the attraction of convention business – the lack of a guaranteed block of hotel rooms in a single venue. The availability of suitable hotel rooms is a top factor in choosing where to hold a convention, with 83 percent of event planners identifying it as their main consideration. Two recent studies confirm that the majority of event planners consider a headquarters hotel an important component in their decision making. Surveys indicate that room block agreements (“committable rooms”), the kind only available at headquarters hotels, are increasingly important to event planners.

According to BACVA, the combined forces of pricing, lack of room inventory, and the lack of a convention headquarters hotel contributed to the loss of 136 convention center events in 2004. The economic impact attributable to that loss of convention business, when coupled with the significance of the local tourism industry and the desire to keep pace with competing cities for convention business, highlights the need to address one of the factors negatively impacting Baltimore’s stake in the convention market – the need for a convention center headquarters hotel with a significant room block agreement.

Public Ownership and Financing of Convention Center Headquarters Hotel

The fact that the proposed convention center headquarters hotel is to be publicly owned and operated has been a significant concern of the Greater Baltimore Committee. The ownership and operation of a hotel is not the typical function best suited for a municipal government. Private financing and management is clearly the preferable method.

However, in recent years the trend for funding headquarters hotels has moved away from private financing and even private financing with a limited government subsidy. Since 1999, no convention center headquarters hotel has been privately financed, without public tax, loan or grant incentives, except in New York City and at resort locations, usually associated with gaming.

The Request for Proposal (RFP) issued by the Baltimore Development Corporation allowed for the submission of both privately financed proposals and publicly financed or publicly assisted proposals. Despite claims and reports to the contrary, our review reveals that no entirely privately financed proposal was submitted to BDC. Each proposal relied heavily on public funding or public subsidies.

Based upon the current financing trends and the lack of a legitimate privately financed option, it is evident that without the type of publicly owned and financed structure being proposed it is highly unlikely that a convention center headquarters hotel project would be developed and the city’s need for the hotel and growth of convention business would go unmet. The Baltimore Convention Center and the convention industry can not be expected to grow and succeed in this highly competitive market without the appropriate tools and resources.

From a financial point of view, the GBC has expressed concern and raised questions as to whether the development of a publicly owned and financed convention center hotel might negatively impact the city’s financial stature. Recently the City received news from Fitch’s, a major bond rating agency, of its positive outlook for the financial stability and management of Baltimore City’s government. It is imperative that no harm be done to that positive report.

Equally important, the GBC has expressed a strong position that the City finances are held as harmless as possible and that risk is kept to a minimum. There is a distinction between public subsidies and public ownership of a profit generating project. Public ownership of a project of this magnitude can result in a relatively unpredictable impact on city finances based upon the revenue generating capacity of the project; whereas other public incentives, such as grants, have a defined and finite exposure. However, after review and analysis of the documents provided to the GBC in connection with this project, it is apparent that the Baltimore Development Corporation and the City of Baltimore have taken great pains to minimize the city’s exposure by structuring the financing so that the majority of the debt service is guaranteed by hotel profits and by incremental tax revenues from the hotel itself.

The only risk to the City’s current fiscal resources is the citywide hotel occupancy tax pledge against 25 percent of the annual debt service. Further, this resource would only be tapped in the unlikely event that hotel revenues and site specific taxes were not sufficient to cover that expense and until the Hilton’s pledge of $25 million in guarantees is exhausted. Our review concludes that the maximum exposure to the City coffers ranges from $1.7 million in 2008 to $5.9 million in 2036. The potential benefits to the city and its related convention industry outweigh the maximum risk involved. The expected financial benefits for the city’s general fund can in turn, be utilized to address other public needs.

Also, it cannot be ignored that public ownership of this project, and the risk to the city’s general fund that it entails, albeit minimal, will be perceived by some as diverting funds from more pressing societal public needs.

It is important to note that the funding proposal calls for tax-exempt revenue bonds and that the full faith and credit of the City of Baltimore is not being called on as in the case of general obligation bonds. It is also important to highlight that the issuance of these bonds does not negatively impact the issuance of general obligation bonds that provide for schools, infrastructure, parks and parkland, and other important government responsibilities. Some will argue that rather than building a convention center headquarters hotel that the monies should be utilized instead for schools, infrastucture, and the like. The financing plan proposed, i.e.- the issuance of revenue bonds, are not conducive for those non-revenue generating public projects.

In addressing the significant needs that do exist within the city on non-revenue generating public projects, the GBC does strongly encourage the Mayor and City Council to examine the current debt limit imposed on general obligation bonds and to conduct an examination of innovative financing alternatives to address the significant needs of schools, infrastructure, and other capital expenditures for public purposes.

BACVA and Convention Center Funding and Performance

Another GBC concern focuses on the funding for, and the past performance of, the convention center and BACVA.

Currently, the appropriation to BACVA for funding marketing and tourism promotion is tied to the amount of proceeds from the hotel occupancy tax. Representatives of the hospitality and tourism industry have expressed concern that the statutory funding for marketing area tourism, including convention center business, will be reduced to pay for the convention center headquarters hotel.

This concern exists because, under some circumstances, a portion of the debt service of the new hotel is guaranteed by the citywide hotel occupancy tax.

A review of the current law assures that BACVA’s funding would be held harmless. But while reviewing the law, it was noted that Article II, Section 40 (e) of the Baltimore City Charter provides for a sunset of this funding requirement as of June 30, 2007. The GBC strongly believes that it is in the best interest of the city, region, and state to take necessary legislative and budgetary steps to ensure a dedicated funding source to maintain BACVA’s marketing efforts.

As mentioned above, the convention business is becoming increasingly competitive. It is incumbent on BACVA to take the commensurate steps to keep pace with this competitive environment. According to a 2004 Task Force on Baltimore Convention Center Financing, BACVA has devoted insufficient resources to conventions sales and marketing. It is clear that BACVA’s future marketing efforts cannot rely solely on the draw of the new hotel. More strategic and aggressive efforts to attract and book conventions is needed from the leadership of BACVA. The expansion of convention business should be the top priority of BACVA in light of this significant public investment.

The GBC is confident that with a renewed and aggressive marketing effort, a sustainable funding source, and the lure of Baltimore’s tourist attractions, the convention center will remain competitive.

Project Development and Review

Another very critical concern to the GBC that has received little attention throughout the review process is the hotel’s design and architectural elements. Recognizing the unprecedented level of public funding associated with the project, it is important that the hotel’s design and architectural features are compatible and complement its neighborhood. It should possess design and architectural features that command a stature worthy of the public’s investment. Located on one of the city’s premier locations, at the foot of the downtown’s revitalized West Side and immediately adjacent to the Oriole Park at Camden Yards and M & T Bank Stadium, the convention center headquarters hotel must be a world-class, architecturally appealing building. Anything less would squander the site’s natural assets and public value and do a disservice to Baltimore’s famed Inner Harbor and skyline.

Public review and comment must be a vital component of public development projects. The GBC submits that this type of public financing brings with it a heightened obligation to ensure the project’s profitability and compatibility with its environs. It is critical that the City, the hotel corporation, and the hotel management contracted to operate and manage the facility be cognizant and mindful of this fiduciary obligation and maintain an open and transparent relationship with the business community and public throughout the life of the hotel project. It should be noted that until recently, comprehensive information regarding this project was difficult to obtain.

It is also imperative that the hotel corporation’s board be comprised of a mix of public officials and non-elected officials who represent the best interests of the public and who have expertise that would complement the needs of running a profitable hotel.

To minimize the likelihood of City financial exposure, the hotel’s profitability must be paramount. It is recommended that the management contracts be subject to full disclosure and public review to the extent feasible. Some would argue that since a portion of the hotelier’s fee is subordinate to debt service and that Hilton is providing a $25 million debt service guarantee the incentive already exists to ensure hotel profitability. However, the availability of these documents for public review would ensure that these incentives remain and are providing the necessary inducements to run a profitable hotel.

As the leading business organization in the central Maryland region, it is incumbent on the GBC to comment upon major development projects that impact the regional business climate. The input of the GBC is especially important for projects that include substantial public investment. The convention center hotel project not only meets these criteria, but will it also greatly affect an industry critical to the region and will dramatically alter the downtown landscape. As such, the GBC committed much time and analysis to the understanding of this project. It is similarly recommended that the City Council utilize its full legislative prerogative to undergo a full and deliberative review of this proposal.

Conclusion

The Greater Baltimore region is experiencing new and varied growth. One needs only to look at the Baltimore skyline dotted with new buildings under construction, the emergence of a strong demand for residential properties and increased market values throughout the city, as well as a resurgence of the city’s spirit for evidence of this growth.

With diligence properly paid to the issues and concerns addressed above, the Greater Baltimore Committee believes that the construction of a new publicly owned and financed convention center headquarters hotel will be another integral part of the urban renaissance of Baltimore.