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Cash Cow or White Elephant?

Ringmaster Brown takes over the convention center hotel circus.

There's often a never-never land quality to the way current events unfold and are reported in Houston. It's as if everything that has gone before vanishes into an Orwellian memory hole, and this morning a new sun shines on virgin landscapes. Such is the case with the return of the convention center hotel proposal, nearly a half-decade after a federal sting and a developer long on talk and short on financing helped send its predecessor into a slow-motion demise that ended when the city yanked its life support last month.

Laid-back Mayor Lee P. Brown seemed unusually forceful at a press conference two weeks ago, as he announced the highly predictable findings of a handpicked advisory committee stuffed with hotel backers. The media dutifully reported the recommendation to rush a resolution to City Council for a publicly owned 1,000-room hotel adjacent to the George R. Brown Convention Center.

The committee party line is that if only we build the hotel they, meaning major conventions, will come. The convention center now resembles an underused ocean liner grounded on the east downtown reefs. The report recommends that while the hotel is under construction, a long-shelved expansion of the center should also be done to handle the future flocks of conventioneers.

Lost in the mists of recent history, or at least unmentioned in the reportage, is the irony that the chairman of the Council committee processing the recommendation is none other than John Castillo, inconclusively tried twice on federal charges of accepting bribes to champion the hotel during its previous incarnation.

Unfortunately, two other major advocates of a downtown hotel were not available to be on Brown's advisory committee. Former councilman Ben Reyes is locked in a Beaumont federal prison, while lobbyist Betti Maldonado works in the kitchen and lifts weights at a Fort Worth penal facility. Both are serving their time for hotel-related bribery and conspiracy convictions.

Since Mayor Brown reappointed Castillo to the Council ethics committee in the midst of the bribery trials, he must not be not excessively troubled by the reverberations from the federal investigation. Perhaps Brown just figures the councilman knows the ins and outs of the hotel deal as well as the palms of his own hands.

In 1995 Castillo backed the bid by developer Wayne Duddlesten to build a privately financed hotel with tax rebates from the city, county and school district. Duddlesten triumphed over rival JMB by playing on ethnic and free-market issues. He promised black and Hispanic councilmembers that 30 percent of the project would go to minority investors. His team warned of the dangers inherent in having the city involved in the hotel business.

As it turned out, minorities got no ownership, and the city got no hotel. Trapped behind the credit line, Duddlesten lateraled the deal to Fort Worth's Richard Rainwater and his Crescent Real Estate Investment Trust. Crescent ran into its own financial problems and declined to move forward.

Way back at the beginning, Councilman Ray Driscoll was one of the Duddlesten Council faithful. He issued a 1996 press release endorsing Duddlesten and opposing public ownership.

"I do not believe that a government sponsored non-profit corporation with all of its baggage is conducive to the successful construction and operation of the convention center hotel." Driscoll argued that because the nonprofit board would be appointed and contracts would have to be negotiated with the city and hotel operators, "the political process will forever be involved."

So you figure Driscoll would be even more appalled by the current plan, which has open-ended city ownership and liability in a $170 million project that Duddlesten and Crescent could not get off the ground. Not so.

"At the time, there was a proposal by private industry to do the hotel, and if there's a choice between the city doing it and private industry doing it, then the city should stay out of the picture," explains Driscoll, who's now backing the public hotel plan. "Right now, there is no private industry looking to build the hotel. We need that hotel, and if the city can do it with the least amount of risk, then we're probably going to have to do it."

One of the conclusions of the mayor's task force is that while the city may have to finance and build the hotel, it could then be sold to the highest bidder, an exit strategy embraced by Driscoll. "After it's built," he says hopefully, "then conceivably the city can sell the hotel and make money on it."

That expectation is based on two articles of faith pushed by the hotel preachers. One, a convention center hotel will suddenly make Houston competitive for the really big confabs with conventioneer faves New York City, New Orleans, Las Vegas and Denver. The second is that after the city absorbs the risks of financing and construction, the hotel will be an attractive acquisition for a private venture. San Antonio-based hotel consultant Bruce Walker, president of Source Strategies Inc., questions both assumptions.

 

"Downtown Houston just isn't a very attractive convention destination," opines Walker. "You can say, 'We've got a nice convention center and a nice hotel.' But that's not why you select a convention location."

Walker believes the city will find itself stuck with an expensive hotel that will not generate a commercial rate of occupancy year-round. According to the consultant, such hotels are marginally profitable ventures at best.

"Where I'm coming from is it's not financially viable," says Walker. "The cash flow from this thing will never pay off the bonds unless you subsidize it to a major amount. I'm going to guess the taxpayers will have to pay for half the hotel before you could get any private operator to step in and pay good money for it."

Walker's firm is working on a 150-room Holiday Express for downtown Houston. Construction will cost $55,000 a unit. According to the Brown committee report, rooms at the downtown convention center hotel will cost $140,000 to $180,000 to build.

"How can they compete with that same room built in the middle of downtown, next to the office buildings where the businessman wants it," asks Walker. "They can't. They can only compete if your taxpayers pay for a major part of that hotel."

While the advisory committee report is based on projections for 60 to 70 percent hotel occupancy, Walker claims the likely figure is much lower. Even if the hotel draws a flood of conventions, he predicts the hotel is never going to run more than 50 percent occupancy. "If they were going to run 70 percent, the hotel builders of Texas would build six small hotels around there, and they will make sure that hotel runs 50 percent because it can't compete with them."

Brown's advisory committee report touts a financing plan that relies primarily on cash flow and "minimizes the need for a pledge of tax revenues." Compare that rosy assessment with the performance of the convention center.

Last year the George R. Brown, which cost about $100 million to build in the early '80s, limped along with revenues of $7.3 million versus the $18.5 million it cost to operate it and retire the bond debt. To stay afloat, it requires an infusion of $14.7 million a year in city hotel occupancy tax revenues. The justification for that chunk of the total $39 million room-tax haul is that the convention center brings in the customers whose dollars fuel the hotel industry.

Southwest Hotel Management executive Ray Hankamer bristles at the idea that the convention center hotel might be carried on the backs of hotel owners who risked their own money in the marketplace. "Now their customers are going to be taxed to support a hotel that the market says is not sustainable?" asks Hankamer sarcastically. "Well, there's something real sick about that."

The initial mistake, opines Hankamer, was building the convention center on the east side of downtown, beyond walking distance from the booming theater and restaurant district to the west. The next mistake, he believes, will be constructing a second tax-dependent white elephant to cohabit with the first.

Most bullish on the hotel plan is city Convention and Entertainment Director Jordy Tollett, who also doubles as Convention and Visitors Bureau head. Tollett has long cast an envious eye at the Aviation Department, which owns its own hotel at Bush Intercontinental Airport. While the advisory committee report recommends that the city sell the convention center hotel as soon as possible after building it, Tollett hopes that doesn't happen for a long, long time.

"I'm a greedy little director," says Tollett with a chuckle. He cites studies to back his hope that low city financing costs could make the hotel a long-term money earner. "Ain't no way I'd want to sell it," says the director, conjuring up the prospect of a hotel that spins off $13 million a year to its owner. "If the hotel is that successful, why do I want to sell it?"

On the other hand, if the hotel doesn't make money, Jordy will be stuck with it, because no private operator would buy it.

Others have more mercenary interests in pushing the project. Consultant Marc Campos, who worked for the JMB forces in the first hotel fight, figures that if nothing else, the new push amounts to the promise of future full employment for the city's lobbyists.

"I'm sure all the hotel operators, like Marriott and Hilton and whoever, are out there already trying to figure out, 'Who do I need to hire to get this thing done for my company?' "

 

Lobbyist Ross Allyn, the only member of the Hotel Six crew to win a court-ordered acquittal of bribery-conspiracy charges, is ready to put his acquired knowledge of the hotel deal back to work.

"I'd certainly be willing to look and see who would be the best operator for the city," purrs Allyn, "and I'd certainly like to advocate for their position."

Check your news tips in with the Insider. Call him at (713)280-2483, fax him at (713)280-2496, or e-mail him at insider@houstonpress.com.


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