Paying the Hotel Bill

Increasingly, cities and development authorities are building and owning the hotels that support their convention centers.
August 2002
William Fulton
By William Fulton  |  Columnist
Director of the Kinder Institute for Urban Research at Rice University and former mayor of Ventura, Calif.

I don't think anybody in the country has benefited more from public subsidies for convention hotels than I have. I'm a conference rat-- often lurking around the hotel and convention center from early in the morning to late at night in search of one more tip, one more trend, one more good yarn about what's going on. It's how I stay in touch.

I wouldn't be able to do this if America's big cities didn't subsidize convention centers and the towering hotels adjacent to them. So maybe I'm not the best person to raise the question of whether such subsidies are a good idea. I guess I should just say, "Thanks, taxpayers."

Actually, the latest question on this front isn't whether subsidies are a good idea. They're probably inevitable. Rather, it's what to do when subsidies aren't enough--when private investors won't build a hotel even when the city is willing to write a big check.

Increasingly, cities and development authorities are building and owning the hotels themselves. This has already happened in Chicago, where the Metropolitan Pier and Exposition Authority floated $108 million in tax-exempt bonds to build and own the Hyatt Regency McCormick Place. It's being discussed in Los Angeles, where civic leaders believe that only a public or nonprofit entity will be willing to build a hotel adjacent to the odd combination of the successful Staples Center and the unsuccessful Los Angeles Convention Center.

A recent analysis of 21 convention hotels by C.H. Johnson Consulting Inc. found that almost half of the development money came from the public sector. In five cities--Chicago, Houston, Austin, Sacramento and Overland Park, Kansas--the public sector paid for 100 percent of the cost of the hotel.

Cities do it because of the paradoxes of the convention business. A successful convention center can attract hundreds of thousands of tourists and hundreds of millions of dollars each year. To succeed, however, the centers need a huge array of ancillary facilities, including hotels, restaurants and retail shops, which can serve as vehicles for extracting tax money from convention-goers' wallets.

But successful convention centers are also behemoths. Although they're often located in or near downtowns, they're so huge that they tend to be separate from everything else that's going on. It's hard for them to feed off the existing infrastructure--and market--for hotels, restaurants and so forth. (This is the problem in Los Angeles, where the convention center is downtown but just far enough away from the hotels to be inconvenient.)

So that's the dilemma. Convention centers need hotels to thrive, but convention hotels are totally hostage to convention-goers. If there's a convention in town, they do fine; otherwise they're empty. So private investors won't touch them--meaning that it's up to the public sector to build the hotel as a piece of infrastructure, kind of like highway off-ramps and parking garages.

But does this make sense? Convention centers can be big winners for cities--garnering publicity, stimulating activity and generating a lot of spinoff sales- and bed-tax revenue. But at some point you have to wonder why it makes sense to go after bed tax and sales tax if you have to pay for and own a $200 million hotel to get it? Or if you have to dedicate all the bed- and sales-tax revenue to paying back the bonds you floated to build the hotel in the first place? In other words, why try to stimulate an economic activity that requires a huge, expensive and completely separate set of infrastructure?

If you look at the most popular convention cities, they fall into two categories: big and cool. The first category involves the places where the convention facilities are so enormous that the biggest conventions have no choice but to go there--such as Las Vegas, Anaheim and Orlando. The problem is, these cities are engaged in a kind of arms race to build ever-bigger facilities. Not everybody can afford to play this game, and most cities that try will lose.

The second category involves the places that have other fun stuff to enjoy besides just the convention center and the hotel--such as San Francisco, New Orleans, Boston, San Diego and Seattle. These are places where the city itself becomes part of the convention attraction, and so the convention infrastructure and the rest of the city feed off one another. This kind of synergy means you don't have to rely on a whole separate convention infrastructure that might lose money. The hotels near San Francisco's Moscone Center are not empty when there is no convention in town.

I know: Not every city can be New Orleans or Boston, just as not every city can afford the Anaheim-Las Vegas arms race. But I'm naïve enough to believe that every city is special, and building "cool" is more feasible than building "big." On the other hand, maybe I'm just tired of hanging around convention hotels surrounded by nothing but parking garages and freeway off-ramps.