CLEVELAND, Ohio — Recent financial trouble involving the Hilton Cleveland Downtown Hotel raises a number of questions, none larger than this one: Should governments be in the hotel business?
It’s a question that’s no longer really relevant in Cleveland – that decision was made years ago and taxpayers are now facing the consequences: County coffers have been tapped for an unexpected $22 million to make debt, tax and insurance payments for the hotel for 2020 and 2021.
That’s on top of the $10 million annually that the county has been paying for years to reduce the debt on the $272-million Hilton, which opened in 2016, a companion to the adjacent Huntington Convention Center of Cleveland, also built with taxpayer dollars.
There are more than a dozen publicly owned hotels in the United States, and many others that have received substantial public funding to be built.
All are facing severe financial distress caused by the dramatic downturn in travel because of the coronavirus.
“This is the worst disaster that could possibly befall these hotels,” said Thomas Hazinski, managing director at HVS, a hospitality consulting firm in Chicago. “They were basically shut down, not generating any income.”
Both privately owned and publicly funded hotels have been fighting to survive in recent months, negotiating with creditors to forestall debt payments because of a lack of revenue.
“Every hotel owner is having to dip into their savings to pay their mortgages,” said David Sangree, president of Hotel & Leisure Advisors, a Cleveland-based hospitality consultant. “All the downtown hotels are doing terribly.”
It’s unclear, however, how many government-owned hotels have had to tap into general tax revenue to pay debt, as the Hilton Cleveland did in both 2020 and 2021.
The 2014 agreement between the county and the Hilton includes certain financial triggers that commit county taxpayers as a last-resort option for debt and other payments. Those specific triggers are considered proprietary and were blacked out in a media-reviewed copy of the contract.
This is the first time since the hotel opened that the county has had to provide the extra payments, according to Walter Parfejewiec, director of the county’s office of management and budget.
He said he was aware of no discussions that would require the Hilton to repay the county, once the tourism industry rebounds.
The timing for the additional public subsidy couldn’t be worse – as local governments face funding crises of their own, and residents and businesses, suffering during the economic downturn, turn to government for help.
Even so, Hazinski said Cuyahoga County could not reasonably have let the hotel default on its portion of the debt, an outcome that would have resulted in both a distressed property and a reduction in the government’s credit rating.
“The decision to pay the debt, while probably unpopular, is in the best interest of the government,” said Hazinski.
The publicly-owned Hilton Columbus Downtown Hotel has not had to rely on county general fund dollars to meet its financial obligations. Instead, the hotel, owned by the Franklin County Convention Authority, has tapped a $36 million reserve fund to make debt payments on the hotel, open since 2012.
The reserve account is funded by rent the authority collects from property it owns in the neighborhood between downtown and Ohio State University.
“We believe those reserves will be sufficient to carry us into next year,” said Don Brown, executive director of the authority, which also owns the Greater Columbus Convention Center and Nationwide Arena. “We see occupancy and the financial performance of the hotel is on the rebound now. As conventions and meetings and other events return, we will be able to come out on the other side.”
The authority is in the middle of building a major addition to the Hilton Columbus, expected to open in 2022, which will bring the total number of rooms to 1,000 and make the hotel the largest in the state.
Before financing the addition, he said, “We did some shock scenario testing. We never anticipated the shock scenario would hit us so soon.”
Indeed, the pandemic has roiled the hospitality industry in ways that no one could have predicted. Hotel occupancy nationwide last year was record low 44%, down from 66% in 2019. In downtown Cleveland, it was a dismal 31%.
In Columbus, taxpayers in Franklin County and the city would have been on the hook for part of the shortfall if the reserve fund hadn’t covered the losses, said Brown. “We’re confident in our ability to remain self-sustaining in the future,” he said. “We want to preserve our perfect record.”
Larry Trabulsi, executive vice president at CHM Warnick, a hotel asset management firm near Boston, cautioned against comparing the details of public financing deals, calling it “apples and bananas.”
“Every hotel bond deal has unique elements,” said Trabulsi, who helped negotiate the Cuyahoga County-Hilton deal. “We did the best we could to minimize what [the county] had to put in it. Unfortunately, it’s what had to happen.”
A change in tax law in the late 1990s expanded the ability of government to publicly finance hotels with municipal debt, making it a popular option for communities that wanted to boost tourism to their downtowns and couldn’t entice private developers to gamble on big, convention-center oriented hotels.
Chicago, Houston, Denver, Dallas, Austin and Baltimore, among other cities, all have publicly owned hotels.
Ideally, governments shouldn’t want to be in the hotel business, said local consultant Sangree. “They’re competing against privately owned hotels. It’s really not fair.”
At some point, Sangree said, the county could seek to sell the Hilton to a private buyer. “When they built this hotel, my hope was that they were hoping to sell it at some point,” he said.
He cited the sale of the Sheraton Grand Phoenix, owned by the city of Phoenix, to Marriott International in 2018. The city sold the 1,000-room hotel for $255 million, considerably less than the $350 million the city paid to build it a decade earlier.
Publicly owned hotels aren’t expected to be major profit centers, said Hazinski. They’re built as economic development generators – to boost tourism, to generate convention center business and to strengthen downtowns. “The benefits go beyond the monetary return on the hotel,” he said.
Indeed, numerous local government and tourism officials believe that the Hilton Cleveland was key to attracting numerous high profile events to the city in recent years, including the Republican National Convention in 2016.
Even so, Hazinski said, governments officials would be wise to take a second look at any project in the future and build in more safeguards, as a result of the problems facing Cleveland and other communities.
“This sets another standard for worst case scenario,” he said.
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