Hotel Development

Issues For
Municipalities
Evaluating Hotel
Projects
 Trends In Debt & Equity …

• Despite limited capital market activity for existing assets

with current cash flow, construction financing is quite
“tight” if not non-existent in certain markets.

• When and if available, Loan-to-Cost ratios for construction

loans are in the 65%+ range.

• Requirements for equity of 30%+ will continue to create

significant pressures on yield; particularly on larger
projects.
 In Savannah, In Order To
Move Forward, Success Demands…
• Treat the development opportunity like a potential
“transaction” and not a report writing “consulting”
engagement.
• Determine the most marketable, optimum capital structure
that:
• Highest certainty of execution;
• Requires the least, if any, subsidy;
• Provides the greatest control;
• Greatest certainty of completion.
 In Order To Move Forward,
Success Demands…
• Determine the development model that ”makes sense”.
• Determine the players that have experience under the
“optimum” capital structure and development model.
• Negotiate the contribution of qualified participants for a
“team”.
• Determine timeline and activities to get to a closing table.
• Develop “awareness” campaign for internal and external
constituencies.
 In Order To Move Forward,
Success Demands…
Retain a Transaction Advisor who knows how to work, on behalf of and
as an integral member of the Project Team, with the parties in interest
to a potential transaction:

Authority Architect
Underwriter Convention & Visitors Bureau
City Bond Counsel
Rating Agencies Hotel Manager
Disclosure Counsel Underwriters’ Counsel
Counsel to the Authority Counsel to the City
Hospitality Consultant Engineering Firm
Market Consultant Program Manager
Trustee Surety Bond Provider
Issues In the Sponsorship of
Hotel Development
 Headquarter Hotel Market Fundamentals

• Room Revenue Per Available Room (“RevPAR”)

generated by new downtown, convention-oriented hotels
continues to not support the rate of return required by
private equity investors.

• Construction costs increases for double loaded, vertical

urban development are equal to or in excess of RevPAR
gains.

• Some form of incentive/subsidy/grant/conveyance is

required to make the vast majority of deals work.
 If Credit Support is Provided To Private Hotel
Developers, How Are Objectives Determined?

• How do you define how much, which types of support, to

what projects? What is reasonable?

• How do you define a “successful” investment?

Occupancy? Developer Profit? What is the metric used?

• How does an investment impact the City’s ability to

contribute to other municipally sponsored deals?
 Credit and/or Direct Support is Needed to Make The
Traditional Private Development Model Work

• Investor-developer goal in securing

“incentives/subsidies” is to close a financing “gap”.
What is this financing “gap”?
• The “gap” is: (Equity Yield Developer Requires)
minus (Equity Yield Project Can Support).
Example: Investors require a 22% return on investment.
Hotel Pro forma forecasts yield of only 15%. The
“gap” is the dollar amount represented by the
difference between 22% and 15%.
 Closing the “Gap”
When development costs exceed levels that can be supported
by a investment return, municipalities have traditionally
provided substantial subsidies. These have typically included:

• Contribution of land.
• Infrastructure development.
• Hotel occupancy tax abatements.
• Parking facilities.
• Contribution of hotel meeting/public space.
• Direct subsidy payments (cash and/or loans).
• On-site sales, property and other tax abatements.
 What are the
Advantages & Disadvantages
in a Traditional Public/Private Deal?
 Traditional Public/Private Deals…

Advantages:

• Beyond zoning, entitlement, permitting, inspection

processes, little if any interaction necessary.

• Requested “subsidy”, if properly limited, defines extent

of financial participation.

• Development, if constructed/operated as planned,

satisfies certain economic development objectives.
 Traditional Public/Private Deals…
Disadvantages

• In addition to tax abatements and other concessions,

subsidy requests often must take the form of direct
payments.

• Rarely can future “subsidy” requests, if truly needed, be

limited. This creates the potential for unanticipated,
increased financial commitment or project shutdown.

• No sponsoring entity control over the business model:

service quality, facility maintenance, potential
physical/functional obsolescence.
 Traditional Public/Private Deals…

Disadvantages

• No control over use of “room block” for events with room

nights requirements.

• No control of public space for community goals.

• No control or benefit over income distribution.

• No control over sale of the asset.

 A Perspective on Financing
for Public Benefit Corporations and
Not-For-Profit Corporations
 What Can Public Benefit and Not-For-Profit
Corporations do?

Advantages
Low cost of capital. Probably 10+ percentage points below
blended debt/equity cost of private development. This
allows:
• greater cash flow for some defined building program;
• expanded spatial programming;
• higher quality level.
 What Can Public Benefit and Not-For-Profit
Corporations Do?

Advantages
• No “up-front” cash contributions.
• Recovery of project/transaction related costs through
bond proceeds.
• Funding of Debt Service, Reserves, Operating Reserves,
Pre-Opening Budgets, Operating Cash.
• 100% funding of all hard and soft development costs.
 What Can Public Benefit and Not-For-Profit
Corporations Do?

Advantages
• “Pro Forma” performance would result in no call on any
requested/required guarantees.
• Cash flows can be structured in such a way that any
guarantees, if necessary, can often be delayed for up to 5
years.
• Required Public/Private “subsidies” can be utilized to
directly benefit the issuing entity and not private
developers.
 What Can Public Benefit and Not-For-Profit
Corporations Do?

Advantages
• Use of income distributions for any lawful purpose
whatsoever.
• Ability to sell the asset, when appropriate, to pay off
bonds.
• Ability to eliminate guarantee obligations at the time of
sale.
• Control.
 What Can Public Benefit and Not-For-Profit
Corporations Do?

Disadvantages
• Investors, mono-line insurers and credit rating agencies
likely to demand some type of guarantee on annual debt
service.
• In the event of substantive, long term market
deterioration, annual debt service guarantee remains as
long as the asset is owned by issuing entity.
• Should a Guarantor choose to default, insurers pay debt
service obligation. However, impact of such an action
should be considered.
 What is the Market Telling Us About How a
Convention Center Hotel Can Get Done?

Sacramento, CA Houston, TX Omaha, NE

St. Louis, MO Denver, CO San Antonio, TX
Lombard, IL Erie, PA Vancouver, WA
San Diego, CA Baltimore, MD Myrtle Beach, SC
Overland Park, KS Trenton, NJ Bay City, MI

How Are Other Cities Moving Forward?

New York, NY Washington, D.C. Indianapolis, IN
Broward County, FL Denver, CO Tucson, AZ
Anaheim, CA Savannah, GA West Palm Beach, FL
 Examples of Cities That Have Utilized
Project Revenue Bonds
City Rooms Par (000,000’s) Year
Baltimore 756 $301.0 2006
Phoenix 1,000 $350.1 2005
Erie County 203 $ 45.4 2005
Denver 1,100 $354.8 2003
Vancouver 226 $ 67.6 2003
Omaha 450 $108.9 2002
Bay City 202 $ 15.5 2002
Austin 800 $265.1 2001
St. Louis 1,200 $ 98.0 2001
Myrtle Beach 404 $ 64.3 2000
Questions and
Answers