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The Good and Bad of City-Owned Hotels

The Good and Bad of City-Owned Hotels

After the record-breaking flood of 2008 caused billions of dollars of damage in Cedar Rapids, Iowa, the city faced an uphill battle as it struggled to rebuild its downtown corridor. Part of the revitalization initiative included the construction of a brand new convention center and arena—funded with $50 million of grant money—to replace the former Five Seasons Center and boost meetings and events business in the city.
But in order to fully take advantage of the redevelopment project, the city recognized the need to save the fledgling hotel adjacent to the site of the convention facilities. Without any interest from private investors, the city decided to step in and buy the asset, formerly a Crowne Plaza, with $3.2 million in city funds.

“It wasn’t the number one goal of the city to own a hotel,” says City Manager Jeff Pomeranz. “We had a significant need in our downtown and had hoped the private sector would come forward to redevelop it. We were in a situation where we had this beautiful convention center adjacent to a hotel that had its needs. The city had to act because there weren’t other options.”

The city secured Hilton as the hotel operator for both the hotel and convention center and the DoubleTree by Hilton Hotel Cedar Rapids Convention Complex opened in June. As part of a Tax Increment Financing (TIF) district, redevelopment of the hotel was financed through the issuance of urban renewal bonds, which will be paid back with hotel revenue, says Casey Drew, director of finance for the city. Although it’s still early in the game, he fully expects the hotel will exceed expectations—especially as convention business picks up. “We put together a budget for each year and we’re expecting to beat those projections,” he says.

But not all city-owned hotels have reason to be optimistic. With the exception of high-performing properties such as the Omni Dallas, which exceeded revenue projections by 24 percent in its first year, many city-owned hotels struggle to break even and cause hardships for taxpayers and other in-market owners.

“I get why municipalities find it important to make sure there is an appropriate convention hotel in their market but more often than not, they discover that they are not necessarily the best owners,” says David Loeb, senior research analyst for Baird. “They’re just not the people who have the skills and the sophistication to be able to asset manage a hotel effectively.”

In August, the board that oversees the Lafayette Yard Hotel and Conference Center in Trenton, N.J., announced that the hotel would file for bankruptcy to relieve its $30 million in debt. The hotel, which lost its Marriott flag in June, never achieved the levels of success that were anticipated when the property opened in 2002. The bankruptcy filing will allow the hotel, which is expected to run up an $800,000 operating deficit this year, to stay open until it can attract a new buyer.

Loeb explains that municipalities get involved in the business of owning hotels when they are trying to come up with solutions for increasing economic activity in and visitation to the city. But Loeb warns that if the private sector isn’t interested in making the investment, cities should practice caution. “If nobody else wants to do it, that’s a red flag,” he says. “Maybe the city can tolerate a zero return, but most of them don’t want to really lose money, and that’s often what happens.”

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