Demanding Answers as the Dallas Convention Center Hotel Moves Forward
There was a buzz March 12 at Urban Market, and it had nothing to do with the beer and wine samples at the front of the store. Downtown residents were gathering near the meat and cheese section, where chairs were set up in front of a microphone. An elderly couple sat patiently, claiming back-row seats in anticipation of hearing Dallas Mayor Tom Leppert give an "update on downtown."
Leppert arrived shortly after 7 p.m. wearing a blue blazer, no tie and accompanied by his wife, Laura. He greeted several folks with a handshake and a "Hi, I'm Tom." Grabbing the mic, he asked how many among them lived in downtown. Almost all of the nearly 75 audience members proudly raised their hands. Leppert told them he wanted to turn Dallas' downtown into the finest in the country "with the exception of New York." Calling the crowd "pioneers of downtown revitalization," Leppert described his plans to turn his vision into reality.
He outlined three anchors to the future of downtown revitalization: the Arts District, Victory/Uptown and the convention center area. In just two years, the Arts District would be the finest of any in the nation, he said, and in four years, the Woodall Rodgers Deck Park would highlight the continued success of Victory/Uptown. The third anchor, he said, was the convention center area, which he emphasized was "an important element not only for downtown but for all the city."
Dallas City Council
The mayor spoke with passion in his voice and a grin on his face, stretching out his long arms as if to punctuate his big ideas. The crowd seemed captivated, heads bouncing up and down in agreement like bobbleheads. But he was just warming up for his big sales pitch:
Despite more than $1 billion invested into the convention center, more than 1 million square feet of exhibit space and Dallas annually ranking among the top convention sites in the country, Leppert said the Dallas Convention Center "is fundamentally uncompetitive in today's environment." He said building a convention center hotel is the solution.
"It is the right thing to do to keep ourselves competitive in an important industry. It's the right thing to make sure we keep having investment in the downtown," he said, as if still on the campaign stump. "And it's the right thing to make sure we have a strong tax base throughout the city."
And then he talked about "tiers."
For Dallas to be a Tier 1 city, it needed a hotel attached to its convention center like other Tier 1 cities such as Las Vegas or Orlando. Without a hotel, it would drop to a Tier 3 city because many of the Tier 2 cities already were building them. The American Heart Association, he added, had already canceled its 2009 annual mega-convention because Dallas lacked an attached hotel.
For those downtown residents who didn't care about Dallas' tier level, Leppert offered another reason to support the project: A hotel meant jobs, restaurants and retail for downtown—and it would keep their residential areas attractive.
Leppert spoke in generalities, but offered just enough insight and information to sound as though he had mastered the subject. His Harvard MBA cum CEO image, carefully crafted by top political advisor Carol Reed during his 2007 mayoral campaign and the Trinity toll road referendum, seemed to win over the audience.
After he wrapped up his speech, Leppert took questions from the audience, discussing, among other things, Deep Ellum, dirty sidewalks and the homeless. But the conversation quickly returned to the convention center hotel, which Leppert estimated would cost $300 to $450 million and would require some form of public financing. Few seemed to wince when Leppert spoke about basis points, tax abatements and debt service—perhaps because they may not have understood that he was asking taxpayers to pick up the tab. For those who were following him, Leppert insisted that the risk of operating the hotel would not fall on taxpayers; and no, the city wasn't getting into the hotel business either.
So just where did Leppert want to build this hotel, asked one downtowner?
"I actually want it to go wherever it is recommended and wherever the facts say that it will be the most effective for the convention center and for downtown," he said.
The answer amounted to little more than political sleight-of-hand.
A month earlier, the city council by a 10-2 vote approved spending $500,000 on an option to acquire 8.375 acres of land in front of the convention center for $42 million, which would presumably be the site for the hotel. The city's chief financial officer Dave Cook explained that the property, owned by Cincinnati-based Chavez Properties Ltd., could also be used for more convention center parking or meeting room space. The city, however, commissioned two appraisals for the property (View one appraisal in its entirety). Both valued the land—over the doubts of council members Mitchell Rasansky and Angela Hunt—at $40.1 million. And on March 7, the city issued a Request for Proposals from real estate developers to submit "a full detailed proposal for a hotel development on the Chavez parcel." Proposals for alternative sites would be considered, the RFP stated, but only if a proposal was submitted for the "Chavez parcel." Because the proposals are confidential, it is unknown whether the six developers, who are each bidding on the project, will insist that the city give them the land as part of their development deal, or require other public subsidies to build and operate the hotel.
Despite unanswered questions on such hot-button issues as taxpayer involvement, questionable appraised values, voter approval and the economic viability of the project, the mayor seems hell-bent on pushing a convention center hotel through the council. And a council vote is scheduled on April 23 to approve financing for the purchase of the Chavez parcel, which for all practical purposes will seal the deal.
The mayor's enthusiasm for the hotel is shared by one of his most ardent supporters, the Belo Corp. One of its holdings, The Dallas Morning News, has for many years thrown its editorial endorsement behind a convention center hotel. And yet the local media conglomerate's large real estate holdings around the convention center give it a vested interest in seeing this project become reality.
But there are other political forces in play. Council members Mitchell Rasansky and Angela Hunt, who represent adjacent districts, voted against optioning the Chavez land. Both spoke out against the deal, at least until they were given more information about how much the hotel would cost, how much public subsidy would be required and how similar hotels in other cities have influenced convention business and economic development. But as of April 7, Rasansky is done speaking out. The city attorney claims Rasansky has a conflict of interest in the project because of some of his stock holdings, and he has been banned from voting on the issue or speaking about it publicly.
This leaves Hunt as the only vocal critic on the council. "[Rasansky's] removal from this debate is very crippling for me," she says. "We can no longer bounce ideas off each other, and I can't analyze the data in the way he does because of his experience in real estate."
Veteran real estate developer Harlan Crow also opposes the hotel as proposed. He too is concerned about the use of public money and the haste with which the mayor seems to be railroading this project past the council. Crow is not without his own self-interest. His company, Crow Holdings, owns the Hilton Anatole Hotel, which would be in direct competition with a convention center hotel.
Despite his head-cheerleader role, Leppert would not answer questions from the Dallas Observer about the project. His chief of staff Chris Heinbaugh said, "As I mentioned before, [Leppert] is not ready to discuss it until things have firmed up and we know which direction the city is heading."
But for those who oppose the project or wish to slow it down, that's not hard to figure out. There is only one direction the mayor is taking the city: full-speed ahead.
This isn't the first time that the city has grappled with the issue of a convention center hotel. Discussions for adding a hotel were fanned by additions to the Dallas Convention Center. Originally named the Dallas Memorial Auditorium, it was built in 1957 with 70,000 square feet of exhibition space until it was expanded four times to its present size of around 1 million square feet, making it only one of nine U.S. convention centers of comparable size. But the idea of a hotel didn't gain much traction until early 1995 when former Mayor Steve Bartlett encouraged a proposal for a hotel using tax abatements.
Months later, when former Mayor Ron Kirk took office in May 1995, he put some of his newly acquired political capital behind a hotel. DHP Ltd. Partnership of Utah came to the table and met with the council's Business and Commerce Committee. It proposed converting the former Employers Insurance Building on Young Street, now an office building, into a 1,000-room convention center hotel at an estimated cost of $100 million. DHP's request included $40 million in tax abatements and other financial subsidies.
The day after the meeting, Harlan Crow sent Kirk a letter saying he opposed any deal that would use public money to subsidize the project. In an attempt at damage control, DHP hired political consultant Carol Reed, who also had helped Kirk in his campaign. Almost three months later on November 25, 1995, The Dallas Morning News published an editorial, which said a new convention center hotel would benefit the city. The council ultimately balked at giving DHP the $40 million in subsidies, and the deal disintegrated.
When former Mayor Laura Miller took office in 2002, she tried a different tactic to secure a convention center hotel for Dallas. Because the prior hotel deal broke down over local incentives, Miller partnered with her husband, former Texas Representative Steve Wolens, to pass legislation that would authorize state incentives for the hotel. Wolens wrote the bill, which allowed any hotel built within 1,000 feet of a convention center to be eligible for a rebate of 10 years' worth of state hotel occupancy and sales taxes.
On March 12, 2003, Miller took seven council members to Austin to lobby for the legislation, but the bill seemed all but doomed. Then in the waning hours of the session, Wolens tacked it on as an amendment to another bill, which was enacted into law.
Armed with the legislation, the city offered to lease property next to the A. Maceo Smith Federal Building on Griffin Street, and proposed including a $20 million moving walkway from the Hyatt Regency hotel and Reunion Arena to the new hotel. The Hyatt and the air rights over Reunion Parking Center are owned by local billionaire Ray Hunt, who also owns Woodbine Development Corp.—one of three developers who bid on the exclusive negotiating rights to develop a hotel. After the city council endorsed the plan, The Dallas Morning News followed suit, publishing an October 20, 2004, editorial saying a convention center hotel was a good investment in Dallas' future.
Miller says that she and Wolens rejoiced at their legislative coup, thinking that the tax revenue would be enough to cover the city's portion of a privately owned hotel deal. But when the three developers offered their proposals, they found that wasn't the case. "We had sticker shock," she says. Developers were estimating that the project would cost taxpayers between $50 and $100 million, "which was way too expensive for us at the time," she says. Although the city selected Woodbine in December 2004 to build the hotel, the developer's exclusive rights expired without consummating the deal.
Miller would still like to see a convention center hotel built but wants any public subsidy limited to $50 million in addition to the estimated $50.6 million in tax breaks that Wolens' legislation would still generate for a hotel developer. "If the new administration can figure out how to subsidize a convention center hotel that is privately owned for less than $50 million in tax monies, then I think it's terrific, and my hat is off to them."
After his election in June 2007, it became Mayor Leppert's turn to pick up the hotel torch. In his June 25 inauguration speech, Leppert mentioned building a convention center hotel as a "key to our economic and competitive success tomorrow." The day after the city council returned from its July recess, members were presented with a convention center hotel status briefing. In this briefing, city staff told the council that one of the key site selection criteria (similar to a factor that was part of the city's lease proposal under Miller) was that the hotel be located in a place where the convention center could be linked to the Hyatt Regency and the Reunion Parking Center owned by Woodbine—one of the six developers to submit a proposal to build the hotel.
Before the February 13 city council meeting, a last-minute item was added to the council's agenda: a vote on whether the council should approve using $500,000 from the Dallas Convention Center & Visitors Bureau to pay for an option to purchase the Chavez property as a possible site for the hotel. The city commissioned two independent appraisers, who had each valued the property at $40.1 million or $110 per square foot. The economic development committee selected the site in a closed session despite there being no public briefings to the council. The council, however, voted to approve the option, with only council members Hunt and Rasansky dissenting. Both felt the council had little information upon which to move forward; Rasansky, a real estate developer himself, called the option "extremely flawed" and was amazed that the two appraisals came in for the exact same amount to the dollar. Hunt pointed out that the gap between the Dallas Central Appraisal District's taxable value of approximately $7.3 million and the city appraisals of more than $40 million was "remarkable." Assistant city manager A.C. Gonzalez says after he showed the two appraisals to DCAD, its staff admitted the property was undervalued.
During a February 19 Economic Development Committee meeting, councilman Ron Natinsky, chair of the committee, told Rasansky and Hunt that there was a difference between the tax rolls and the appraised value because the appraisals were done assuming a hotel was already on the site. The tax rolls appraised the property according to its current use as a parking lot. Gonzalez says the appraisals were done based on the "highest and best use," and not assuming a convention center hotel was on the site.
"It looks like the appraisals were done as instructed," Rasansky would later say. "You do appraisals based on its current use, not if you build a Taj Mahal on it because what if the hotel isn't built and we have to sell the property?"
Hunt's and Rasansky's concerns were not enough to stop the council from taking the next step. On February 27, the council approved the use of certificates of obligation (secured by property taxes) to raise the $42 million needed to purchase the property. These certificates are short-term debt instruments and are used much like long-term revenue bonds to raise money to finance major construction projects. The main difference is that bonds require voter approval; certificates of obligation do not, which is part of their appeal to politicians concerned that their pet projects might be defeated at the polls. The certificates are interim financing, and the city will either refund them from the sale of revenue bonds for the hotel or the restructuring of the convention center's debt.
Again, Rasansky and Hunt were the lone dissenters, voting against plans for the certificates. Both claimed to be in favor of a convention center hotel, they just opposed the manner in which it was proceeding and the scarcity of information upon which they were being asked to cast their votes. "I am ready and willing to support it if I know it's more than just a vanity project," Hunt says.
Differences between the mayor and city staff regarding financing seemed to mirror these council members' concerns. Leppert's public position at Urban Market was that the city would be relying on public money to finance the project. This seemed at odds with the position of the city staff in its March 7 Request for Proposals, instructing prospective hotel developers that "It is the city's goal to minimize the level of public financial participation in the project and to attain the most distinctive, highest-quality and marketable project possible."
On April 7, the council's Economic Development Committee received a briefing from HVS Convention, Sports & Entertainment Facilities Consulting, which the city retained to study the feasibility of building a hotel. During this briefing, Rod Clough, managing director for HVS' Texas office in Flower Mound, recommended the development of a 1,200-room hotel with restaurants, retail and other amenities. He said his report was dependent on using the Chavez property as the site for the hotel.
In that same meeting, city attorneys informed Rasansky that he could no longer vote on or even publicly talk about the convention center hotel because of a conflict of interest. He owns shares of Citigroup, and on March 26 the council approved Citigroup as one of six underwriters for possible debt issuances for a convention center hotel. Rasansky was clearly upset. "I think this really sucks," he said after leaving the meeting. "But there's nothing I can do about it."
This silenced one of the major critics of the project, but it didn't silence them all.
Harlan Crow, the son of real estate mogul Trammell Crow Sr. and chairman and CEO of Crow Holdings, walks through the halls of his luxurious Uptown offices, stopping to admire an architectural model sitting on a table. The miniature mock-up of the old Parkland Hospital on Maple Avenue will house the future corporate headquarters of his company. Crow says the collection of buildings offers a campus feel, and it's his favorite project.
Wearing a golf shirt and khakis, Crow enters the conference room overlooking Dallas' Arts District. "This is where the prime real estate is," he says. Although Crow is one of Dallas' wealthiest men, one of Crow Holdings' most prized assets, the Hilton Anatole, is no stranger to tough times. And to protect his hotel's bottom line again, Crow has thrown himself into the middle of the convention center hotel controversy.
In late 1990, the hotel (then the Loews Anatole) was unable to make payments on its $75 million debt and for two-and-a-half years was in foreclosure. The Crow family finally found a new partner, the Teacher Retirement System of Texas, which gave it a much-needed cash infusion to resuscitate operations. The Crow family regained control of the hotel in 1995, the same year its name was changed to the Wyndham Anatole, reflecting the change in hoteliers. Ten years later, the name would change again to the Hilton Anatole, its association with the Hilton chain helping to boost its reputation as one of the top hotels within the vicinity of downtown Dallas.
The Anatole has never received any city subsidy or bailout, and that has helped inform the conviction of Harlan Crow, a staunch Republican who claims that Mayor Leppert's plans for a new convention center hotel amount to little more than "corporate welfare."
"The City of Dallas shouldn't be in the hotel business," Crow says. "There are things that cities are supposed to do...but building, owning and operating a hotel and exposing taxpayers to operating losses aren't what they should be doing." Despite these statements, Crow says a convention center hotel will be good for the city. He likes the idea, he says, because it will give Dallas some much-needed soul. "I hate to say this because I love Dallas, but Dallas doesn't have a heart. The closest thing we have to a heart is White Rock Lake."
Crow says he harbors no ill will toward Leppert, even though he supported his defeated opponent Ed Oakley, donating $5,000 to his campaign (as did Crow's father). Yet he calls Leppert "a nice guy," recalling a time between 1986 and 1989 when Leppert worked for Trammell Sr. as one of his national partners. At the time, the Trammell Crow Co. was the largest apartment developer in the country.
Crow began speaking out against the hotel project within two months of Leppert taking office. In a July 31 letter to the mayor (read it), Crow called the project "not economically viable." He also speculated that city staff was secretly working with Woodbine to cut a deal that would be detrimental to taxpayers. On February 14, he fired off another missive to the mayor (read the letter), calling the council's vote to option the Chavez property "morally wrong." He wrote that a convention center hotel would hurt the existing private downtown hotels, including his own. Not only did he envision that the hotel would be "a huge loser," he also branded its possible use of public money as "the height of folly."
A meeting was arranged between Crow and Leppert, but a health reason prevented Crow from attending. Instead, he sent Anne Raymond, who is in charge of Crow Holdings' hotel investments. Says Raymond, "It was a friendly meeting where we agreed to disagree."
Raymond says a 1,000-room hotel will cost approximately $500 million, but moving forward with the land purchase is irresponsible without knowing the actual cost of the public's investment. She maintains that a hotel of this size will be a burden on an already weak hotel occupancy rate, which was approximately 60 percent last year in Dallas and is forecasted by The Linneman Letter, an economic and real estate research publication, to decline for the next three years. And that's without the addition of at least another 1,000 rooms. "It's why we don't have it—because the market doesn't support it," she says. "And the only way it will materialize is if a whole series of huge, uneconomic decisions are made."
Crow and Raymond take issue with the city appraisals, claming the city is paying too much for the land. So Crow Holdings recently commissioned two appraisals of its own. According to a Crow representative, one appraisal valued the Chavez property at $29.4 million, the other at $33.9 million—both noticeably lower than the city's two appraisals, which valued the property at $40.1 million. The Crow appraisals were done, however, on an as-is basis, meaning the property was evaluated according to its current use as a parking lot.
Although first assistant city manager Ryan Evans gave Crow assurances in a May 2005 letter (read the letter) that "the city will not underwrite any operating losses" of a convention center hotel, Crow remains unconvinced. He believes the city will likely own the hotel, with losses falling on taxpayers. "There are so many ways to obfuscate and to make it look like someone else owns the hotel and is taking the risk—lawyers can be very creative," he says. "If they paint the picture using direct English, [the hotel] won't happen." That's why Crow feels City Hall is interested in keeping taxpayers in the dark, paying for the project with certificates of obligation rather than issuing municipal bonds that would require voter approval. "They don't want a vote," Crow says. "They'd lose a vote."
The Dallas Morning News won't accurately cover the issue, claims Crow, and it's not hard to understand why. In an October 31, 2007, editorial, the paper opined that the city should move "expeditiously" on plans for a convention center hotel.
"The bias they've had on this issue is remarkable," Crow says. "The land ownership over there is unbelievable."
Belo Corp. owns Belo headquarters on Record Street, The Dallas Morning News building and the WFAA building on Young Street, along with nine downtown properties within walking distance of the convention center. The nine properties totaling more than 5.2 acres are on the tax rolls for more than $9 million.
Dan Blizzard, a senior vice president at Belo, says Belo is not taking a position on where the hotel is built. When reminded that the hotel could have an impact on Belo properties because it will be built within 1,000 feet of the convention center to take advantage of the Wolens legislation, he adds, "We're not supporting the convention center hotel because we own land. We're supporting it because we want the convention center to attract the kind of business it once did, which will be great for the city."
Council member Hunt, who battled a barrage of pro-toll road Morning News editorials during the Trinity River Project referendum, says Dallas residents should decide if the paper is truly neutral on the hotel issue. "It would be nice if every time they do an editorial lauding the merits of this fabulous convention center hotel, they disclosed their own property interests and what their corporate owners have to gain," she says. "But they don't do that, and I think that certainly makes their opinion and motives on this issue questionable."
One person the Morning News hasn't quoted in its editorials is University of Texas-San Antonio professor Dr. Heywood Sanders, a leading researcher analyzing the convention center industry. Sanders testified before a congressional committee on the subject and wrote a research brief for the Brookings Institute in 2005 called "Space Available: The Realities of Convention Centers as Economic Development Strategy," in which he detailed an industry in decline (read the report).
He maintains that none of the three basic arguments coming from proponents of a Dallas Convention Center hotel withstand close scrutiny.
Their first argument is the "keeping up with the Joneses" argument: All the other major convention cities have hotels or are in the process of building them so we better get on board or fall behind. That argument is flawed, says Sanders, because city officials don't analyze what factors contribute to making a hotel a success—things such as a robust downtown that will fill the hotel when conventioneers don't. Their second argument is the "look at all the business we are going to lose if we don't have an attached hotel" argument. Business ebbs and flows, says Sanders, and every convention and visitors bureau will get some business and lose some.
The third argument is that a hotel will become an economic generator for all that it touches. But Sanders counters that the economic development expected from building a hotel simply doesn't happen in most cities. The convention center market needs people to come in large numbers, which isn't the case in many cities. And a hotel has a financial incentive to keep people inside, visiting its shops and restaurants, which cuts against the larger goal of generating new business for others. Just look at the Gaylord Texan Resort and Convention Center in Grapevine, says Sanders, which is "making a hefty profit" because it is able to keep conventioneers inside the hotel, spending their money in Gaylord's restaurants and entertainment venues. "The Gaylord is trying to tell Dallas that there is a market in this area, but it's not in downtown Dallas," Sanders says.
Another problem facing a downtown hotel is the zero-sum-game effect of revitalizing one part of downtown at the expense of another. Sanders points to Victory Park, where the American Airlines Center was built using public financing. Its success came at the expense of revitalizing downtown, says Sanders. "This happens all the time. Folks assume that you can do something like Victory and not have any negative impact on other places."
In his Brookings Institute research brief, Sanders maintained that U.S. exhibit space grew by 51 percent between 1990 and 2003 while demand plummeted.
Chicago, which annually is among the top convention cities and a major rival to Dallas, has poured more than $1.5 billion of taxpayers' money into its McCormick Place Convention Center over the last 25 years. Even with its recent expansion making it the largest exhibition facility in the United States and the addition of an 800-room hotel that opened in 1998, the convention center isn't anywhere close to reaching the attendance figures it hit prior to 2003.
Closer to home in Houston, the Hilton Americas, a 1,200-room hotel attached to the George R. Brown Convention Center opened in December 2003. The city owns the hotel, which was publicly financed by selling more than $300 million in bonds. After the sale, the total debt on the hotel was $482 million. But with little principal paid and changing interest rates, the debt actually increased by $6 million in its 2006 audit, and the hotel's losses continue to grow as it has added to its deficit in every year of its operation. In addition, the 977-room downtown Hyatt Regency went into foreclosure approximately a year after the Hilton Americas opened.
One of Sanders' harshest critics is HVS Convention, Sports & Entertainment Consulting, which has a more upbeat assessment of the industry. In one of its reports to the Dallas City Council, HVS said that convention attendance in Dallas increased nearly 24 percent from 2006 to 2007, and it expected this "strengthening trend" to continue through 2010. Each time the city has hired HVS to study the economic feasibility of a convention center hotel (2001, 2004 and now in 2008), it has reached virtually the same conclusion: The Dallas market needs more hotel rooms, hotel supply is the reason for lost convention business, and a headquarters hotel would increase demand at the convention center.
Assistant city manager A.C. Gonzalez couldn't agree more. He co-chairs the city's convention center hotel task force and says the hotel is an obvious component of the city's inability to compete as well as it should for major conventions. He stresses that the convention center business is a huge piece of local economy and should not be taken for granted. "Talk is cheap, but until you've tied down the property, that's the beginning point," he says. "You either improve in the face of increased competition or you choose to give up."
With the city moving forward on the purchase of the Chavez property and the use of public money to develop the hotel, Mayor Leppert's unflinching support for the project could be enough to make it happen. Gonzalez says Leppert has brought "strategic leadership" to the project along with energy and "additional clarity."
Sanders has seen this before. He says that like Houston and other cities, Dallas has a standing policy commitment to make this hotel a reality. "Based on the public statements from the mayor and the information that's been laid out by city staff, it's pretty clear that the city is committed to doing this project," he says. "It sounds like Dallas decision-makers have found the answers before they've even fully posed the questions."
With Rasansky now banned from the debate and Hunt still seen as an outcast after her stance on the Trinity referendum, the council is poised to take a decisive step on April 23, when it is scheduled to vote on whether it will approve financing for the purchase of a site for the hotel.
"All I want to know is what the hell is the city participation in this?" said Rasansky, pre-muzzling. "How in the world can we go forward without knowing what the cost is?"
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