City Hall

The Hotel That HUD Built

Gazing south from the upper floors of City Hall, the first thing you'll probably notice is the shell of the old Plaza Hotel rising 12 stories just across Interstate 30. The second thing you notice is how ugly it is. The beige monolith was charmless when it opened as a Ramada Inn in 1972, and it has aged with all the grace of a chain-smoking Florida meth head, who actually might be more pleasant to live next to. Michael Przekwas, an eight-year resident of the Cedars, says it has been a magnet for vagrants, "kind of a place that the criminal element broke into constantly" and a roadblock to the type of development that has transformed the neighborhood from a derelict industrial district into a destination.

All of that's about to change. Developer Larry Hamilton, after nine years of trying, is moving forward with plans to rehabilitate the property. Earlier this year, the longtime caretaker moved out as crews began asbestos remediation. The building is scheduled to reopen in the summer of 2016 as the Lorenzo Ascend Hotel, which Hamilton describes as "boutique" but not "luxury," with rates "well below what the Omni's are." It will also provide a much less desolate link between the Cedars and downtown by putting decent sidewalks and bike lanes along Akard Street and lining it with public art. Hamilton predicts the 237-room hotel will serve as a catalyst for business at the nearby convention center and the entire neighborhood. "[The Cedars] is really a gritty place that's starting to emerge," he says. "It has the potential of being the next version of Uptown in terms of urban revitalization."

With a total price tag of $35 million, the transformation won't come cheap. And since Hamilton has been unable to lure sufficient private investment, a phenomenon Hamilton blames primarily on the hotel's location south of I-30, he has turned to the city for financing. The sidewalks and bike lanes across the freeway and similar infrastructure work will be covered by a $2.3 million grant from the Cedars TIF district, which captures future increases in the area's tax revenue to subsidize development. Three years ago, back when the proposed hotel franchise was a Holiday Inn, the City Council agreed to give Hamilton and his partners an $11 million loan backed by its federal Housing and Urban Development funds. Next Wednesday, the project goes before the City Council once again to decide whether to allow Hamilton to increase the first-lien bank loan (i.e., what gets paid first if the hotel deal falls apart) from $13 million to $18 million, reducing the city's ability to collect if Hamilton defaults. "In consideration for approval of the new senior loan," city staff write in council documents, "Lawrence E. Hamilton will provide the City with a personal payment and completion guaranty."

The city has made riskier bets. Hamilton's a competent developer and a known quantity, having successfully completed a half dozen redevelopment projects downtown, including the Davis Building and Lone Star Gas Lofts. He's not going to turn out a boondoggle like the city's Bexar Street project or a piece of zombie vaporware like Patriot's Crossing. But risk aside, a nagging question remains: Should Dallas, a city that has become synonymous with misspending housing fundsreally be mortgaging $11 million in HUD money to build a sort-of fancy hotel?

There are a couple of ways to answer that question. One is going by HUD's rule book. Every year Dallas gets about $15 million from HUD in the form of Community Development Block Grants, which it gets to dole out pretty much as it chooses so long as expenditures are in line with one of HUD's three "national objectives":
  • Benefiting low- and moderate-income persons,
  • Preventing or eliminating blight, or 
  • Meeting other community development needs having a particular urgency because existing conditions pose a serious and immediate threat to the health or welfare of the community, and other financial resources are not available to meet such needs. 
During the 2013 fiscal year, the most recent for which a report is available on HUD's website, the city spent CDBG money on a variety of things including home construction, code enforcement, street and sidewalk improvements and "direct financial assistance to for-profits."

HUD offers local governments even more flexibility through its Section 108 Loan Guarantee Program, which allows cities to use future CDBG funds to backstop loans to private businesses or nonprofits. This, according to HUD, "allows local governments to transform a small portion of their CDBG funds into federally guaranteed loans large enough to pursue physical and economic revitalization projects capable of renewing entire neighborhoods."

Hotels are clearly fair game. Houston used the Section 108 program to help finance a Marriott hotel a couple of years back. Bakersfield, California, used it to renovate the 80-year-old Padre Hotel. Jersey City put Section 108 funds toward building a new Hilton. Dallas' $11 million loan is larger than most, but it's clearly OK with HUD, which formally signed off on the project last December.

The other approach to answering the question is to weigh the risks and opportunity costs of the loan with the benefit to the city, and to consider if or when the benefit might exist absent the city money. Even if one assumes that Hamilton's gold and the risk to the city is essentially zero, the wisdom of the investment is much murkier from this angle.

Hamilton, naturally, emphasizes the benefits of the project. "It won't cost the taxpayers a nickel, first of all," he says. "Second of all, it fits into the city's GrowSouth initiative. And there's economic development involved. It's creating well over 100 jobs for low-income people." It also provides the city a way to invest housing funds south of I-30 without violating the letter or spirit of this summer's Supreme Court ruling that's effectively prevented the city from building more affordable housing in southern Dallas. Former housing director Jerry Killingsworth was "very pleased" with the project, Hamilton says. "They had Section 108 funds to allocate toward southern Dallas, but they needed a project, and this one gave them a tool to fight [blight]." Przekwas, too, thinks the renovation is well worth the investment. He says progress on the hotel has already spurred three developers to announce new projects nearby.

That said, the line here between the city investing in an emerging neighborhood and bailing out a failed real estate investment is thin. Hamilton bought the property — seedy but still in operation — way back in 2006, then as now with an eye toward turning it into a boutique hotel. That effort fell victim to the recession, which spurred Hamilton to team up with Central Dallas Community Development Corporation's John Greenan in a proposal to apply for tax credits and use the building for permanent supportive housing for the homeless. That plan was then stymied by angry neighbors, who ultimately worked with Hamilton and his partners to craft a plan that was more palatable/less oriented toward the homeless, ergo, a boutique hotel. The Cedars seems to have some momentum, with new, modernist town homes listed for more than $300,000 springing up. Given the circumstances, one wonders how long the private sector would allow it to sit vacant.

And then you look around and wonder why Dallas can't be a bit more creative and forward-thinking when it comes to promoting affordable housing and economic development. HUD has a list of Section 108-funded projects on its website. There are plenty of duds, but there are also some intriguing models that don't involve subsidizing friendly developers' projects in already gentrifying neighborhoods. Los Angeles, for instance, gave a $15 million loan to finance a local nonprofit's small-business loan program. Portland used the same amount to capitalize a "housing preservation loan fund," which supports the construction of affordable housing throughout the city. They don't even have to be that progressive. York, Pennsylvania, used its money largely to rebuild decayed streets. Dallas, in case you hadn't noticed, has plenty of those.