The Convention Center Hotel: One More Look at the Numbers

Larry Hamilton, who really builds hotels (the picture is of his new Aloft Hotel that will open later this year in Downtown Dallas) and raises capital at market rates, was kind enough to let me read an early draft of an essay he wrote about the Convention Center Hotel.

You can read Larry Hamilton’s article here: http://larryjamesurbandaily.blogspot.com/.

I found out that I had grossly underestimated the cost of raising private capital to build a hotel like the Dallas Convention Center Hotel. I was right on the amount banks would lend—60% of the project at 8% per annum—but the cost of raising the rest of the private money is far higher than I estimated. The real cost would be 13% for a mezzanine loan for the next 15% of the project ($75 million) and 25% for the equity partner for the final $125 million.

That puts the total cost of privately financing the project at a whopping $67,620,000 per year, while the cost to the City of Dallas is still $36 million. Add in the tax exemption for the City of Dallas at $12.5 million per year, and it turns out the cost to the City of Dallas is $44 million less than to a private developer (not the $24 million that I originally estimated) each and every year.

The difference in the number of rooms that you need to fill to make up $44 million (at $200 per room per night) is 220,000 or 220 nights for each of the one thousand rooms in the hotel.

Think about taking seven months of renting every room every night just to make up the difference in cost, and you’ll realize why the Convention Center Hotel can be a good deal for the City of Dallas even when it isn’t for a private developer.