Convention Center Hotel: Thinking about some Numbers

Let me start with a disclosure: I’m going to vote “No” on the proposed charter amendment. I have three reasons:

I’m an unashamed booster of Downtown Dallas;
I know Mayor Leppert, not well but enough to trust him; and
The campaign against the hotel has seemed disingenuous and dirty with its personal attacks against the Mayor.

http://cityhallblog.dallasnews.com/archives/2009/04/are-anti-dallas-convention-cen.html

Those reasons don’t seem like much, even to me, so I’ve been trying to think through the economics of the project. This isn’t easy. I don’t know much about hotels. I do, however, know quite a bit about government subsidies and public-private partnerships. They’re our life blood at Central Dallas CDC.

One of the major arguments of the anti-hotel campaign is that if it were a good deal that private parties would build it. I’ve heard the ubiquitous television ad playing in the background—twice--while I’m writing this. The last person to speak says: “If it [the convention center hotel] would make money, the private enterprise guys would already be here. They’d be lining up.”

It ain’t necessarily so.

Let’s do some numbers. (No groaning. It’s good for you and these will be pretty simple. Besides, if you aren’t willing to do numbers, then you shouldn’t even bother to have an opinion on economic questions). A first rate, highly capitalized, top of line private developer of a hotel that costs $500,000,000 would need to raise $200,000,000 in equity to build the project because no lender would lend more than 60% or $300,000,000 on the project. The cost of the equity would be at least 10% (probably a lot higher, but let’s say 10%). The best you could hope for on the money you borrowed would be about 8%. Total yearly payments on the total of debt and equity (amortized over 30 years) would be about $47.4 million per year. (We’re assuming you can actually raise the money, hard as it is in this economic climate).

The City of Dallas can issue municipal bonds at about 6%, because the bonds are tax exempt. Yearly payments over 30 years would be $36 million. In addition, property owned by the City of Dallas is tax exempt. The current total property tax rate in Dallas is just barely over 2.5%. That means the tax exemption is worth $12.5 million per year.

A city-owned hotel starts with a total economic advantage over a privately developed hotel of $23.9 million per year ($11.4 in financing costs and $12.5 million in tax savings). That’s real money. Enough so the convention center hotel could be a good deal for the City of Dallas but a bad deal for a private developer.

There are other options, though, and I’ll discuss them tomorrow.