Wednesday, May 6, 2009

The Convention Center Hotel: What about public-private partnerships?

I can hear the question already. Why does it have to be either or? Why couldn’t the hotel be built as a public-private partnership combining the strengths of both public financing and private enterprise?

The first answer is that the proposal is already a public-private partnership. The hotel will be built by Matthews Southwest and operated by Omni Hotels, both private companies. The City of Dallas will provide the financing and own the hotel. So, I assume, the people I hear asking this really want one important change. They want the Convention Center Hotel to have private, not public, ownership.

This is a bad deal for the City of Dallas or bad for the possibility of a successful hotel project, or maybe both.

Let’s assume the City of Dallas puts the full subsidy from yesterday’s blog into the deal, about $23.9 million per year. Now one of two things happens:

1. the Convention Center Hotel makes money; or
2. the Convention Center Hotel loses money.

(I suppose it could exactly break even, but in that case who cares who owns it?)

If the Convention Center Hotel makes money, then the City of Dallas wants to own it and get the profits. If the Convention Center Hotel loses money, then, sooner or later, when the private owner runs out of money or files bankruptcy, the City of Dallas will find that has to stand behind the bonds.

With private ownership it’s heads you win, tails I lose. That’s a very bad deal. If the City owns the hotel, then at least it’s a 50-50 coin flip.

The City of Dallas could reduce the subsidy for the hotel, but then the chances of success go down, and if the hotel loses money, the City of Dallas is still ultimately behind the bonds and will have to pay up sooner or later.

The hotel is going to get built, if it does, with City of Dallas money. I’m glad to see the Dallas, for once, hanging on to the up side of the deal and not just take the down side. I’m taking that as a sign that the Mayor is using is business background to make a better deal for the City.

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