More convention center hotel news this week: Sam Merten with the Dallas Observer reports that the city’s own study of the convention center’s profitabilty, just completed in January 2009. shows that the convention center actually will make more money without a convention center hotel attached to it than it will if the hotel is there.
What’s more, according to Merten’s story: Hotel supporters are ignoring this information and instead telling voters that the convention center is going to lose $3-$5 million a year without an attached hotel, even though the study — completed by the same company that told the city council that the projected convention center hotel itself will be profitable — says the complete opposite.
This information, if true — and Merten includes links to all the lengthy reports he’s citing — is pretty damning because it implies that the pro-hotel people are basically ignoring the truth and distorting the hotel’s impact on the convention center’s profitability.
I haven’t had time to read the documents, so I can’t comment on them directly. I will say that Merten has been writing about this hotel deal longer than anyone else in town, and as far as I know, none of his substantitve reporting has ever been proven to be incorrect.
And having spent 10 years in the commercial real estate business — much of it during the last big economic crisis in the mid-1980s — something about this story brings back bad memories. Back then, one of the most prevalent tools in distorting the real estate market was property appraisals based on very rosy economic assumptions. The appraisals often assumed that rents would keep rising at such a fast clip that the properties being appraised increased in value almost exponentially; this was exactly what the lenders who were paying for the appraisals wanted to hear, because they were lending money based on the properties’ projected values. The higher the property value, the greater the loan value, resulting in even higher loan fees for the lender.
Any of this sound familiar? It’s what has been happening the in financial industry for the past few years, leading to today’s economic problems.
In this case, the city payed an appraiser to attach a value to the convention center by using projected cash flows, and it was in the city’s best interest — since the appraisal was being done to facilitate the city’s refinancing of the project — to show the highest possible value for the center so that the maximum amount of money could be borrowed against the facility (we’re talking about bond money, of course). The appraiser understands the job — find the most value you can legally find and support through legitimately possible economic assumptions — so you can bet the assumptions are going to be aggressive, showing that the convention center is one heck of a project worthy of being refinanced.
The problem is that even as those assumptions work in favor of refinancing the convention center, they work against the argument for the convention center hotel — that the hotel is the lynchpin project needed to make sure the convention center makes money, and if a hotel isn’t built, all hell will break loose downtown (see the recently launched R.I.P Dallas pro-hotel campaign website).
In this case, to achieve the desired result — lower convention center revenues creating the need for a more competitive situation in Dallas, thereby requiring the construction of a convention center hotel to make the center and the city more competitive — the flip-side of the revenue projections are used, with the lowest possible revenues are projected to back up the need for the hotel.
It’s just a theory, mind you, but that’s the way things worked in the commercial real estate market in the mid-1980s, and that’s the way things were working as recently as last year in the financial markets with the sub-prime mortgage situation. And there’s nothing illegal about using rosy projections to value a project — we all do it every time we want to sell our homes, because after all, don’t we want to sell the house for the highest value possible? And even if we think that maybe the buyer is paying a pretty fantastic amount, well, that’s his/her problem, right? We’re just willing to go along to get along.
It’s certainly possible that the same thing could be happening here with the convention center hotel debate.
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