How Cleveland ended up with $230m in debt on a convention hotel it didn’t need

The Cleveland Hilton Downtown is still open, although largely empty. The few rooms that are occupied are largely filled by airline crews, the least financially rewarding part of the hotel business. It’s not surprising. Hotels and the entire travel and hospitality industry have been devastated by the coronavirus pandemic.

But the Cleveland Hilton Downtown isn’t just any hotel. It is owned by the government of Cuyahoga County, its bills and finances the responsibility of the county’s residents and taxpayers. And now they have to pay — more than $7.9 million immediately — to meet the requirements of a $230 million debt issue the county sold in 2014.

The $7.9 million is just the first installment in what is likely to be a continuing, expensive commitment to the debt service on the Hilton. The debt payment this year comes to $20.7 million. It’s another $20.7 million next year, and each and every year until 2029, when it drops to $6.6 million. And if — as appears likely — Cleveland’s convention business doesn’t come roaring back, and the hotel isn’t filled with convention attendees, the publicly owned Hilton will have to fight for a limited pool of downtown hotel business.

How did Cuyahoga County decide it made sense to get into the hotel business? Well, back in 2004, PriceWaterhouseCoopers did a feasibility study for a new convention center in downtown Cleveland. PWC declared, “it appears that a high-quality, 600-room headquarter hotel would be required in order for Cleveland to meet the demand estimates presented in this report.” And when no private developer appeared interested in building such a hotel in downtown Cleveland, the county decided to go into the hotel business. County officials assured the public that the combination of the hotel’s revenues and the taxes it generated would more than pay the annual debt service — there was nothing to worry about. And meeting planners, it was argued, didn’t want to spread their attendees across a number of smaller 200- or 300-room hotel properties. A big hotel, right next door to the new convention center, was critical to making Cleveland a competitive convention destination.

Even as county officials began to consider a publicly-developed hotel, the city’s convention and visitors bureau, Positively Cleveland, commissioned a feasibility study from PKF Consulting for a 600- to 700-room hotel. PKF’s Peter Edelman came back in May 2013 with an analysis that claimed to justify a 600-room property: A new convention center, in Edelman’s assessment, would generate new business amounting to 131,000 annual hotel room nights, about equal to what Positively Cleveland was forecasting. With that convention business, the hotel would operate in 2020 with an occupancy rate of 68% and an average daily rate of $185. That would yield net annual revenue of $7.8 million.

Those hotel revenues, plus the 5.5 percent county hotel tax on the new hotel’s rooms, would obviously not come close to paying the debt service on a convention bond issue. So rather than issuing debt for the hotel backed by the hotel’s revenues, the county used a lease arrangement, with the actual debt (“certificates of participation”) issued by the Cleveland-Cuyahoga Port Authority. The hotel, of course, had nothing to do with the port: The virtue of the debt arrangement was that it obscured the actual source of the funds needed to repay it, and equally obscured the performance of the hotel. The county government has since said that the hotel’s actual performance and finances are “proprietary,” thus sidestepping the question of whether the hotel is actually a profit-making enterprise.

The Cleveland Hilton Downtown and the adjacent Huntington Convention Center have clearly not delivered anything close to the forecasts of PWC, PKF, or Positively Cleveland. The 2004 PWC report had pegged the center’s annual hotel generation at 125,000 room nights; PKF used an assumption of 131,000 room nights a year, Positively Cleveland 130,000. In 2016, outside of the Republican National Convention, convention center events had produced 60,215 room nights. The next year the center’s events yielded 65,118. The room night total for 2018 came to 94,416, although 19,519 were attributed to “conferences and large sporting events.”

And with the convention center underperforming, there can and should be questions about the hotel, but the county government has refused to release it to the public. The county’s hotel asset manager did allow that the hotel made an $8 million payment towards the $20.9 million annual debt service in 2019, and it is supposed to make a $9 million payment this year. But the hotel will only be able to manage $3.7 million if that, leaving the balance to be paid from the county’s other revenues. The asset management firm offered no figures for next year, simply saying “additional support will be required.”

The future of the convention business is at the very least uncertain. Yet what is absolutely certain now is the Cuyahoga county’s taxpayers are on the hook for a great many more millions in the years to come.

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8 comments on “How Cleveland ended up with $230m in debt on a convention hotel it didn’t need

  1. ” A big hotel, right next door to the new convention center, was critical to making Cleveland a competitive convention destination.”

    Not being Cleveland would have helped greatly in making it a competitive convention destination.

    If no private partner is interested in being the developer/owner of the proposed hotel, there’s probably a message there… and the message is that there is no money in doing it. If there was, you’d have a line up of people willing to own the development. Maybe even a competition to see who would be willing to offer the best (for the city) deal.

    This goes for professional sporting venues too. If no-one is interested in owning the development and leasing it out to tenants, there’s a lesson in that fact alone.

    Good luck Cleveland.

  2. Just a point of info: Port Authorities in Ohio don’t just do port/maritime related stuff. They are also finance/economic development agencies. Even the landlocked counties have port authorities

  3. One other thing I will say is that 4 other high end hotels came into Cleveland and a dilapidated Sheraton was completely gutted and rebuilt into a high-end Westin all after ground had broken on the new convention center

    1. Developers often buy distressed properties on the hope of big things…
      From the PD:
      The Westin would open in mid-2013, with a new exterior, a new roof, 481 remodeled hotel rooms, a restaurant, a fitness center and – possibly – a spa. The buyers hope to connect the hotel to Cleveland’s historic Public Auditorium, creating an indoor pathway to a new convention center and medical mart complex set to open in fall 2013.

      The possibility of a Crowne Plaza purchase emerged early this year, as developers positioned themselves to benefit from the $465 million medical mart and convention center project and a planned casino on Public Square. Despite Cleveland’s soft hotel market, a handful of hotel operators see opportunities to bring new brands downtown.

      And it didn’t hurt that the county did a bond deal for the Westin as well:
      OFFICIAL STATEMENT
      $5,685,000
      COUNTY OF CUYAHOGA, OHIO
      TAXABLE ECONOMIC DEVELOPMENT REVENUE BONDS, SERIES 2013B
      (Westin Cleveland Hotel Project)

  4. FWIW, this story is the carbon copy of the Baltimore Hilton, which is owned by that city, was built on the same premise, has consistently lost money, and blew a hole in the city’s budget.

    1. Cincinnati too seems intent to throw its hat into the convention center flagship hotel ownership scheme as well.

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