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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Friday roundup: Phoenix to maybe get soccer stadium/robot factory, Raiders roof is delayed, Def Leppard and Hamilton face off over who’s old and smelly

Happy Friday! I have no meta-commentary to add this week, but hopefully when you have Def Leppard getting into a flamewar with Canadian elected officials over arena smells, you need no prelude:

  • The Salt River Pima-Maricopa reservation, long rumored as the possible site of a Phoenix Rising F.C. soccer stadium, has released an image of a proposed “$4 billion sports, technology and entertainment district” that indeed seems to show a soccer stadium, though honestly it looks a little small just from the rendering. There’s also an amazing image of people testing out robots and what looks like robot dogs, which surely will be the growth industry of the rest of the century, because I bet robot dogs don’t have an enormous carbon footprint or anything.
  • The Las Vegas Raiders are now projecting $478 million in personal seat license sales for their new stadium, up from an initial projection of $250 million. (All this money will go to defray Raiders owner Mark Davis’s costs, not the state of Nevada’s, because why would revenues from a publicly funded stadium go to the public? That’s crazy talk!) Unfortunately, the stadium might not be ready on time thanks to its roof behind months behind schedule, which could cause damage to the already-built parts of the stadium if it rains, but all those Raiders fans in Vegas (or people in Vegas anticipating selling their seats to out-of-towners who’ve come to see their home teams on road trips) will surely be patient after shelling out as much as $75,000 for PSLs.
  • Charlotte is still up for giving Carolina Panthers owner David Tepper $110 million to renovate his NFL stadium to make it more amenable to hosting an MLS franchise, but may want Tepper to agree to a lease extension first. Given that the last time Charlotte gave the Panthers money for stadium upgrades it was $87.5 million for a six-year extension, the city could maybe keep the team in town through 2027 this way. At this point, it might have been cheaper for the city just to buy the Panthers outright, thus guaranteeing the team stays in town while not only avoiding all these continual renovation fees but also getting to collect all that NFL revenue for itself. (Ha ha ha, just kidding, the NFL outlawed that years ago, no doubt partly to avoid anyone from trying exactly this scenario.)
  • The Atlanta Braves‘ stadium got a new name thanks to a bank merger, and the bank got lots of free publicity when news outlets wrote about the new name, but hell if I’m going to participate in that, so google it if you really must know.
  • A Virginia state delegate wants to reboot Virginia Beach’s failed arena plans by setting up a state-run authority to attempt to build a new arena somewhere in the Hampton Roads region, which includes both Virginia Beach and Norfolk. “The hardest part is the financing mechanism behind it,” said Norfolk interim economic development director Jared Chalk, which, yeah, no kidding.
  • Denver is helping build a new rodeo arena, and as a Denverite subhead notes, “The city says it won’t reveal how much taxpayers could be on the hook for because that would be bad for taxpayers.”
  • Kalamazoo is maybe building a $110 million arena to host concerts and something called “rocket football,” which I’m not even going to google because it would almost certainly be a disappointment compared to what I’m imagining.
  • Anaheim is considering rebating $180 million (maybe, I’m going by what one councilmember said) in future tax revenues to hotel developers so that Los Angeles Angels and Anaheim Ducks players will stay in them? Don’t the Angels and Ducks players own houses locally? What is even happening?
  • And finally, what you’ve all been waiting for: A video from last summer has surfaced showing Def Leppard lead singer Joe Elliott complaining that Hamilton, Ontario’s arena is “old” and “stinks like a 10,000 asses stink,” to which Hamilton councillor Jason Farr replied that Def Leppard is “also old and stinks.” Clearly one of them needs to be torn down and entirely replaced! It worked for Foreigner!
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