In addition to bogging down a city’s bottom line, city-financed hotels tend to attract the ire of other owners because they create unfair competition in the marketplace. And in some instances, taxes generated by established, privately-owned hotels wind up subsidizing economic development projects—including the construction or refurbishment of convention center lodging.
Monty Bennett, CEO of Ashford Hospitality Trust, says the real estate investment trust (REIT) owns a hotel in Fort Worth, Texas, that pays a citywide occupancy tax. Bennet explains that the tax was originally imposed to help generate more demand for hotels by funding initiatives at the convention and visitors bureau as well as other downtown development projects. But when the city of Fort Worth decided it wanted to add more hotel rooms, the law was changed so that the tax revenue could be used to fund the construction of a convention center hotel. In 2006, a deal was struck with Omni Hotels and Resorts that included several tax abatements and incentives—capped at $89 million—for the hotel company to develop the project. Before the hotel opened in 2009, the city also paid Omni a $6.3 million construction grant for an underground garage as well as an additional $2.3 million to fund the facility—all from existing hotel-occupancy tax funds.
“It’s very frustrating,” says Bennett. “Businesses shouldn’t get into government and government shouldn’t get into businesses. I think we’d all be better served if cities exercised restraint.”
Loeb explains that there are a few instances where city-owned hotels make sense, especially if the hotel market in a particular area is making it difficult for private investors to get financing. And if a city does decide to purchase or build a hotel, he says, hiring the right management company is the only way to give that asset a chance at success—a step that Cedar Rapids didn’t take lightly.
“We’re certainly more adept at taking care of snow in the winter, maintaining streets, or providing police or fire protection,” says Pomeranz. “This is different, so it was very important for us to have a very skilled management team with us as partners. For us, this is more than a hotel—it’s a resource and amenity. Do we expect it to be successful? Absolutely.”