CLEVELAND, Ohio – Cuyahoga County Council is expected on Monday to consider a $7.9 million taxpayer bailout of the Hilton Cleveland Downtown to cover property taxes and debt payments on the publicly owned hotel.
The administration of County Executive Armond Budish contends the county is obligated to cover the debt, which could eventually balloon as high as $20 million, under a contract with Hilton Worldwide, the hotel’s manager.
That contract, the administration says, makes the county responsible for any debts that hotel revenues can’t cover. And that is now the case - the administration says, but has not documented - because of a decline in hotel stays attributed to the coronavirus pandemic.
Today, cleveland.com and The Plain Dealer look back six years to review details of the hotel deal in the making and to gauge whether our leaders at the time envisioned that their handiwork might, in the not too distant future, leave taxpayers on the hook for millions.
Who owns the hotel?
County administrators recently have stated that the county is the owner, in part to support their contention that taxpayers should not view the $7.9 million payment as a bailout. To the administration’s way of thinking, propping up something you own does not constitute a bailout.
But the county isn’t the owner.
Six years ago, public officials identified the hotel’s owner as the Cleveland-Cuyahoga County Port Authority, a taxpayer-supported agency that maintains the marine terminals in Cleveland and helps finance economic development projects in the region.
Brent Leslie, the port’s chief financial officer at the time, told The Plain Dealer in May 2014 that the county was only leasing the hotel to avoid restrictions that state law would have placed on county ownership.
Leslie said the port would remain the owner for the 30-year life of the bonds used to help finance the project.
“This is a unique structure that differs from a lot of our other financing arrangements,” he said.
Why did the county get into the hotel-building business?
Public officials and civic leaders believed at the time that they needed a convention-grade hotel at Lakeside Avenue and Ontario Street, the site next to their new convention center and the Global Center for Health Innovation, in order for the region to attract major conventions
But private developers were only interested in using the spot for parking.
So, the county opted to become a developer and contract with a hotel management company to operate the facility. The Plain Dealer reported in 2014 that such a model had been used elsewhere, including Columbus, with “varying degrees of success.”
How is the hotel financed?
As with the issue of ownership, financing of the $272 million hotel is complicated.
The main source of financing involved the issuance of $230 million in bonds. The Plain Dealer reported at the time that the county would send money for the debt payments to the Port Authority, which would then pass it on to the bond trustee.
Those bonds, plus interest, were to be paid off with money from a variety of sources.
Attorney Jeff Appelbaum, who managed the project for the county, said at the time that the bonds were projected to come with a 4.37% interest rate. A bond-related document provided to cleveland.com by the Port Authority this week lists interest rates on the bonds ranging from 3.75% to 5%.
While interest rates are now at near record lows, the Budish administration told cleveland.com last week that refinancing the bonds is not a “viable alternative at this time.”
What are the other revenue sources?
As noted this month by county administrators, hotel revenues – money the hotel makes by booking rooms and otherwise serving guests – figure into the financing mix as do so-called bed taxes that the hotel collects from its customers.
Both those sources of revenue have been diminished by people traveling less as a result of concerns about the coronavirus. How much? That is being kept a secret by the county and Hilton officials, who contend the hotel’s occupancy rate is “proprietary” information.
Also committed to the project is a portion of the quarter-cent sales tax that had been earmarked to pay for the $465 million Convention Center complex, which includes the Global Center for Health Innovation.
Other sources include new property taxes generated by the hotel, a fairly common arrangement known as tax-increment financing, and leftover cash from the Cleveland Convention Center complex.
The city of Cleveland kicked in $8 million from a separate bond transaction.
Did officials envision future financial difficulties?
Certainly not to the extent caused by the coronavirus pandemic. That said, the people putting together the deal acknowledged at the time that hotel revenues alone would not be enough to cover debt payments.
But The Plain Dealer reported in 2014 that financial projections prepared by investment bank Stifel, Nicolaus & Co., the lead underwriter on the bond deal, blended tax revenues and other funding streams earmarked for both the hotel and convention center projects.
The result: projections showed that the combined revenues should cover debt payments for all of the buildings, with enough money left over to make repairs and provide a reserve. (The Budish administration has not mentioned in its recent public statements about the hotel whether a reserve exists, and if so, whether it could cover the current shortfall.)
The Plain Dealer story noted that the projections by Stifel assumed no increase from 2012 revenues generated by the bed tax and the quarter-cent sales tax hike, – revenue streams that were actually growing in 2014.
"The revenue will come from what already existed from the convention center and whatever comes from the hotel itself," Appelbaum told the newspaper at the time. "We have something here that builds an extraordinary building, and we use nothing other than those revenue sources. And we see significant risk-mitigation built in."
The administration of then-County Executive Ed FitzGerald nonetheless negotiated a contract with Hilton that obligated county taxpayers to cover any hotel revenue shortfalls, and County Council approved the contract with one dissenting vote cast by Dave Greenspan.
Greenspan, now a state representative, told cleveland.com last week that he did not believe the county should be in the hotel business and was concerned about making the county responsible for covering hotel-related financial obligations.
He said he supported the construction of a hotel as part of plans to augment the convention center, but questioned at the time whether the 600-room hotel could sustain itself among other downtown competitors.
What does the current County Council think?
We will soon find out.
Council postponed a vote last week on the administration’s request to draw $7.9 million out of the county’s general fund to cover the hotel debt. Instead, council scheduled a hearing for Monday before its Finance and Budgeting Committee.
“My concern is how the hotel’s doing because of the economy,” Council President Dan Brady told cleveland.com last week. “We have skin in the game with the Hilton, so we’re on the hook here….I think a public discussion about the Hilton hotel and about what [the county is] doing is appropriate.”
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