THE BIG FIX

A desperate St. Louis pays top dollar to gamble on a risky convention-center hotel

The Harmon committee had at least four hotel proposals to consider that year, but only two ended up in the running when the group met behind closed doors in September 1997. The Hyatt chain dropped out of the running, and the committee rejected an offer by local hotelier Charles Drury and the Sansone Group that would have included a hotel at Laclede's Landing. This whittled the field to two competitors: Mesirow Stein Real Estate Inc. of Chicago, which was teamed with Hilton, and the HRI-Marriott group.

The Chicago developer wanted to transform the Dillard's store into a Hilton hotel for an estimated cost of $125 million. HRI, on the other hand, proposed a $129 million package that would renovate the abandoned Lennox and Gateway hotels and build an additional 46-story tower.

The HRI proposal was bolstered by the New Orleans company's track record of successfully renovating historic buildings. By the time of its entry into the St. Louis market, HRI had completed 23 projects in New Orleans and other cities, including the renovation of the historic Blackstone Hotel in Fort Worth, Texas. These achievements had garnered accolades for the company among peers and recognition within the real-estate industry.

The city-owned Lennox and Gateway hotels, which will be renovated as part of the 
proposed convention-center hotel
Jennifer Silverberg
The city-owned Lennox and Gateway hotels, which will be renovated as part of the proposed convention-center hotel

In December 1997, the selection committee accepted HRI's more expensive proposal, the cost of which by then had increased to an estimated $172.5 million. The committee liked the location and the appearance that the HRI design would do more to stimulate development of other properties along Washington Avenue. "For me, they picked the right site, from a development-impact standpoint," says Michael Jones, deputy mayor for development. And, even more compelling for the city, the team said it had lined up private financing for the project from GMAC Commercial Mortgage Corp., the giant commercial lender spun off by General Motors Corp. in 1994.

From the very beginning, though, HRI and the city encountered a series of obstacles.

To secure control of the development rights to the Gateway and adjoining city blocks, the city was compelled to cut a deal with Larry Deutsch, a local real-estate investor. Deutsch owned the Washington Avenue Redevelopment Corp., which he had acquired from the now-defunct Pantheon Corp., original redeveloper of the Lennox Hotel. Ownership of the redevelopment corporation gave Deutsch condemnation authority over property on Washington Avenue, including the Gateway site. The city couldn't sell the proposed hotel site to the current developers without first reaching a settlement with Deutsch. So to keep the project on track, it quietly agreed to pay him $4.3 million about a year-and-a-half ago. Under the terms of the arrangement, the city captured the development rights and also took deed to the nearby Merchandise Mart Building. In return, Deutsch received $2.5 million in community-development block-grant funds and an IOU of $1.8 million. Jones, who negotiated the transaction for the city, says Deutsch "knew I didn't have any other choice." The cost of buying out Deutsch is not included in the $242.2 million hotel price tag.

Another hitch came when unions raised objections to Marriott's checkered record with organized labor, including the company's protracted battle in San Francisco with the Hotel Employees & Restaurant Employees union. Labor opposition threatened to hold up state and local government approvals of subsidies, but a deal was cut behind closed doors. Under the pact, which took months to reach, the AFL-CIO Building Investment Trust pledged to invest $30 million in the project and Marriott agreed not to interfere with union-organizing efforts. The union money helped cinch the deal and bought labor peace at the same time, says St. Louis Labor Council president Bob Kelley, who is credited with delivering the deal.

On a different front, HRI had to change its preliminary plans to meet the criteria of National Park Service guidelines. The developer initially planned to erect a 46-story tower directly east of the renovated Gateway Hotel. To qualify for more than $13.6 million in Missouri historic tax credits, however, the hotel design must conform with federal rules set forth by the Park Service, which oversees the preservation of historic buildings. The original HRI plan would have allowed the new hotel tower to overshadow the renovated historic structure in violation of the Park Service standards. Since the oversight surfaced about a year ago, HRI has redrawn the design, lowering the height of the new structure and incorporating the ballroom and other hotel facilities above the parking garage that will be built on the ground now occupied by the Herkert & Meisel building. The cost of the garage has added another $30 million to the cost of the projects, according to HRI. But a spokesman for the U.S. Park Service in Washington, D.C., says that HRI has not yet submitted a formal application based on its new plans.

The biggest stumbling block -- one that almost killed the project -- came when GMAC backed out of the project. In part as a result of the Asian banking crisis, which began in the spring of 1997, and subsequent Russian government defaults on international loans, the market for large, speculative real-estate deals began to dry up. "The capital markets completely collapsed," says Tom Leonhard, HRI senior vice president of development. GMAC, which was expected to provide the hotel developer with a traditional mortgage, changed its lending objectives, focusing instead on smaller, less risky hotel projects.

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