THE BIG FIX

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

"General revenue is not building the hotel," Jones says. "We've structured the situation so that the block grants will take no long-term hit. The first year or two, (block grants may pay for) some debt service," he says. "But the practical reality is, the project will generate its primary sources of repayment of the public funds." Jones also says a portion of the hotel tax, used to finance expansion of the convention center, may be available in future years for the hotel project but that "no decision has been made on this."

Though the city and the developer say they're confident the hotel will generate enough tax revenue to repay most of the city's financial commitment, they argue it's less expensive to borrow the money from HUD than issue TIF bonds. "The thinking is that if you're a bondholder and you're going to acquire a bond that is paid back from real-estate taxes on a project that's not even built yet, then you're going to charge a pretty high interest rate for taking that risk," Leonhard says. "As a result, it costs the city more money because they've got to raise more funds to meet that $74 million requirement."

There's no dispute the convention-center hotel will generate tax revenue, attract new investment and create jobs. According to a study by St. Louis-based Development Strategies, commissioned by HRI, the 1,081-room hotel is expected to draw enough new business to St. Louis to generate $185 million in state and city tax revenues over 25 years. But those projections will be influenced by a range of variables, including general economic trends (will the economy slip back into recession?) and the competitive environment (how many additional hotel rooms will compete for business?). The biggest argument for the hotel is that it will allow St. Louis to draw additional convention business -- an expectation that's supported, in part, by anticipated bookings compiled by the St. Louis Convention and Visitors Commission.

"That hotel is going to allow St. Louis to host more major conventions during the course of any year because we'll have two headquarters hotels (including) the Adam's Mark," says Bob Bedell, the CVC president. "We'll be able to handle groups that overlap. We'll be able to handle conventions that occur simultaneously." Bedell estimates the number of major conventions will climb from 33 in 1998 to more than 50 a year after the new hotel goes on line. A corresponding increase in smaller meetings should help boost convention-related hotel business from 413,676 room nights in 1998 to 800,000 a year, according to CVC projections. That's still a fraction of the total St. Louis metropolitan hotel market, which saw nearly 6.3 million room nights in 1998 for an average occupancy rate of 61.7 percent, according to statistics compiled by Smith Travel Research of Hendersonville, Tenn.

Bedell's projections on future convention business and Marriott's estimates for hotel occupancy provide the foundation for the city's financial estimates for the hotel.

"That's the given," Jones says.

Whether the rosy projections on new convention business and occupancy rates for the hotel will withstand scrutiny in an independent market analysis is unknown. For the St. Louis market, average occupancy rates have been trending lower as the number of hotels and the supply of hotel rooms continue to increase. Investment banks that will underwrite the bonds for the project have retained PricewaterhouseCoopers to conduct another feasibility study. The results of the study are expected within the next few weeks, but will not be made public, HRI's Leonhard says.

Landing a project of this magnitude requires a deft political practitioner. In this case, HRI employed Sidney Barthelemy, a former mayor of New Orleans, who lobbied behind the scenes for the deal. Barthelemy, an HRI vice president, showed up in St. Louis in the summer of 1997 -- just months after Harmon was elected mayor -- to scout out development opportunities for the New Orleans firm. HRI already was active in other cities but had never before ventured into St. Louis.

"He knows political folks and contacts, says Kabacoff, referring to Barthelemy. "Sidney called me up after he had scouted St. Louis. He said, "You ought to come up. There are a lot of buildings. Maybe there's a play.' So our thought was, we'd do a couple of residential buildings here. That was our goal. Then we heard about the convention-center (hotel) competition."

The relationship between Barthelemy and Kabacoff goes back more than a decade. As mayor from 1988-94, Barthelemy supported a series of HRI projects, including the conversion of an old department store on Canal Street in downtown New Orleans into a mixed-use property that includes the luxurious 243-room Chateau Sonesta Hotel.

HRI got its start in 1982, building condominiums and apartments in the New Orleans' warehouse district. Before forming the company, Kabacoff helped develop the New Orleans Riverside Hilton hotel. He owes some of his early success to his father, Lester Kabacoff, a prominent New Orleans hotelier and developer for the past 50 years.

As the hotel project has slowly ground forward, efforts appear to have been made to grease the political wheels. For instance, Steven J. Stogel, the local expert who helped put together the complicated financial package for HRI, contributed thousands of dollars to the state Democratic Party last year. Campaign-finance records on file at the Missouri Ethics Commission in Jefferson City also show that Edward B. Boettner, Kabacoff's partner in HRI, gave $1,000 to the Senate campaign of Missouri Gov. Mel Carnahan.

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