By Sam Levin
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The unobtrusive five-story cast-iron storefront blends with the streetscape so well that it is easily overlooked. An architectural inventory prepared by the city in the early 1990s cited the significance of the building's bay windows but misspelled the name of the business. As if in protest, the letter "T" has fallen on its side on the overhang above the entrance. The sign now reads "Herker Meisel." Through the dusty window, the place looks almost vacant, except for Wallace McNeill's pet macaw, who is perched outside his cage, in the middle of the display room.
McNeill owns the Herkert & Meisel Trunk Co., 910 Washington Ave., in the heart of downtown. He bought the firm in 1985 from a descendant of one of its founders. The luggage company has been located in the same building for 111 years. Herkert & Meisel still makes the steamer trunks that made it famous, but nowadays it more regularly produces sample cases for the shoe industry.
The manufacturing is done upstairs, using many production methods that originated in the 19th century. On the fifth floor, for example, a crew of four skilled workers glues the linings into sample cases while, two floors below, the frames are cut and riveted together. One sewer has worked for the company for 30 years. The entire operation employs 15 union workers.
"It's very difficult to go into a union contract negotiation not even knowing where you're going to be located," McNeill says. For more than a year, the businessman has been living in limbo, unsure of whether he will be forced to sell his place of business. As the months slip by, he sometimes wonders whether his troubles are real. But then the phone rings or a letter arrives in the mail, and he feels besieged again.
McNeill would like to stay put, he says, but his building is in the way of the parking garage and ballroom planned for the proposed downtown convention-center hotel. This has forced him into sales talks because the city could invoke eminent domain and seize the property. But so far, negotiations with the hotel developer, Historic Restoration Inc. (HRI) of New Orleans, have been sporadic, unsuccessful and less than cordial, McNeill says. The city, he adds, has only recently contacted him, making an unreasonably low offer. This lack of consideration has left him frustrated and doubtful as to whether the hotel project will ever get off the ground.
"It's very frustrating because it's not like I can just pick up and move in 30 or 60 days," McNeill says. "I can't put any improvement into the building because I don't know if I'm going to own it. I don't know anything. I've never talked to anybody from the city who represented themselves as being any part of this deal, ever. I wish somebody would clarify it for me. I can't get a straight answer out of anyone.
"I've never heard so much double-talk in all my life. It borders on harassment because I have this thing hanging over my head."
This "thing," as McNeill refers to it, has also been described by one city official as the most complicated financial package ever assembled in the history of St. Louis.
The deal, which is expected to close next June, involves the redevelopment of a two-block area of Washington Avenue near America's Center, the publicly owned convention facility. The project entails renovating the existing Gateway Hotel and linking it to a new tower to be built immediately to the east. The two structures, which would serve as the 916-room convention-headquarters hotel, will be operated by the Marriott chain under the Renaissance Hotel brand. On the block immediately west of the Gateway, where the Herkert & Meisel building is located, the plan calls for the construction of a parking garage topped by a ballroom and other facilities. Across Washington Avenue from the Gateway, next to America's Center, the old Lennox Hotel would be converted into a 165-room Marriott Renaissance Suites hotel. The hotel complex -- 1,081 rooms -- is expected to open in 2002.
At a press conference held at America's Center in June, Mayor Clarence Harmon triumphantly announced that the long-delayed hotel deal had been cinched, but he failed to detail any of the unresolved issues, including the cost of acquiring privately owned property or how the city planned to meet its financial commitment to the project.
For instance, the estimated cost of the project has risen from $172.4 million to more than $242 million, in part as a result of design changes. The hotel's price tag doesn't include millions of dollars in other expenses that the city incurred to set up the deal. In addition, project financing is still in flux, having already been repeatedly restructured. The latest changes have pushed the level of public subsidy to more than 30 percent -- significantly higher than similar projects around the country -- and the bulk of the other financing depends on bonds issued by public agencies and substantial tax credits. It's a risky project -- if the projected revenues from the operation of the completed hotel don't meet the optimistic expectations of the developer, the city could be held responsible for the shortfall.
"I think it's a house of cards," McNeill says. "I don't know how they could be putting a financial package together unless they know what they're paying for things."
The project is viewed much more optimistically on the opposite side of the street from Herkert & Meisel, where HRI recently leased a suite of offices. From the vantage point of a second-floor conference room in the renovated Lammert Building, HRI president Pres Kabacoff expresses enthusiasm about the hotel project and the progress being made on it.
"Let me tell you what excites me about this project: We have participated in elevating confidence in this community," Kabacoff says. "We're very proud of that. I think the project has changed from one that would never be built to one that's going to have a hard time finding a way to die. It's moving in the direction where we know it will bear fruit and we know that they (city officials) are committed to it."
The quest for the ever-elusive downtown convention-center hotel has been pursued like the Holy Grail by the past three mayoral administrations. In each case, the impetus for building the hotel has been the city's desire to attract larger conventions, which might otherwise shun St. Louis.
At least half-a-dozen convention-hotel proposals have been floated in the past decade. Some foundered because the city didn't embrace the location; others fell apart because would-be developers pushed for too much public money. But the argument for the hotel never lost momentum, especially after the city paid for a substantial expansion of the old Cervantes Convention Center, adding exhibition space and a 70,000-seat stadium. As a result of the expansion, the city demolished the 614-room Sheraton St. Louis, which had served as a convention hotel. Today, the cavernous America's Center, which boasts 502,000 square feet of exhibit space, is only partially utilized.
"You can't look at the hotel by itself," says Aldermanic President Francis Slay. "We've got a tremendous investment in the convention center. The hotel will help us get a better return on that investment and help it reach its potential."
In part because of the failed efforts of the past, a sense of urgency or even desperation is attached to the current hotel plan. Slay, who has already announced his intention to oppose Harmon in the 2001 mayoral primary, nonetheless expresses qualified agreement with the mayor on this subject, having signed the intergovernmental agreement that approved the HRI proposal in June. He says one of the reasons the city needed to close on the deal was to salvage the reputation and image of the city. At the same time, the aldermanic president acknowledges that saving face has turned into a costly gamble.
"We're paying too much money for this. There's no question about that," Slay says. "(But) I'd say -- not even reluctantly -- that this is an investment that we ought to be making. There's going to be risk involved, but we're willing to take the risk. We've made a decision that we're going to get into the convention business. We should make sure that we make that convention business the best it can be. We can't do that without a first-class convention- center hotel."
Events leading up to this point illustrate how a relatively small out-of-town developer sealed the lucrative deal -- when others couldn't. Much of HRI's good fortune to date seems to have hinged on the serendipitous timing of its entry into the competition.
After helping bring the Rams to town, former U.S. Sen. Thomas F. Eagleton began lobbying in earnest for a downtown convention-center hotel. By early 1996, then-Mayor Freeman Bosley Jr. had tapped Eagleton to head a three-member committee dedicated to securing a deal. Others named to the task force were Bob Bedell, president and chief executive of the St. Louis Convention and Visitors Commission, and Gregory Smith, an attorney with the firm of Husch & Eppenberger. Bedell and Smith also were key players in bringing the Rams to St. Louis.
The Eagleton group began negotiating with Melvin Simon & Associates, the Indianapolis-based owner of St. Louis Centre, and the adjoining Dillard's department store building at Seventh Street and Washington Avenue. Alternative plans were floated that involved either razing the historic department-store building to make way for a new hotel or rehabbing the existing structure.
"I don't think I invented the Dillard's site," says Eagleton. "I think that was what they call "CW' -- that was the conventional wisdom of that time, during the Bosley years. Both Greg Smith and I just thought it was killing two or three birds with one stone."
The concept, says Eagleton, involved locating the hotel at the Dillard's site, which was already attached to St. Louis Centre by a skywalk. The plan called for an additional skywalk to link the hotel with the convention center. Knocking off more than one bird, as Eagleton puts it, would have had the ancillary objective of revitalizing the beleaguered downtown shopping mall. In retrospect, Eagleton says: "That obviously was too much to do in one fell swoop. It did not succeed."
By late 1996, talks with Simon had failed to achieve results, but the Eagleton group forged ahead, announcing the city's plans to formally solicit development proposals for the hotel in February 1997. But when Harmon defeated Bosley in the Democratic mayoral primary in early 1997, the dynamics of the selection process changed. Harmon named a new 15-member selection committee, Eagleton's role in the selection process ended and the city made clear it was seeking proposals for not only the Dillard's site but the abandoned Gateway Hotel at Ninth and Washington.
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.
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.
There may have been another factor in GMAC's rebuff, though. The giant mortgage lender backed out of the project within weeks of receiving a market study prepared for it by Boston-based Pinnacle Advisory Group, a leading hotel consultant. "They actually did a feasibility analysis and an appraisal that GMAC was going to use in their underwriting process, and shortly thereafter they (GMAC) made a quick about-face," says Gary Andreas, a hotel-industry consultant with St. Louis-based Tellatin, Louis, Andreas & Short Inc. "I'm sure it wasn't their sole basis for changing their mind, but it was probably one of several contributing factors." A GMAC spokesman did not return calls; Pinnacle principal partner Dan Hanrahan declined comment.
GMAC's decision to withdraw left a major gap in the financing -- one filled, at least temporarily, by Mercantile Bank, which agreed in late 1998 to take the lead in putting the mortgage together. Credit for the bank's move went to bank chairman John Dubinsky and Tom Reeves, a Mercantile senior vice president who served on Harmon's hotel-selection committee.
"We saw this as such an important project for St. Louis, and we were involved obviously heavily as far as the redevelopment efforts on a number of projects down on Washington Avenue. So we saw this as a cornerstone to really continue that," Reeves recounts. "We stepped in and offered to use our experience to structure a consortium of banks or put together a consortium of banks to step in for the first mortgage and the construction financing."
Mercantile invited NationsBank (now Bank of America) into the deal but continued to seek other sources of financing. "We all agreed, if we can make this deal better and stronger as we go -- that's a good thing," Reeves says. "And we've since gotten more creative and used more economic development tools that have become available, including the empowerment zone (bonds)." Mercantile, the last big bank headquartered in St. Louis, was acquired earlier this year by Firstar Corp. in a $10.6 billion deal; Reeves recently left the bank to head Downtown Now, the umbrella organization that links the city's most influential political and business interests.
Although Mercantile and Bank of America continue to play key roles in the hotel project -- providing construction financing, marketing bonds and buying some tax credits -- the bulk of the financing for the $242.2 million project is a rich stew of direct public subsidies, tax credits, taxable and tax-exempt bonds and TIF bonds.
Asked why the banks aren't involved in the long-term mortgage financing of the hotel, Reeves says, "Hotel financing, in general, is a unique type of lending. It's good business, but you really have to understand what you're doing. It's difficult for out-of-town banks to come into a market and really understand the market itself. Hotel financing is a specialty because it's an operating business, and you have to understand not only the market but the operations themselves. We saw this, quite frankly, as a project that needed to be done locally, so we had control of the destiny of this hotel in St. Louis, instead of Wall Street."
As it turned out, though bankers and underwriters still control the destiny of the project, much of the financing has fallen on government agencies and taxpayers.
· The biggest single chunk of funding -- $77 million -- is expected to come from the sale to private investors of tax-exempt empowerment-zone bonds, which are expected to go to market in early 2000. To qualify for the bonds, the hotel must "use its best efforts" to employ about 210 workers who live in the empowerment-zone area, which includes depressed areas of St. Louis, Lemay, Wellston and East St. Louis.
· Two additional series of bonds, expected to generate $40 million, will be issued by the city's Land Clearance for Redevelopment Authority. Unions, thanks to the deal brokered by Kelley, will be buying $30 million of the bonds.
· Nearly $34 million for the project will come from the proposed sale of federal and state tax credits, including a substantial purchase by Housing Horizons LLC, an affiliate of papermaker Kimberly-Clark Corp.
· The Missouri Development Finance Board has agreed to issue $16.5 million in bonds to pay for the parking garage destined to take the place of the Herkert & Meisel building.
· The agreement signed June 22 by Harmon, Slay and city Comptroller Darlene Green commits the city of St. Louis to providing more than $74 million for the hotel project -- but four months after the mayor announced the deal, the city still hasn't nailed down the sources of the funds. According to the agreement, the city would borrow $22 million from the U.S. Department of Housing and Urban Development (HUD) and issue tax-increment-financing (TIF) bonds to raise about $36 million. The agreement did not identify where the city was getting the remaining $16.7 million it pledged to the deal.
But Jones says the agreement was just a starting point -- and the city has the option of finding the least expensive way of raising its share of the project cost. Current plans have the city borrowing as much as $50 million from HUD under a program that allows cities to borrow against future community-development block-grant funds. Jones says the city still plans to rely on taxes generated by the hotel to repay the city's loans rather than use general-revenue dollars or block grants, which are used to support programs for the poor.
"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.
In addition to alms to the pols, the art of the deal also involves the establishment of other necessary allies. In this regard, it behooved HRI to gain the support of Carolyn Toft, the executive director of the Landmarks Association of St. Louis and a staunch preservationist of downtown architecture.
And the developer also attracted minority participation and a key City Hall ally with Clifton Gates, chairman of Gateway National Bank. Gates says he approached HRI in 1997, knowing the developer "would be interested in minority participation." Gates solicited other potential minority investors, including restauranteur Eric Bachelor and World Wide Technology founder David Steward. Bachelor agreed to invest; Steward, who did not return a telephone message, did not. Gates and Bachelor, who are raising money for Harmon's re-election, will each own 5 percent of the hotel, and they're helping pay their share of the front-end costs incurred by the developer, Gates says.
Gates says there's risk to the project, but he considers the hotel essential to the city's future. "It's going to add to the economy of the city. It'll bring some life after 5 p.m. to downtown, with additional shops and the things that will spring up here and there. It'll be a catalyst -- and I'm sure a lot of things will follow as a result."
A stroll down Washington Avenue on a Saturday night leaves the impression that something akin to a revival is going on downtown these days. A woman with a bad dye job and fishnet stockings stands in the middle of the street, causing traffic to slow in front of Velvet, a lounge at 1301 Washington, where a horde of nightclub customers loiters outside on the sidewalk. Two blocks to the west, art patrons cluster around the entrance to a gallery exhibit in the rehabbed East Bank loft building. It may be as ephemeral as the steam rising from a manhole cover or more permanent than the historic warehouses that still fill the mostly abandoned garment district. But the sense of heightened expectation is palpable. The recent success of the City Museum has added a measure of reality to the nascent resurgence, as have the growing number of loft dwellers who have taken up residence.
These signs of renewed downtown life are part of a vision that Deputy Mayor Jones calls "divinely inspired." It is a vision that, perhaps more important, has the blessings of the local corporate establishment. Within days of the hoopla over the hotel deal's being signed in June, Downtown Now announced its intention to pump $17 million into street improvements along Washington Avenue. Like the hotel plan, financing for the proposed infrastructure improvements is held together by a mortar of heavy tax subsidies.
Until now, Washington Avenue redevelopment has been limited mainly to a few blocks west of Tucker Boulevard, leaving an aura of desolation around America's Center. The city's idea of reinvigorating downtown involves connecting the convention center to the burgeoning nightclub and arts scene. The cornerstone of that dream has become the old hotel at Ninth and Washington.
The Gateway Hotel, with its Italian Renaissance design, was originally built in 1917 as a part of the Statler chain. The 18-floor structure, which is listed on the National Register of Historic Places, features an ornate two-story ballroom at the top and a lobby of similar grandeur on the ground level.
In 1981, the hotel fell into the hands of a group that included Denver businessman Victor Sayyah and former St. Louis License Collector Peter Webbe. Sayyah already had a stake in the St. Louis hotel trade through his interest in the nearby Mayfair Hotel, which he co-owned with Webbe's brother Sorkis Webbe Sr., an attorney with local political and mob connections. A fire that broke out at the hotel on Feb. 12, 1987, was ruled arson by investigators. This prompted the insurance company to refuse to pay off the claim, but Sayyah eventually won $6.7 million in a court settlement. After the fire, the hotel never reopened, languishing in neglect until the city finally exercised its option to buy the building in 1997.
The city already had taken deed to the Lennox in 1995, after HUD foreclosed on millions of dollars in unpaid loans made in the 1980s to the previous owner, the Pantheon Corp. The late Leon Strauss, the founder of Pantheon, had used the hefty public subsidies to convert the 24-story Lennox into an upscale apartment complex before his company went bankrupt.
At the expected closing date in June, the city is supposed to sell the Gateway and Lennox hotels for $3 million to Gateway Hotel Partners LLC (GHP), the company that will own the hotel. Partners in GHP include Washington Avenue Historic Development LLC, a corporation set up by HRI to develop the hotel project, and Kimberly-Clark's Housing Horizons. The same agreement allows the developer to be reimbursed for more than $9 million in predevelopment expenses when the deal closes.
The high level of public subsidy in St. Louis' convention-hotel project is hardly unique. Indeed, it follows a pattern established across the country from Philadelphia to Denver. In most all of these cases, cities subsidize private hotel developments to the hilt with the intent of attracting convention business. But, with $74 million of public subsidies, St. Louis ranks as perhaps the most accommodating locale for a developer in the nation.
It was not always this way. St. Louis voters approved the city's first convention center in 1923. When it finally opened in 1934, it bore the name of its most avid backer, Mayor Henry Kiel. General- obligation bond issues require a two-thirds majority at the ballot box. To increase the chances of voter approval, downtown projects were often packaged with other bond issues supporting neighborhood improvements. By the 1960s, however, attempts to expand Kiel Auditorium had been defeated repeatedly at the polls. So St. Louis, like other cities, turned to another method of financing -- the issuance of revenue bonds -- which allows them to raise capital to pursue projects without electoral consent. Under this mechanism, after completion of a project -- be it a stadium, convention center or hotel -- a city, ideally, pays back the principal and interest to investors with some form of newly generated tax revenue. Earnings on municipal bonds are lower, but investors are often attracted to the market because of its tax-exempt status.
The other reason cities sell revenue bonds is that they can't secure private financing because the projects are deemed financially unsound investments by commercial lenders. Bankrolling the construction of a 1,000-room hotel in the flagging core of a Midwestern city is by definition a risky business -- making taxpayers lenders of last resort.
Kabacoff says he's confident the city will deliver on its pledge. "We'll reshuffle, things will change, but basically the fundamental pieces are there and are to be relied upon," he says. "We're spending a lot of money betting on being able to do this project. I was willing to make that bet because I felt this community had committed to do this project. When the public puts money into a deal, they ought to be able to envision that the deal will have more of an impact than just the project, because the city doesn't need to be in the real-estate business. So they have to make a bet that if this thing happens then other things happen. That's the only way you can justify, in my belief, (putting) public dollars into a project.
"This community had lost its confidence about its downtown," says Kabacoff. "That happens in cities many times. That's why local developers really come to the conclusion that they're not going to pioneer downtown. Our goal is to restore these cities by historic renovation."
In a promotional video produced for HRI, Harmon makes the same pitch in a sound bite culled from a local TV-news broadcast. With the cameras rolling, the mayor says: "Sometimes people from outside our city see it better than ourselves."
Harmon's and Kabacoff's opinions, however, are not universally shared. Ald. Freeman Bosley Sr. (D-3rd) and Ald. Sharon Tyus (D-20th) -- both frequent Harmon-administration critics -- voted against the HRI deal in June. Both continue to voice concerns about the financing. "I just think it's a real fiasco," Bosley says. "I think it's an affront to every taxpayer. I don't see any dollars going into our neighborhoods at all. And it's all to benefit Marriott. (They're) talking about putting a convention-center hotel here, and the people who are going to end up paying for the damn thing will never spend a night in it. That's a problem for me."
"Let's just watch and see where the money goes," says Tyus. "First of all, I was against how much (HUD) block-grant money was involved with it." Tyus suspects that St. Louis may encounter difficulties by borrowing money from its future HUD block grants, because the federal formula for allocating such funds is based on population, and the city's numbers are continuing to decrease.
During her nine-year tenure on the Board of Aldermen, Tyus says, she has witnessed how the repayment of federal loans has forced other budget-cutting measures. "What I remember is that it significantly reduced the amount of money that we had to work with," says Tyus. "When you make a loan from one pot to another (and) you start paying it back -- something has got to go."
Tyus complains that Slay routed the hotel bill away from her Convention and Tourism Committee to prevent her and Bosley from holding hearings on it. "Francis (Slay) didn't send it there on purpose, and that's not right."
Slay counters that the bill was sent appropriately to the Housing, Urban Development and Zoning Committee, on which half the members of the Board of Aldermen sit. "I make the decision on that. If somebody thought that I assigned that bill to the wrong committee, they could have certainly brought it up and challenged my decision, and that was never done by anybody, including her." Slay dispels Tyus' other concerns by labeling her an obstructionist. "She usually votes against everything," says Slay. "But that's all right. That's up to her."
Critics outside the immediate political arena may not be so easily dismissed, however.
"It seems that there is not much private market interest in doing this project," says Heywood T. Sanders, an urban-policy expert at Trinity University in San Antonio. "What should that tell us? That this is a project that carries with it some very clear risks."
The St. Louis hotel is most bothersome, says Sanders, because the city plans to use empowerment-zone bonds to help finance a hotel. But similar projects are cropping up across the country. "This is getting to be a very common phenomenon," says Sanders. "This is not just St. Louis. This is every St. Louis in the country. We have achieved hotel socialism in American cities."
Ronald Utt, of the conservative Heritage Foundation in Washington, D.C., concurs. "You've got a lot of desperate cities like St. Louis which have been convinced that tourism and entertainment is the way to go and are prepared to use taxpayer dollars to fund these things," Utt says. But the convention and hotel trade create only a modest number of low-wage jobs, Utt says. "The business community always has some scheme that involves subsidizing some business activity. The meeting and conference business (have) become the target of this kind of corporate welfare. What is happening in your city is literally happening in every city around the country."
Utt calls the resulting intercity competition for convention trade "the equivalent of an arms race." Ironically, as cities subsidize bigger convention-related facilities, market demand is declining, Utt says. "This is not a growing industry. Things like Internet and other forms of immediate communication and information-sharing have diminished the necessity of professionals to utilize conventions as a way of getting information in their field. So you have a flat business confronting more and more space. What this means is that people who do have conventions are in a stronger bargaining place, to the point where sometimes you actually have to pay them to come as opposed to them paying you."
Jones concedes as much: "In order for the convention center to be at a sort of break-even operation -- because it ain't ever going to make money -- you would probably have to get 58 to 60 major meetings. The economic activity that the city wants will come from the spending that conventioneers will do once they arrive."
The difficulty with attracting those conventioneers to St. Louis is that it's St. Louis, says Jones. And that's what makes the hotel project more expensive to pursue here than elsewhere. Denver has the mountains and 300 days of sunshine a year; Chicago has Lake Michigan. These are natural advantages that make these cities more appealing destinations.
All hotels are speculative investments, Jones says. But the St. Louis market is more risky because it doesn't have a track record. "You're not talking about how much a project like this costs in a market that people perceive to be on the uptake, you're talking about how much this costs in a market that people perceive to be troubled. To be honest, we only had two bids," Jones says. "If we were doing the same project in Chicago, you'd have people falling over themselves, trying to position themselves to do this hotel deal, because they know it's guaranteed to be successful and make money. So I think in light of who we are and where we are in time, I think it's a good project.
"The public needs to understand about this kind of transaction," Jones says. "Why it's difficult and why it takes so long is that it's all about money. Fundamentally, what a developer is trying to do is develop a project and use as little of his money and as much of your money as he can. They all do that. Everybody does that. Our job, and mine principally, was to get a hotel built and use as little of the public money as possible and try to get the best return."
Legend has it that a small room on the second floor of the Herkert & Meisel building served as a gambling den for the original owners of the company and some of the civic leaders of the day, including the mayor. There is no way of telling, of course, the kinds of schemes that may have been hatched as the bets were made and the whiskey flowed. But the card games would have likely spanned the period of time at the turn of the century, when St. Louis gained notoriety for its political chicanery. Bribery and kickbacks were then endemic to the system. After Lincoln Steffens, a prominent muckraker, reported on the scandals in the pages of McClure's magazine, reforms were adopted. But the profiting of private business at the public's expense has never really gone away.
On the third floor of the Herkert & Meisel building, production continues for now. Connie Bivens, a nine-year employee at the company, crafts the frames for the shoe-sample cases by the natural light that streams through the old window glass onto his workbench. He is surrounded by the tools of his trade: a rivet machine, air compressors, staple guns. A 6-foot stack of finished frames rests by his side.
"It seems like a slow process, but once I get going, I go through them like hotcakes," Bivens says. His portable radio is tuned to an oldies station that is playing Hugh Masekela's 1968 hit "Grazing in the Grass." The calendar on the wall, which advertises industrial rubber and plastics, is dated December 1980.
Time in this particular corner of the world seems to have come to a standstill, but the future is closing in. McNeill, Bivens' boss, reiterates that he doesn't want to vacate the building and says he's concerned about his employees as well. He then offers his view of the hotel project.
"I honestly think it's time for the people of this city to know what's going on in relation to this fiasco," says McNeill. "St. Louisans should start asking questions of the developer. If, in fact, this convention-center hotel is so important to the city of St. Louis and to the people of St. Louis, then I think someone has to figure out why nothing ever happens on this thing. It's absolutely beyond my comprehension. I think the pyramids in Egypt were built quicker than this convention-center hotel."
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