NO-SELL HOTEL 

Ex-Mayor Vincent Schoemehl swings a headache ball at the city's convention-center-hotel deal -- and misses

You run a major Midwestern city. You've been working for two-and-half years on plans to build a new convention-center hotel downtown. Then you get a call from a local businessman who tells you he's figured out a way to build a hotel that will cost less than yours, open sooner and use less public money.

If you're Mayor Clarence Harmon, you call a press conference, denounce the rogue and describe his proposal as a "bunch of crap." And if you're Aldermanic President Francis Slay, you accuse the guy -- who didn't even bother calling you -- of trying to wreck the city's credibility.

That is, of course, what happened in St. Louis last week.

Given that the local businessman is former three-term Mayor Vincent Schoemehl Jr., perhaps Harmon and Slay should be forgiven their fits of pique. After all, Schoemehl's proposal would mean dismantling the complex $242 million-plus deal they struck for their own convention-center-hotel project. It doesn't help that Schoemehl won't discount speculation that he'll be a candidate for mayor in 2001, along with Harmon and Slay.

If Schoemehl's goal was to sell his alternative proposal to politicians who count, he failed. If his intent was to raise questions about the viability of the current hotel project, that's a different story. The heated response to Schoemehl's proposal betrays a fear that the city's deal is vulnerable.

With underwriters working on a prospectus for the first series of hotel bonds, Deputy Mayor Michael Jones says Schoemehl and the investors he's representing want to damage the city's deal. "I don't think their motives were the highest on this," says Jones. "If you just looked at the timing, even if you thought what we're doing was a bad idea, you should have said, "Damn, man -- I should have come up with that a year ago.' You would not wait until this moment to create this kind of confusion. Their motives are less than honorable."

The city picked New Orleans-based Historic Restoration Inc. to build a convention-center hotel in December 1997. The company's proposal was one with broad appeal, because it addressed the needs of the local convention boosters and the goals of preservationists. HRI's proposal calls for renovating and reopening the derelict Gateway and Lennox hotels on Washington Avenue and building a tower immediately east of the Gateway. In total, the company will add 1,081 rooms to the downtown market, all within a stone's throw of America's Center, the city's underused convention facility. Marriott Corp. will operate the hotel, which is scheduled to open in August 2002; the state is financing the construction of an adjoining parking garage at Ninth Street and Washington Avenue.

But the project -- the biggest ever undertaken by HRI -- was slow getting out of the gate as the city and developer struggled to sell the deal to potential lenders. GMAC Commercial Mortgage, which HRI identified in 1997 as its primary mortgage lender, backed out in 1998, and it wasn't until last June that a financing agreement was inked by the city and announced with fanfare by Harmon ("The Big Fix," RFT, Nov. 10). Even then, it turned out the money for the heavily subsidized project wasn't nailed down -- and the city had to seek bigger federal loans and a larger slice of the empowerment-zone bonding authority. The actual deal is expected to close this summer; construction of the hotel is expected after the closing.

The agreement signed in June and approved by the Board of Aldermen is complicated, but the bottom line is that more than $108 million of the project -- about 45 percent of the estimated cost -- comes from state and federal loans, tax credits and direct subsidies. There's little equity investment in the deal, although two of Harmon's campaign fundraisers, businessmen Clifton Gates and Eric Bachelor, will each own 5 percent of the hotel. City taxpayers are on the hook for about $74 million, including future tax revenues from the hotel, which will be used to pay off tax-increment-financing bonds. The sources of financing have been moving targets; for example, the AFL-CIO Building Investment Trust originally agreed to buy $30 million in bonds but has since pared its commitment to half that amount. That forced the city last month to ask to increase the amount -- to $98 million from $77 million -- of empowerment-zone bonds for the project, which are tax-exempt and designed to assist distressed areas, including East St. Louis, Wellston and Lemay.

The changes and delays have continued to feed skepticism about the project. "All the details of the HRI plan have been played so close to the vest that I'm not sure that anybody beyond a real narrow circle really knows what it is," says local hotel-industry consultant Gary Andreas, whose firm -- Tellatin, Louis, Andreas & Short -- did market research for Schoemehl's group. "I would be very suspect that it's as close as they've described it."

Schoemehl says uncertainty about the status of the HRI project was one of the reasons he began exploring other hotel proposals in late summer last year. The former mayor says he was looking for a hotel plan that could do several things -- complement the current wave of investment in the Washington Avenue area, put future conventioneers nearer to Laclede's Landing and, most important, salvage the anemic St. Louis Centre, the struggling downtown mall built with taxpayer help during Schoemehl's first term.

His proposal would create a hotel using three existing structures -- the old Dillard's at Seventh Street and Washington Avenue, a portion of St. Louis Centre, and the One City Centre office building, which sits atop the downtown mall. According to architectural plans by Ryan Stephens, senior vice president and director of design of Hellmuth Obata & Kassabaum, the top two floors of St. Louis Centre would be converted into meeting rooms, ballrooms and a banquet kitchen. The northwest corner of the mall would be razed, creating a dramatic entryway to the complex. The cost of the hotel is tagged at about $174 million; related retail improvements to St. Louis Centre and the ground floor of the Dillard's building would bring the total estimated cost to $216 million.

This isn't the first time the Dillard's building has been proposed as a piece of a convention-center hotel. A similar plan, which did not propose the use of St. Louis Centre as part of the hotel complex and did not include One City Centre, was shot down by Harmon's hotel-selection committee in 1997. That plan, pushed by Chicago-based Mesirow Stein Real Estate Inc. and the Hilton chain, was rejected, in part, because the hotel developers didn't identify a source of financing.

HOK's Stephens says that although the design work is preliminary, the cost estimates and design elements are pretty much on target, judging from the firm's previous work with Mesirow Stein and Simon Property Group, which manages St. Louis Centre. "We have a great deal of knowledge of the buildings," Stephens says.

Like the HRI plan, Schoemehl's deal would rely on a mixed bag of public subsidies, including about $50 million in tax-increment financing and a $20 million loan from the U.S. Department of Housing and Urban Development. What's not in the mix are the empowerment-zone bonds, and the amount of state historic tax credits would be lower, he says.

Schoemehl argues that his plan, by converting One City Centre into hotel space, has the advantage of taking about 375,000 square feet of premium office space off the downtown market, which should help boost rents in the downtown market and steer tenants to nearby properties such as the 555 Washington Building, the 500 Broadway Building and the Edison Bros. Building. That would mean moving current One City Centre tenants, including SSC Inc., where Schoemehl serves as chairman, and Trans World Airlines, which occupies three floors. "The only significant lease here is TWA," Schoemehl says, "and the idea is to move them to buildings across the street." (TWA spokesman Jim Brown says the airline, which just last month signed a five-year lease, wasn't made aware of any discussions that would require it to move its corporate headquarters.)

Schoemehl says his group would provide about $60 million in equity investment, including $40 million from the Carpenters' District Council of Greater St. Louis. Also part of Schoemehl's group are Starwood Hotels & Resorts Worldwide Inc., which owns the Sheraton brand, and Simon Property. None of the money is on the table yet, and Schoemehl hasn't made public letters of commitment from any of the parties. It's not known what conditions the union and the other parties are placing on their participation.

It's also unclear what Schoemehl would get out of his deal. The former mayor, who describes himself as "a facilitator" and someone with "a great interest in the city," says a company, probably a limited-liability corporation, will be organized to develop the hotel (the working name is City Centre Hotel). Schoemehl says he'll likely serve as the managing member. Simon Property, the Carpenters union, Starwood, and the Building and Construction Trades will own a piece of the company, as will other investors he declined to name. The group's financial advisor is attorney Michael Lazaroff, who resigned from Thompson Coburn on Dec. 3 amid questions about apparent billing discrepancies. (Schoemehl says Lazaroff, a longtime friend, is "a very experienced guy" whose current legal difficulties shouldn't cloud efforts to get a hotel built: "I know Michael, and I respect his abilities.")

But Jones contends Schoemehl's proposal is so squishy, and would take so long to firm up, that it isn't worth considering seriously. There are no construction drawings, no firm financial commitments, and Schoemehl's group doesn't own the real estate yet. And Jones says Schoemehl's cost estimates can't be relied upon, either: "He doesn't have a contractor on board that has said, "I've looked at the construction drawings, and we've costed this out, and I guarantee I can build this project, at this price, in this time frame.'" Jones dismisses cost estimates drawn from HOK's preliminary design work: "There is nobody in America who would take an architect's word for what it costs to do a project."

And Jones notes that the city has already spent about $10 million to acquire real-estate and development rights for the HRI hotel. That doesn't include the $4 million the city just advanced to HRI for internal demolition and remediation of the Gateway, which was damaged by fire in 1987. How would those funds be recouped? And what about the city's legal obligation to HRI? And what would be the fate of the city-owned Lennox and Gateway hotels, which are components of the HRI hotel?

Schoemehl's response is that the city could adopt his plan while retaining portions of the existing project. The Gateway and the Lennox should be rehabilitated for housing, he says, and HRI could still be used on those buildings as the developer. "I think HRI should get that property at a price that allows them to realize a similar profit to what they would have realized in developing the hotel. "HRI should not be penalized because they acted entirely in good faith," Schoemehl says.

Whether Schoemehl had acted in good faith was the question being asked around St. Louis last week. Schoemehl waited until Monday, Jan. 24, to contact Harmon, then unveiled his plan before the media on Tuesday.

According to Schoemehl's account of his conversation with Harmon: "I was on the phone with him, and he said, "We're pretty far down the stream on this other deal,' but he said, "I'll get back to you -- at the very least, we owe you a hearing on this idea.' I never heard back from him, so I assumed he got tied up.... I took him at his word that we would meet in the morning." Schoemehl says he assumed Harmon had left for a previously scheduled trip to Washington, D.C., so he went ahead with a scheduled press conference at the Carpenters' District Council. Harmon, who was still in St. Louis, immediately responded with his own press conference, during which he denounced Schoemehl and compared himself to Dick Vermeil, head coach of the St. Louis Rams: "This is like trying to call the quarterback plays in the last quarter of the game when we're winning and giving us a playbook that tells us how to lose."

The mayor's people say Harmon never agreed to meet on Tuesday and that he was not told by Schoemehl about the press conference. "I was in the room when (Schoemehl's) phone call came in," says Chuck Miller, Harmon's spokesman. "Vince said, "I had this idea' -- I'm getting this from the mayor, but I'm in the room -- "I had this idea and I want to run it past you,' and he goes through this previous proposal that the city saw two-and-a-half years ago. And the mayor says, "No, Vince, we're about ready to let the bonds go on this deal and everything's in place and the groundbreaking is going to probably be in March. If you want to talk to Mike Jones about it, that's probably your best bet.' But Vince said, "No, but can I talk to you further about it?' I can't remember if the mayor said, "Whatever,' or, "If you must,' but (he told Schoemehl), "We're going down this road.' And that was it."

Schoemehl makes it clear he would have gone ahead with the press conference whether or not he and Harmon had met and whether or not Harmon liked his proposal: "It was my hope that by having that meeting in advance that we could have presented it to the press in a variety of different ways. I could have said, "The mayor doesn't like this, and, understanding that, I'm not suggesting that this is an alternative at this time' -- there are a number of different ways this could have been played out. But the absence of a conversation in advance left them in a position where they were reacting to something they didn't see."

And the reaction was overwhelmingly negative.

Slay quickly joined Harmon in rebuking Schoemehl -- he told the RFT that Schoemehl was interfering with the city's convention-marketing efforts and that his proposal was sending the world the message "We don't have our act together." The ex-mayor's calls to HRI went unanswered; a meeting with Convention & Visitors Commission (CVC) president Bob Bedell was canceled.

"His favorite saying (as mayor) was, he can sell the sizzle and somebody else can sell the steak. This is a case of a whole lot of sizzle and very little steak. There is no plan," says John Ferrara, CVC chairman and president of the Pasta House Co. "Why would anyone think that Vince Schoemehl would have the capability, with no experience and no money to pull this off? It's so ridiculous as to be unbelievable."

Downtown Now! executive director Tom Reeves, the former Mercantile Bank executive who was pivotal in putting the HRI deal together, says Schoemehl misfired by going public with the proposal. He met with Schoemehl's group before Schoemehl went public. "He was just pretty insistent he wanted to come out with a public announcement of some sort -- and my feeling was that was probably not the way to go," Reeves says.

If Schoemehl's group has a serious proposal, Reeves says, Schoemehl probably damaged it: "I think he's wounded himself pretty severely. He's no further along than he was months ago.... He risks harming the other deal. If he had cash, letters of credit, firm commitments, and walked into the mayor's office, I think people would have listened."

Right now, few are inclined to give Schoemehl a hearing. Ferrara says Schoemehl's plan doesn't merit review -- "There's no way you build a world-class hotel from combining a failed mall, an office building and a discount department store," he says. Says Slay: "I have no intention to abandon the proposal that's on the table, and because of that I see no benefit in reviewing the alternative proposal." And there's no interest from Harmon, either: "The mayor stands by his statement that it's a "bunch of crap,'" says Miller.

Jones is even more emphatic. "Mayor Harmon is an honest, principled individual. I, on the other hand, am not a nice man. And if something happened to this deal after the money we spent and the time we put into it, Schoemehl would be the last guy who could bring me a new project. He couldn't bring me a cure for cancer. And I would suggest anybody who was with him ought to be trying to get out of town before sunset."

But Schoemehl and his contingent are gambling that time is on their side. The message they're pitching is that the HRI deal is too expensive and too risky. They're positioning themselves to be the only viable alternative if the HRI deal falls apart -- so if Harmon really wants a convention-center hotel to open within the next three years, he'll have to come to them.

"It can't be done without some political support -- this is not something that can be financed without political support," Schoemehl says. "You know, I have been in the mayor's office, and I've been subject to, shall I say, fits of passion, and things have a tendency to come into focus over time, and I'm hopeful that as we discuss this, tperhaps this will come into focus and be regarded as a viable approach to developing the entirety of Washington Avenue."

Andreas, the industry consultant, says looking at an alternative plan shouldn't hurt the city's marketing efforts and could even help hold HRI's feet to the fire: "There's a lot of skepticism out there, but from the business community and convention community.... In my mind, if there's an alternative that costs less, has a little more equity -- which means a little less debt to make it work -- and can come on line quicker with basically the same amount of room and amenities, I don't know that it's not worth at least taking a look at."

But Slay worries that the likely result of considering an alternative now is the death of the HRI deal. "If this thing doesn't get done, I'm concerned that an alternative proposal, if we even stop to consider it, could further delay a process that's already taken too long and in the end could jeopardize the hotel deal altogether, which would be a disaster for downtown and the city of St. Louis.

"We can always sit back and criticize the one that's on the table -- believe me, it's a difficult deal, and there's a lot of things you can criticize. There's a huge public subsidy," says Slay. "But the deal Schoemehl has proposed, I understand, also would require a large public subsidy -- maybe not as large, but certainly a large public subsidy."

Of course, some wags worry that St. Louis loses no matter which hotel proposal is embraced.

Ald. Freeman Bosley Sr. (D-3rd), father of the mayor who served between Schoemehl and Harmon, was only one of two aldermen who voted against Harmon's hotel. But Bosley is no fan of Schoemehl's alternative:

"When Schoemehl was in office before he left, he was interested in putting together a deal that would cost the taxpayers $50 million anyway for a convention hotel. Now he's back with another proposal that will get into the taxpayers' pockets. Why do they always have to get into the taxpayers' dollars?... It's all about money, and when it starts out all about money, it's the taxpayers who are the ones whose money they're looking at."

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