A preliminary agreement between Denton, a developer and the University of North Texas shows city leaders seeking to cover a gap between the cost of financing a new $25 million convention center and the city tax revenue that may come from the project.
Signed in January, the preliminary agreement calls for O’Reilly Hospitality Management to lease the convention center from the city at a rental rate that covers the gap.
Using the city’s 2009 hotel market study and common amortization calculations, a Denton Record-Chronicle analysis has found that the gap between project financing and revenue could range from $5.6 million to $8.2 million, or more, in the first 10 years of convention center operations.
The nonbinding agreement contains a few financial figures, including a $100,000 annual lease payment by O’Reilly to the University of North Texas, which owns the land, and a specification that the city’s bonds have a maximum 20-year term.
The agreement does not specify a minimum or maximum lease payment O’Reilly makes to Denton. It only specifies that O’Reilly makes up the difference after the city cobbles together sales, property and lodging taxes from the convention center and hotel to make the debt payment.
The city currently charges a 7 percent hotel occupancy tax.
Tim O’Reilly, the company’s chief executive officer, was out of the country and could not be reached for comment, according to his office staff. His assistant, Scott Tarwater, did not return calls for comment.
Borrowing costs for municipal projects such as a convention center tend to be slightly higher than other city projects, according to Assistant City Manager Jon Fortune. Currently, the city estimates the annual debt service for the convention center to be between $1.7 million and $2 million. Several factors would affect what that annual payment might be, including the interest rate, the amount of the debt and its structure, Fortune said.
Discussions about building a convention center at the former site of the Radisson Hotel, on UNT land, had been dormant since 2009. They were revived earlier this year with an unsolicited proposal from O’Reilly. The idea for a convention center has long been on Denton’s wish list, first identified in 1994-95 as part of the “Vision for Denton” project — a project that included many residents and city leaders who met for months to outline a plan for the city’s future. The convention center officially became a City Council goal in 2001, according to city officials.
In briefing the Denia Neighborhood Association last week about a proposed zoning change for the land, Linda Ratliff, the city’s economic development director, told residents that O’Reilly had hired some of the management team from John Q. Hammons Hotels & Resorts after the Hammons family announced they would no longer develop new properties.
Hammons had been identified at the original developer, but shelved the project in 2009.
Discussions between O’Reilly and the city are ongoing, Fortune told Denia residents. An earlier proposal for a second, smaller hotel on the site has been shelved. Discussions are focused now on a $60 million, 318-room, full-service hotel and restaurant that would compete in a regional market with such facilities as the Gaylord Texan in Grapevine and the Frisco Convention Center.
The city’s market analysis includes revenue projections that are based, in part, on estimated room rates for the convention center hotel.
Area hoteliers are concerned about those estimates and the project’s impact when there aren’t conventions in town. They provided the city a list and documentation of their concerns, according to Charles Helm, with the Best Western Crown Chase Inn and Suites.
Three hotels were built in Denton the past three years, including the Courtyard Marriott, Hilton Garden Inn and Homewood Suites, just as the recession hit Texas. About 1,000 rooms are empty each night in Denton.
According to Smith Travel Research, the average daily rate for the nine hotels in Denton for February 2011 through January 2012 was $85.23.
DP Consulting, a hospitality consultant based in Houston, reviewed the city’s market study for area hoteliers and told them the projected $145 room rate for the convention center hotel was unrealistic until the Denton hotel market recovers.
PEGGY HEINKEL-WOLFE can be reached at 940-566-6881. Her e-mail address is email@example.com.
BY THE NUMBERS
Construction costs for planned convention center: $25 million
Annual debt service: $1.7 million to $2 million
Projected tax revenue for first year: $968,730
Debt service shortage (at $1.7 million, first year): $731,000
Debt service shortage (at $2 million, first year): $1,031,270
Projected tax revenue for 10th year: $1,505,335
Debt service shortage (at $1.7 million annually, after 10 years), approximately: $5.6 million
Debt service shortage (at $2 million annually, after 10 years), approximately: $8.2 million
SOURCE: Revenue includes property, sales and 7 percent lodging taxes, per the city of Denton hotel market study by HVS Consulting and Valuation Services, April 2009