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State, city want taxpayers to aid convention hotel

By Casey Ross
Globe Staff / May 7, 2010

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State and city leaders want to build a 1,000-room hotel next to the Boston Convention and Exhibition Center, a project that will cost up to $700 million and almost certainly require millions of dollars in subsidies and taxpayer-supported loans.

Officials studying how to dramatically expand the convention center said another large hotel is necessary to attract the biggest events, and that building it without taxpayers’ help would be nearly impossible.

The options are still being discussed, but officials said the project could involve a combination of tax breaks, public funds for road work and other upgrades, and hundreds of millions of dollars in debt that would be partly or entirely backed by taxpayers.

“If we stand back and do nothing, another hotel will not be built here for another 10 years,’’ said James Rooney, executive director of the Massachusetts Convention Center Authority, which operates the center. “Boston has shown that it can do well in this market, so the question is do we want to make the tough decisions to build this hotel and take advantage of our capacity?’’

When the convention center opened in 2004, the city and state increased taxes on things such as rental cars, tourist tours, and hotel rooms to help pay for construction of the $800 million South Boston facility. Officials say they will examine whether to raise those again as part of any expansion of the convention center.

A committee of 25 public officials and business leaders has highlighted the hotel as a critical component of such an expansion, which would be undertaken with the goal of making Boston one of the nation’s top five cities in the convention business.

A preliminary study has called for 400,000 square feet of additional exhibit space, a 5,000-seat auditorium, and a 75,000-square-foot ballroom. The hotel could open as early as 2015.

Boston officials say they recognize the demand for additional hotel rooms and the need to examine sources of public support.

“We have to find out how much help would be needed,’’ said Kairos Shen, chief planner for the Boston Redevelopment Authority. “But this is one area a large hotel can work because of the convention traffic and excess demand from the airport and downtown.’’

The convention center’s business has grown steadily, with annual attendance at its events increasing to about 550,000 in 2008 from 200,000 in 2005.

In the last couple years, however, officials said it has lost dozens of large events because it does not have exhibit space or adjacent hotel rooms to accommodate gatherings of many thousands of people. And the big conventions that have come to Boston have faced logistical problems.

For example, attendees of a recent insurance convention were placed in 33 hotels across the city. The event required 8,000 hotel rooms, but the convention center has only 1,100 hotel rooms within walking distance. Most attendees had to be bused back and forth to their hotels, resulting in $300,000 in additional transportation costs.

Rooney said the shortage of hotel rooms was also cited by several convention organizers who decided not to come to Boston, including the American Society of Safety Engineers, which required 4,000 rooms, and the National Safety Council, which required 6,500.

While there appears to be demand, large convention hotels are difficult to build because high construction costs make it difficult to earn the 20 to 25 percent profits demanded by private investors. In most cases public money is used to help defray costs through tax breaks, funds for road work or other infrastructure, and other assistance.

In the last 10 years, only two hotels with more than 700 rooms have been built in the United States without public assistance, according to PiperJaffray, one of several consultants advising the convention center’s study committee. Both were in New York City.

In other parts of the country, large hotels are becoming increasingly reliant on public borrowing and subsidies. Since 1997, 15 hotels have been built with either publicly issued debt, direct funding to help with construction costs, or both. Among cities hosting those hotels are Chicago, Baltimore, San Diego, Tampa, St. Louis, and Phoenix.

It is becoming increasingly common for convention hotels to be 100 percent publicly financed. Officials in Dallas, for example, are building a 1,000-room hotel with $480 million in government-issued bonds that will be paid off through operations of the hotel. The state is also providing tax breaks for 10 years, and the city of Dallas is guaranteeing 100 percent of the debt. A similar financing structure was used in 2005 to build a 1,100-room convention center hotel in Denver.

The model works if the hotel succeeds, as it has in Denver. But if the hotel fails, it can leave taxpayers facing a huge bill. Some industry specialists warn that, with so many cities developing large hotels, demand is going to start to wane, making failures more likely.

Moreover, the US hotel market is already suffering in the down economy. Room rates in the Boston area are down 12 to 15 percent since 2007, and last week the W Hotel declared bankruptcy after just six months of operations. That breakdown came after the city of Boston had provided a $10.5 million loan to the W. Officials have said they secured enough collateral to protect against losses.

“The construction costs of these hotels is so high that it becomes difficult to make enough revenue to pay off the debt,’’ said Michael Oshins, an associate professor at the Boston University School of Hospitality. “So there is some risk.’’

Oshins pointed out the W’s failure was largely due to the inability to sell condominiums that were supposed to help raise enough money to pay off its debt in the near term.

Rooney said a similar failure would not occur at the convention center hotel because it would be supported by a steady stream of event traffic. He acknowledged that many other cities are also building convention hotels, but said Boston has proved it can compete for business.

“There is a tremendous economic opportunity here,’’ he said. “We can be among the leading world cities for assemblies and conventions if we decide to build the infrastructure to support this business.’’

Casey Ross can be reached at cross@globe.com.