Public-Private Financing

Following the NYU hotel investment conference, I have been thinking about ways of finding financing in this marketplace. Just before the conference, coincidentally, I reconnected with an old friend, Rick Rosenberg. Bear with me as I relate these two facts to each other.

For many years, we have seen larger cities build and own, directly or through subsidiary governmental agencies (we used to call these “quasi-governmental agencies,” but no one knows what “quasi” really means), convention centers and convention center hotels. Chicago, Denver, San Antonio and Dallas are recent examples of cities that have done the latter (and the former, too) and I understand that Salt Lake City has a convention center hotel in the works, as well. These cities have been able to build these hotels by using either municipal bonds or industrial development bonds. In some cases, they have been credit-enhanced by developers and hotel companies, but the cities (or the subsidiary agencies) own the facilities.

Rick Rosenberg, with whom I worked many years ago on a Mandarin Oriental transaction in Puerto Rico (one that, in a slightly different guise, is apparently still active), has landed in Phoenix and works for a company called Development Planning & Finance Group. Rick reached out to find me recently, and, in talking, I realized that he knew a lot more about municipal bond financing than I did. In fact, he indicated that he thought that smaller cities’ use of their bond authority would enable them to promote hotel development in ways that the hotel investment community may not have yet considered as a means to geographically diverse financing. The following is an excerpt from a note Rick sent me:

Public financing and its related activities can take many forms such as, but not limited to, special tax districts designed to assist in the financing of infrastructure utilizing additional assessments on the underlying property and those (for example, Tax Increment Financing Districts and Public Improvement Districts) created to utilize the incremental revenues (sales taxes, occupancy taxes, incremental property taxes, etc.) generated by a new project to support the project financing. No matter which specific form is utilized, these available public-based programs offer the commercial developer several key advantages in today’s market:

• Local communities more desperate for economic development activities, especially the high levels of new jobs created by most hotels, may be more willing to discuss and utilize the available alternatives;

• These programs are often designed to finance the most difficult aspect, in terms of perceived risk by lenders, of the development process – horizontal and other public infrastructure including off- and on-site improvements;

• Public involvement in these transactions may lower overall yield requirements for the entire project as the local governments gain comfort from the added value created from the multiplier effect thereby allocating more of the direct economic benefits to the private components of a partnership thereby ensuring their long-term economic viability and feasibility.

The hotel development community, particularly in smaller cities and, even, towns, might want to investigate the public-private approach if it can show the municipal powers that be a compelling or near-compelling case for new development.

And, TIF Districts, oft-used to promote development, may well see a revitalization in a declining development marketplace. Any port in a storm?