Kansas City wants to keep a convention center consultant’s report buried

Just before the Kansas City, Missouri, City Council’s July 23 vote to approve a $311 million downtown convention hotel, Mayor Sly James made a point about including experts and facts in political discussions.

“As a trial lawyer, I will tell you straight up: If I wanted to prove a certain point or make a certain statement and get an affidavit to get my case in court, I could find an expert to say whatever I wanted them to say,” James said from the lectern during an afternoon council session. “It’s all a matter of how much you’re willing to pay them.”

His statement was an apparent reference to a researcher’s appearance the day before at the Kansas City Public Library. Heywood Sanders, a University of Texas–San Antonio professor, had spoken to about 200 attendees at the library about his decades-long research into the national convention business.

His general findings: Municipal leaders ignore the economic principles of supply and demand when large and midsize cities build convention centers and convention hotels. The supply of convention space has far outstripped convention-business demand over the past 12 years.

Sanders’ appearance had become a piece of political theater. Kansas City Star columnist Steve Rose lambasted Kansas City Public Library director R. Crosby Kemper III for allowing Sanders to deliver an openly critical talk at a publicly funded institution without providing a counterpoint.

James did not attend the Sanders lecture, nor did any of the City Council members who voted the next day.

“Let’s use facts and data to make decisions,” James said during the July 23 council meeting. “Facts and data support the decision we’re about to make.”

That decision by the council was a unanimous vote to fund about half of the $311 million hotel project with public sources, through a pledge of convention and tourism taxes and a maze of other development incentives.

In keeping with his story about his trial-lawyer days, James and the city relied on an expert’s report to justify backing the 800-room hotel. Despite the public money going into the project, however, the public isn’t allowed to see the “facts and data” that the city considered when approving about $165 million in subsidies.

That report was submitted by a consulting firm in Chicago called HVS. The firm is among a handful of consulting outfits working with cities and hotel developers — essentially both sides of the hotel-development industry — to evaluate how a proposed project might fare economically. The Pitch has requested a copy of HVS’s report several times.

Chris Hernandez, a spokesman for Kansas City, denied The Pitch‘s request to view the HVS report, citing an exemption in Missouri’s open-records laws that allows cities to keep documents related to contracts under wraps until those contracts are finalized.

With the city signing off on its incentives for the hotel project, it’s unclear what remains to be done in order for the city to make the HVS report public. And it’s not an insignificant document. Its projections of the future convention hotel’s occupancy and revenue form the foundation for how bonds will be issued and repaid.

The development team also doesn’t appear to want the consultant’s report to be evaluated publicly.

Mike Burke, a local lawyer who is leading a group of investors providing the private-side funding of the Hyatt convention hotel, says he’s reluctant to release the HVS report while his development team seeks additional backers.

“There’s some sensitivity to releasing anything that’s old or anything that causes us grief with the bond buyers,” Burke tells The Pitch. “The minute we put it out, somebody with the Show-Me Institute will say it’s unrealistic,” he adds, referencing the libertarian Missouri think tank that has been critical of the hotel project in a series of online posts. (Library director Kemper is Show-Me’s co-founder and chairman.)

Sanders, the hotel and convention expert, says that, in his experience, it’s unusual for a consultant’s report to remain unseen by the public when the project in question will receive public financing. “I’m flabbergasted that they keep refusing to release a report that they’ve announced publicly and ostensibly informed their decision making,” he tells The Pitch. “If they’re trying to hide it that much, there’s usually a reason.”

The Pitch has reviewed HVS’s financial projections of similarly sized hotels in other cities. Predicting the future is hard to do, of course. But HVS has sometimes made it look harder than average, missing on some of its projections by spectacular margins.

HVS consultants are no strangers to the Kansas City area.

In 2010, one of HVS’s consultants gave a presentation to the Kansas City, Missouri, City Council. Only a few years had passed since the opening of the Bartle Hall expansion (for which the city still owes $223 million), and the consultant made no bones about what the city was still missing: a 1,000-room convention hotel. Hans Detlefsen, the HVS consultant who delivered the presentation, told city leaders that KC was missing out on $125 million in convention revenue every year because there was no such hotel.

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For a look at the kind of volume that a shiny new hotel can yield, the City Council could have driven a few minutes to Overland Park, which caught the same convention fever from HVS about 15 years ago. In 2000, the Kansas suburb hired HVS to develop a study on how a convention center and an adjacent 412-room Sheraton hotel would fare. HVS predicted that, by 2013, the hotel would generate $37 million a year.

Overland Park built the project and retained ownership of both facilities. That means it also owns any shortfalls associated with the project. Since the hotel opened, in 2002, it has consistently failed to meet the projections set forth by HVS. For example, in 2013, the most recent year for which figures are available, the hotel reported $21.4 million in revenue — about 27 percent less than HVS’s figure. In 2012, when HVS’s study projected $36 million in revenue, the hotel fetched $19.9 million. Some years, that gap has been narrower, but at no time in its history has Overland Park’s convention Sheraton met the expectations outlined by HVS.

In recent years, the hotel itself has posted an operating profit, which means that its revenues from rooms, food, drinks and rentals add up to beat operating expenses. But investors who bought the bonds need to get paid. Since 2007, Overland Park has tapped into its transient guest tax to make debt-service payments. In 2014 alone, that amount was $3.4 million.

The year in which Overland Park opened its convention center and hotel, 2002, was the last year when U.S. convention demand was in line with available convention space. This fact is neither in dispute nor obscure.

Hunden Strategic Partners, a Chicago real-estate consultant, was hired last year by Fort Worth, Texas, to evaluate the convention business and recommend ways by which that city could make more money from it. The Hunden report included a study of national convention trends. For example, the supply of convention space steadily increased from 2002 to 2013, growing by about 34 percent, according to the report. The amount of space paid for by convention planners — convention demand — had gone up and down over those 11 years but ended up at about the same level in 2013 as it had been in 2002, stymied by increasing travel costs and better technology.

In spite of that trend, cities have proved generally eager to add to convention-space supply.

Baltimore is one such optimist. In 2008, that city built a 757-room convention hotel at the behest of former Mayor Martin O’Malley (that city’s leader till 2007 and now a long-shot candidate for the Democratic presidential nomination in 2016), who could point to a report produced by HVS that made the Hilton seem like a winner.

The hotel would overlook Camden Yards, the home stadium for the Baltimore Orioles, and would be adjacent to the city’s convention center. By 2010, HVS projected, the hotel would be running at 72 percent occupancy.

Up went Baltimore’s Hilton. In 2010, it reported 62 percent occupancy.

Beyond occupancy, a hotel’s performance is evaluated by its revenue per available room, or RevPAR: how much money an average room fetches in a given year.

The Baltimore Hilton’s projected RevPAR in 2011, according to the HVS report, was $154.25. The actual figure that year was $114.50.

In April of this year, a city audit there revealed that while the hotel should have been profitable by now to the tune of $7 million a year, helping line Baltimore’s municipal budget, it had consistently underperformed from Day 1.

“It’s a sad example of the misallocation of scarce capital and misbegotten development strategy,” Loyola University–Maryland economics professor Stephen Walters told The Baltimore Sun.

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Like Overland Park’s Sheraton, Baltimore’s Hilton does well enough to cover its operational expenses but not its debt payments. In 2011, Moody’s Investors Service downgraded its credit ratings for the bonds that Baltimore had issued to finance the hotel’s construction. The Moody’s report said revenues were “well below expected levels,” and indicated there was lower demand for hotel space given that Baltimore’s convention center competes against other East Coast cities for convention business.

Several of those competing cities have expanded, or plan to expand, their convention facilities.

Baltimore briefly considered selling its Hilton, but city officials continue to bank on the idea that the hotel will someday perform better.

Phoenix, on the other hand, is strongly considering selling off its 1,000-room downtown Sheraton hotel. The Arizona Republic reported in April that Phoenix leaders were tired of using taxpayer money to keep the hotel afloat when funds might go instead toward a new basketball arena for the Phoenix Suns.

The hotel was supposed to have performed far better, according to HVS.

HVS evaluated Phoenix’s Sheraton plan before construction and signaled that the hotel would be a moneymaker. But in nearly every respect, HVS’s projections on the Phoenix Sheraton have been wrong. And not just by a little bit. Comparing HVS’s projected 2013 performance with what that year actually yielded shows:

• Projected occupancy: 251,850. Actual occupancy: 209,938.

• Projected occupancy rate: 69 percent. Actual occupancy rate: 57 percent.

• Projected average room rate: $193.03. Actual average room rate: $146.93.

• Projected RevPAR: $113.19. Actual RevPAR: $84.51.

• Projected total revenue: $85.4 million. Actual total revenue: $53.9 million.

“If you forecast 5 or 10 percent off, that’s one thing,” Sanders tells The Pitch. “If you’re getting half or a third of what the consultants say, that’s a problem. And that keeps happening.”

Kansas City leaders have claimed that the city won’t be on the hook financially for the hotel if it goes under. That’s true: The convention center hotel, as vetted by the City Council, would not be city-owned, as are Baltimore’s and Phoenix’s and many others across the county. And the public-financing component of the proposed hotel does a reasonable job of keeping the city’s general fund out of the development.

If the hotel performs well, the city could share in a small portion of the profits, similar to its arrangement with the Sprint Center. And some convention hotels fare relatively well financially; those in Dallas, Austin and Denver come to mind.

Kansas City, however, faces a steep climb. Once a top convention city in the 1970s, culminating with the Republican National Convention at Kemper Arena in 1976, Kansas City has since seen its standing among convention planners drop steadily, in spite of several substantial investments (including two Bartle Hall expansions).

For a nearby lesson in the no-sure-things nature of convention hotels, look at St. Louis.

Missouri’s other big city renovated the historic former Statler Hotel and reopened it as a Renaissance Grand in 2003 to serve its nearby convention center. HVS was the consultant on that project. By 2009, the hotel had gone into foreclosure because its owners couldn’t make interest payments on the hotel’s debt. It finally sold last year for $32 million — well below the $98 million in bonds that had been issued for the project.

According to Sanders, the St. Louis hotel was supposed to be supported by a large influx of new, major conventions to that city — specifically, according to HVS’s projections, an increase from 33 to 56 major conventions a year. When that uptick in business didn’t materialize, the hotel collapsed.

The value of the bonds supporting the St. Louis venture is about 33 percent less than those being contemplated for Kansas City’s new convention hotel.