Savannah getting double – possibly triple – scrutiny on its convention hotel plans

December 11, 2011

Economic Development, Legal Affairs

When an initial market study for a convention hotel in Savannah, Ga., made rosy predictions for occupancy rates for the proposed 500-room hotel, the board that governs the city’s convention center responded with a “not so fast.”

Like Jackson, Savannah has concluded that its convention center, known officially as the International Trade & Convention Center, can’t reach its potential without a taxpayer-supported convention headquarters hotel. But unlike Jackson, public policy makers in Savannah are insisting on a high level of comfort with projections on how a taxpayer-backed convention hotel would do financially.

While Jackson appears ready to move ahead based on a market feasibly study done by PKF Hospitality Consulting for potential development partner Transcontinental Realty Inc. of Dallas, Savannah has taken a second independent look at an initial market study and financing plan and is likely to take a third.

The follow-up analysis has raised questions about the correctness of projections contained in the first study by HVS Consulting and Valuation Services, a firm hired by convention center hotel development partner Journeyman Austin Holdings Inc.

In addition to the taxpayer risk, some of the caution in Savannah stems from concerns among city hotel executives that a publicly subsidized convention hotel could dilute their market shares. Hoteliers are equally concerned that should a convention hotel fail to meet occupancy and rate projections it would begin steeply discounting rates, forcing other properties in the market to follow suit.

At the insistence of hotel executives on the governing body for the convention center, the Georgia International Maritime Trade Authority Center board hired Robert W. Baird & Co. of Atlanta to scrutinize the initial study, especially the study’s plans for financing the proposed $100 million hotel. Mark Smith, who oversees several hotels in downtown Savannah and chairs the trade center board, said he and other policy makers wanted to be more comfortable with the financial projections.

“I think what the Baird report was trying to ascertain was what was the likely cash flow that would go to help underwrite the bond issue,” he said in a recent phone interview.

“They recommended a more conservative set of assumptions than the” initial feasibility study.

In short, Baird concluded chances seem slight at best that Savannah’s proposed convention hotel would hit the occupancy and rate projections put forth by HVS Consulting and Valuation Services.

Baird said two key assumptions underlying these estimates are projected hotel occupancy rates ranging from 64 percent to 71 percent over the hotel’s first full four years of operation1 and average daily room rates ranging from $174.80 to $192.72 over the same period.

Baird concluded that if a new convention hotel achieved occupancy levels similar to those of the neighboring 402-room Weston Savannah Harbor Golf Resort in 2008 through 2010, average occupancy levels at a 500-room convention hotel would translate into occupancy rates of 51 percent, 41 percent and 42 percent. Those are far short of the 64 percent to 71 percent occupancies in the initial study’s projections, Baird noted.

Using the Weston’s highest occupancy rate of 51 percent and achieving the rate of occupancy increases projected by HVS, the convention hotel would fall well below revenue projections, Baird concluded. “Net operating income from hotel operations would be reduced significantly” from the estimates of the initial market study.

The county commission for Chatham County, the county in which Savannah is located, has indicated it will contract for yet another independent analysis before it decides whether to back $50 million in bonds for the convention hotel.

Meanwhile, hotel executives fear a loss of market share to a convention hotel and are pushing to have room capacity scaled back from 500 to 350, said Smith, the chair of the Trade Center. “That would alleviate a lot of concern in the community and potential damages to other businesses and hotels in the community.”

Staying with 500 rooms would cause other hotels in Savannah to lose 47,000 room nights, Smith predicted.

Gaines Sturdivant, a member of the board of the Jackson Convention & Visitors Bureau and president of MMI Group, said in an email the Baird study in Savannah “was quite revealing and helpful in understanding the hidden realities of performance studies. There are wide discrepancies.”

The consequence of getting the projections wrong, he said, “can mean significant cash flow deficits.”

In both Savannah and Jackson, leaders must openly discuss the risks with taxpayers and determine whether the risks are acceptable to them, said Sturdivant, whose Flowood-based hospitality management company operates hotels throughout the South.

Mike Cashion, president of Mississippi Hospitality & Restaurant Association, said he and the association do not question the need for a convention hotel in Jackson. It’s the taxpayer participation that is worrisome, he said.

“The biggest concern that has been communicated to me is that it creates a pretty uneven playing field with a subsidized property competing against other proprieties in the trade area.”

The other issue, he added, “Is that if it doesn’t meet its projections in terms of bringing new clientele to the market, will the presence of those few hundred rooms further dilute the ability of the other hotels to fill their properties?”

The “unintended consequences of the market can be pretty drastic,” said Cashion, whose association represents about 130 hotels around the state.

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