Convention Hotel Subsidies Hurt Private Businesses

Texas Citizens for a Sound Economy released a comprehensive study today that found the primary impact of tax subsidies for convention center hotels is to hurt existing, privately-financed hotels rather than to attract new conventions. GET THE FULL STUDY (large .pdf download)

CSE commissioned the study as several Texas cities have proceeded with expanding convention center space and are considering various public subsidies for adjoining Convention Center hotels. One portion of the study examines Dallas’ proposed convention center hotel in depth and finds that it is not financially viable.

CSE is philosophically opposed to public funding of enterprises which compete with private business. Specifically, this new study examines the impact public subsidies would have on existing hotels, whose owners must pay taxes and risk their own capital in these private enterprises.

The three-part study was performed by Source Strategies, Inc. of San Antonio, a company that also provides detailed analysis of hotel occupancy rates and taxes for the Texas Department of Commerce.

The first part of the study uses historical data to test the theory that demand for hotel rooms can be increased by building a convention center headquarter hotel. It concludes that increasing the supply of hotel rooms will not spur an increase in demand.

The second part of the study addresses the financial feasibility of the hotel. It concludes that the hotel’s projected return on investment is too low to make the hotel a sound investment.

The last part of the study analyzes the impact that a new 1,200 room hotel will have on the Dallas market. It concludes that the primary impact of the new hotel will be to take business from existing hotels and to lower the overall hotel occupancy rate in downtown Dallas.

Studies show that the current hotel occupancy rate for downtown Dallas is about 53%. Adding 1,200 tax-subsidized hotel rooms would only cause the occupancy rate to fall further, potentially driving existing, privately-operated, tax-paying hotels out of business.”

CSE’s goal was to document that bad political philosophy is also bad economics for the state.

The first part of the Source Strategies study tests the theory upon which publicly-subsidized convention center hotels have been justified in recent years. Nationwide, the proponents of these tax-subsidized hotels typically contend that public subsidies are justified because the hotels bring new business to cities. The hotels, they claim, generate additional demand and, thus, do not negatively impact the rest of the market. The Source Strategies study shows that this theory is false. The claims of hotel proponents fly in the face of statistics showing that local attractions, not new hotel rooms, generate additional demand. To the contrary, despite the fact that convention center complexes are being renovated and expanded across the country, overall convention attendance has been decreasing for the past two years.

“An objective analysis of hotel occupancy data conclusively shows that opening large, full-service hotels near convention centers does not increase demand for hotel rooms in the local market,” explained Bruce Walker, president of Source Strategies, Inc. “We based our conclusion on actual market revenue history for the four largest convention markets in Texas: San Antonio, Houston, Dallas, and Austin. Since 1980, sixteen convention-sized hotels have been opened in these markets. The study shows that these hotels generated no additional or measurable demand. The ‘build it and they will come’ belief is not based on actual facts.”

Source Strategies’ database of Texas hotel performance is the most comprehensive and most accurate hotel revenue database in the country. The organization tracks 3,681 hotels and motels with a total of 315,000 rooms that generated $4.4 billion in revenue in the fiscal year ending September 30, 2002.

The second part of the Source Strategies study addresses the financial feasibility of a new 1,200 room hotel in downtown Dallas. The study assumes that the Dallas project will carry a Four-Diamond quality rating from the American Automobile Association and a Marriott Hotel or similar franchise. The total investment is estimated at $276 million, plus an extra $12 million for land.

The study concluded that no private developer would undertake to develop this hotel as it would generate less than a 6% return on investment in an industry that requires at least a 14% return before a project is considered feasible. If a public/private investment were to instead be used, the study anticipates that a $108 million public subsidy would be needed to attract developer interest in the project.

The study observes that the loss to taxpayers is not limited to this $108 million subsidy, but may also include a loss of downtown property tax revenue. The existing downtown hotels are anticipated to lose $175 million in cash flow during the first five years after the hotel is built. As the proposed hotel siphons off occupancy from existing properties, their real estate value will dwindle and less profitable properties may be forced to close. The deteriorating real estate values will result in a loss of property taxes from these hotel properties.

The third part of the Source Strategies study evaluates the impact of the proposed hotel on already-existing downtown hotels. Projections show that existing hotels will lose $450 million in lost revenue during the first five years of operation for the convention center hotel. This lost revenue translates into a loss of $175 million in net profits during the same period.

While occupancy rates downtown are currently at 53%, projections for the next several years show hotel occupancy edging up to just over 58%. The study shows, however, that opening a new convention center hotel in 2006 would send these occupancy rates plummeting back down to 55%; they would not return to the 58% level until 2010.

“The downtown Dallas market is not currently performing at, or even near, capacity; there is therefore no unfulfilled demand for hotel rooms,” Walker concludes. “Any revenues generated by a new hotel will come off the books of other existing properties and would certainly put one or more of these competitors in financial jeopardy, bankruptcy, or could possibly even force their closure.”


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