CIB rescue plan counts on new hotel being big success

April 13, 2009

The pressure on Indianapolis' new downtown JW Marriott convention hotel to perform—despite the recession—is about to increase exponentially.

The Marion County Capital Improvement Board's bailout depends on it.

CIB, which manages the city's professional sports stadiums and its convention center, needs to close a $47.4 million annual budget deficit. On April 2, the Indiana Senate's Appropriations Committee approved Sen. Luke Kenley's CIB rescue plan 10-2. So far, it's the only solution on the table.

Unfortunately, it misses the mark by millions, at least in the first few years.

Under the best-case scenario, with the Legislature adopting Kenley's entire plan, the cash-strapped municipal corporation would be left with an $8.7 million deficit the first year, plus another $4.2 million deficit the second, according to an analysis by the Legislative Services Agency. And that's assuming the economy doesn't worsen.

I n later years, Kenley's pla n likely would generate more revenue than CIB needs.

"We're trying to put a plan in place which will last 20 years and more," said Kenley, a Republican from Noblesville. "When you look at it from that perspective, you have to realize you're going to have some ups and downs."

Much has been made about the plan's key provisions: financial concessions by both the Indianapolis Colts and Indiana Pacers, and hikes in hospitality and statewide alcohol taxes. All are controversial, and in fact Kenley on April 9 signaled he likely will restrict the alcohol tax increase to Marion County.

But the performance of the JW Marriott may be the biggest variable in the equation. Kenley's plan would expand the downtown Professional Sports Development Area that currently covers Conseco Fieldhouse and Lucas Oil Stadium to include the 1,626-room, $450 million convention hotel complex. The project will be anchored by a 1,005-room, upscale JW Marriott hotel. All sales taxes generated at the complex will go straight to CIB.

Kenley is counting on the development to produce $6 million in sales taxes annually. That means a hotel project still under construction must earn at least $85.7 million in revenue during its debut year, then keep up that performance or better indefinitely.

It assumes 65-percent room occupancy—far above what the Indianapolis hotel market is achieving in the recession. It also assumes the JW Marriott will be able to charge more than $180 for its rooms. That's $50 more than the average the rest of downtown's convention hotels are currently getting.

And since the JW Marriott won't open its doors until February 2011, CIB will have a long wait for its cash.

The hotel's developers, locally based REI Investments and Merrillville-based White Lodging, remain confident they will meet Kenley's expectations. Over time, they expect to do even better.

REI President Mike Wells said Indianapolis is moving into the "big time" with the JW Marriott and the ongoing, $275 million convention center expansion, and will be elephant hunting against cities like Chicago and New Orleans for tourism business.

"The bottom line is, we've had a convention strategy downtown for the last 30 years that's been built on continuous improvement of our facilities and the experience for conventioneers," Wells said.

"We shouldn't throw the baby out with the bath water because we're a little upset about the situation we're in."

Growing the pie

Before the economic downturn, hotels across the city enjoyed occupancy rates of about 60 percent. But there's been a considerable slide since. Hotel consultant Mark Eble, regional vice president for Philadelphia-based PKF Consulting Corp., is predicting a deep, long recession with Indianapolis occupancy rates in the 52-percent range this year and next.

He expects the "blood to start pumping" again in 2011. After that, it's anybody's guess how quickly hotels will return to pre-recession levels.

Downtown hotels usually outperform the city averages, thanks to their share of the convention business. The Indianapolis Convention and Visitors Association said downtown occupancy averaged 70 percent in 2008. So far this year, occupancy has slipped a little, said Phil Ray, of the Omni Severin as well as president of the Indianapolis Hotel and Lodging Association.

The JW Marriott's potential to reach its financial projections depends on its ability to help expand the local tourism trade in step with the expansion of the Indiana Convention Center. That project, scheduled to be complete in 2010, will increase exhibit space from 403,000 square feet to 745,000 square feet.

ICVA must not only retain the 40 annual citywide conventions Indianapolis already hosts, but continually attract new ones. And the JW Marriott must draw a steady traffic in smaller conventions and meetings it can hold inside its own walls.

"In essence, they're going to do as well as the convention center does. As long as the city and state can fill the convention center, the JW Marriott will likely do very well," said Christopher Pike, a principal with Lexington, Mass.-based IHS Global Insight, which has studied the Indianapolis tourism market for ICVA.

"Indianapolis is certainly making a big bet with all the new development they've built up, whether it's the hotels, the convention center or Lucas Oil [Stadium]. But they certainly have room to grow."

It's an aggressive goal, Eble said, but an achievable one.

"It would be a big mistake to think the JW [Marriott] is going to come in and take a proportional piece of the existing pie. It won't simply take its business out of the hide of the Westin," Eble said.

"The JW Marriott will make the pie bigger. It's going to attract new business to the city. And it will achieve, as it should, a disproportionately high share of that new business."

In addition to a JW Marriott, the complex will include a 297-room Courtyard by Marriott, a 168-room Indianapolis Fairfield Inn and Suites, and the 156-room SpringHill Suites.

Both REI and White Lodging have many other high-profile projects under their belts and have substantial financial backing. White Lodging is owned by Bruce White, whose father, Dean White, is the billionaire owner of Merrillville-based Whiteco Industries.

"These guys are black belts at doing this. And it's going to be a gorgeous hotel," Eble said. "The Westin is, geez, 20 years old. One would expect a brand new, fancy JW Marriott to do well against that. Mike [Wells] is well within the bounds of reasonability, at the optimistic end of the spectrum."

Although the JW Marriott's rooms will be priced above $180, Wells pointed out that the other hotels in the complex will offer rooms from $135 to $150.

The developers announced this month that the JW Marriott already has prebooked 100,000 rooms. Wells said he's pleased with the advance sales, which will help drive demand for the hotel's other services. For example, if the complex garners $60 million in annual room revenue, it should bring in $30 million for catering, meeting space, audio video equipment rental and the like.

"We're in a little bit of an economic downturn here. But I'm very comfortable with the $6 million [sales tax] figure Sen. Kenley has used in his numbers," he said. "Even if we see a softening as a result of the economy in our projected room rates, we should meet or exceed the $6 million annual figure."

Over time, Wells expects the JW Marriott's occupancy to top 70 percent. If that happens, CIB will get to keep any excess sales taxes. Kenley said he's considered installing a cap on sales tax revenue generated by the sports development area, but so far has concentrated on brokering support for his plan. It's been tough sledding.

"I'm having a hard enough time getting people to understand this is a problem that needs to be addressed," he said.

"Other people are going to need to sit down and say they're committed to finding a solution here. It's not going to be me alone that makes this happen. That's not how these decisions are made around here."

Fierce competition

Other cities that depend heavily on convention business are faring worse than Indianapolis in the recession.

ICVA CEO Don Welsh said cities on the East and West coasts are seeing their convention attendance levels drop as much as 40 percent. Indianapolis, on the other hand, lost only 5 percent to 8 percent of its traffic during the first quarter of 2009.

In part, that's because of Indianapolis' central location, which makes it a drivable destination for many visitors. Its relative low cost also is working to Indianapolis' favor.

But competition is fierce—and getting fiercer.

"I've never seen anything as aggressive as it is right now. Literally, cities are giving away convention centers for free with extremely discounted hotel rooms. Anything to keep business in the city," Welsh said.

"We take nothing for granted. But the value proposition is really working to our advantage here."

Earlier this month, ICVA celebrated the announcement that Indianapolis had retained the annual Gen Con convention for science fiction fans and role-playing game enthusiasts.

Bringing in new conventions—and doing it quickly—is another matter.

ICVA also announced recently that it landed the American Library Association's Midwest Meeting, which should attract 11,000 attendees and bring in $11.6 million in visitor spending.

But the event doesn't occur until Jan. 22, 2012.

Some worry that the JW Marriott's ramp-up period will take longer than expected, if the economy remains sluggish for years.

John Livengood, CEO of the Indiana Hotel and Lodging Association, fears raising Indianapolis' mix of hospitality taxes will dull interest in the city from groups scouting for convention sites. Kenley's plan counts on $15 million in annual revenue from hikes to the local Admissions Tax, Food and Beverage Tax, and Innskeeper's Tax.

"There is always the danger, like on cigarette taxes, your revenue projections won't be as much as you think they'll be if you raise taxes," Livengood said. "I'm an advocate for trying to promote our way out of this problem rather than increase taxes."

And even if the General Assembly adopts Kenley's plan in full, the Legislative Services Agency projects it won't raise nearly as much in the early years as CIB says it needs immediately.

LSA's analysis shows the sports development district would generate just $600,000 in the fiscal year that ends in June 2010, or $5.4 million less than Kenley's plan counts on annually, since much of the hotel complex still will be under construction. And because of the recession, that year's hospitality taxes would generate $12.2 million, or $2.8 million less than Kenley lists.

CIB Chairman Bob Grand conceded that the board has a problem if the bailout doesn't close the financial gap for several years.

"It's a work in progress," he said. "If revenues come in later, clearly, we need other revenues now to make sure we remain solvent and in operation. It doesn't help if we don't get through the next two years."

In the meantime, CIB's problems are beginning to hamstring ICVA's attempts to land new convention business. Word of its crisis is spreading beyond state lines.

"We need to get the funding of CIB behind us. Our competitors are saying, 'Indy is uncertain. Who knows if Lucas Oil [Stadium] will even be open?'" Wells said. "In a competitive world, that's what people do to you.

"The one thing Indianapolis has always been able to sell is that we deliver," he added. "I'm confident that with Sen. Kenley's help, we can show the rest of the country Indianapolis will be just like it always has been in the past, stable and a great place to stay."

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