Convention Center Hotel in Jeopardy

By Dana Hedgpeth and Alejandro Lazo
Washington Post Staff Writers
Wednesday, September 12, 2007

The deal to build a convention center hotel, long plagued by squabbles over its location and who would pay for it, is now in serious jeopardy of collapsing under the weight of the nation's credit crunch.

Marriott International and RLJ Development, the hotel company started by BET founder Robert Johnson, had been planning to build the District's biggest hotel, with 1,400 rooms, at Ninth Street and Massachusetts Avenue NW, across from the convention center. But investors and people involved in the deal say the timing may have made it untenable: The hotel boom has shown signs of slowing, interest rates and construction costs are rising, and it is difficult and more expensive for developers to borrow money from banks.

"RLJ remains interested in the D.C. Convention Center Hotel project, assuming it is economically viable," said Thomas J. Baltimore Jr., co-founder and president of RLJ Development. "However, the current credit crunch and rising construction costs are real constraints and should not be underestimated."

The project was expected to cost $550 million and be completed in 2009, but with construction costs rising as the project encountered delays and the D.C. government having to buy land, it is now likely to cost $750 million and not open until 2012 or 2013.

D.C. Council member Jack Evans (D-Ward 2), who has long supported building a convention center hotel, said yesterday that he recommended to the mayor that the District "pull the plug" on the Ninth Street site. He is proposing putting a hotel on part of the old convention center site at Ninth Street and New York Avenue NW, where a 1.5 million-square-foot project of housing, retail and office buildings is planned.

"We've been working on this since 2001, and we're no closer now than we were then to getting this done," Evans said. "We've tried as hard as we can, and it is seeming nearly impossible. It was a good faith effort. . . . It doesn't appear to have worked out."

The city, which has argued that it needs a big hotel to attract more convention business, is facing increasing competition for bookings because Gaylord Hotels is building a 2,000-room hotel at National Harbor in nearby Prince George's County.

D.C. officials and executives at Marriott and RLJ say they want to build the hotel and are still negotiating. Among the possibilities, District officials say, is scaling down the size to 1,000 rooms.

"We remain committed to this city and to this project," said Norman L. Jenkins, a Marriott senior vice president who is negotiating with the District. "We've been at this project for some time. . . . We will continue to work with the city and its agencies, but it is not an easy deal. I think it will ultimately be completed, hopefully sooner rather than later."

The District has been working on the deal since 2001, when it selected Marriott to help develop and manage the hotel. But it has hit many snags.

Some council members had wanted to put the hotel on the site of the old convention center, a block away from the new center. Tourism officials wanted the hotel across the street from the $850 million convention center so it could attract large, out-of-town shows and conventioneers wouldn't have to be spread out across the city and be bused to the center.

Last year, the District paid $30 million to buy a corner lot at Ninth Street and Massachusetts Avenue NW for a hotel. It has been negotiating for more than a year with developer Kingdon Gould III to swap land he owns next to the corner lot for land at the old convention center site.

But Gould, known as a tough negotiator, has stalled the transaction, said District officials and convention center board members involved in the negotiations. Gould has denied that he delayed the deal and said that it's up to the city to close it. Without the swap with Gould concluded, executives at Marriott and Johnson have said they can't get financing for the project.

Last year, the D.C. Council approved a $134 million subsidy for Marriott and Johnson that would be repaid with tax revenue from the hotel. Marriott and Johnson would pay for the rest of the project through private equity and debt.

But with project and financing costs rising, people close to the deal say Marriott and Johnson can't get the returns they were looking for and now need more money from the city. Marriott had proposed to sell the District a parcel of land it owns north of L Street NW for $50 million. The city was going to build meeting and ballroom space underground on that land. Marriott was going to use some of the land for the hotel and some for housing, which zoning requires.

Because the housing market has soured and the credit markets are shaky, Marriott doesn't want to keep the property and assume responsibility for the housing. But it is unlikely that the city will buy it. Jim Abdo, chairman of the Washington Convention Center Authority's development committee, said, "I don't think the city is going to give us more money."

Another sticking point is that if the District bought the land, Marriott would have to lease it back. But the two disagree on how much the lease payments should be. Marriott wants to pay $500,000 to $600,000 a year; the District says it would need about $5 million a year to cover its debt.

"However, we think $134 million is a reasonable subsidy, and we shouldn't add anything more in there," said a D.C. official involved in the negotiations who spoke on the condition of anonymity because the talks are ongoing.

District officials and tourism experts say that building more meeting and ballroom space underneath L Street may now be unnecessary. Since the convention center opened in 2003, meeting planners have developed different space preferences. Instead of large, open exhibit halls, smaller, meeting rooms for training and demonstrations now are considered desirable. That left the District to consider using the closed City Museum across from the convention center, or reconfiguring parts of the convention center for ballroom and meeting space.

Tourism officials argue that the hotel is crucial to the success of the convention center.

"We've waited too long and disappointed way too many clients to not do something now," said William A. Hanbury, president and chief executive of the Washington Convention & Tourism Corp., which books shows for the center. Hanbury said the District has already lost about $100 million of business because groups that want a large convention center hotel have canceled or booked events elsewhere.

"If the reality is that this project isn't going to get done, let's move on and nurture other projects that can give us more hotel rooms closer to the convention center," Hanbury said.

Staff writer Michael Rosenwald contributed to this report.

© 2007 The Washington Post Company