The sorry saga of the D.C. convention center hotel

By Steven Pearlstein
Friday, February 12, 2010

Over the years, I've learned to cast a wary eye when government officials want an economic development project more than the private interests chosen to develop it do. Projects grow bigger and more ambitious than they need to be, thereby requiring more subsidies than they deserve, until virtually all of the economic benefits wind up in the hands of private interests.

Here in Washington, there is no better example of that than the convention center hotel, the star-crossed project that the city has been pursuing since before the "new" $800 million convention center opened off Mount Vernon Square in 2003.

The abbreviated history goes like this:

The Convention Center Authority began pushing for an adjoining "headquarters" hotel a decade ago, arguing that it would provide the convenience and lower room prices required to draw the most desirable conventions. The city agreed to provide $134 million in "tax increment financing" for a 1,400-room, $750 million monstrosity with lots of meeting space and several stories of underground parking. After a competition, a development team made up of Marriott and RLJ Development, the hotel company headed by billionaire Robert Johnson, was selected. But the project was delayed for more than a year by engineering and budget problems and negotiations with another developer, Kingdon Gould, who demanded a premium price for a piece of land he owned in the middle of the project site.

By the time Gould got his price, the hotel and credit bubbles had begun to burst and Johnson found that he was unable to deliver the investors and financing he had promised. When the city refused his demands for additional subsidies, he walked away, leaving Marriott to find another partner.

Finally, last year, a new deal was struck. The scale of the project was reduced to about 1,100 rooms and a cost of only $550 million, with the city increasing its share of the project financing. The new development team consisted of Robert Gladstone and his Quadrangle Development, along with a new minority-owned firm headed by Norm Jenkins, who just happened to have led Marriott's work on the project. Quadrangle would raise most of the $330 million in private financing from a still-unnamed Middle Eastern investor.

And that's when things started to get really interesting. Just as the deal was about to close, another of Washington's leading developers, Ben Jacobs and his JBG Companies, entered the picture. A few years back, JBG led an investment group that bought the city's largest hotel, the Wardman Park Marriott, hoping to make a big score by redeveloping much of the property for condominiums.

Then, suddenly, the financial crisis hit, the condo plan was put on hold, and JBG found itself in the hotel business during a deep travel recession and facing the prospect of going head to head with a new, subsidized convention center hotel. After Marriott refused JBG's request to renegotiate its management contract at the Wardman on more favorable terms, Jacobs retaliated by filing suit to block construction of the new, Marriott-run convention center hotel.

In its suit, JBG claimed that so much had been changed since the original designation of a developer -- and because the city's new development deal was so advantageous to Marriott and the developers -- that the project should be put out for competitive bidding again. A D.C. judge refused to dismiss the suit even as Quandrangle warned that it might lose its Middle Eastern investor if the deal were not closed by March 15. The city and Marriott are now engaged in quiet settlement talks with JBG's Jacobs, who reportedly is demanding concessions worth tens of millions of dollars to drop his legal action.

It's hard to know who is more to blame for this fiasco.

On the one hand, Jacobs's motives are anything but pure and his gambit borders on a shakedown. On the other, Jacobs's criticism about the lack of due process and his claim about a sweetheart deal have a ring of truth to them. Under the current proposal, the city, through the Convention Center Authority, would be providing $160 million in bond financing for the project, with interest and repayment coming not from the developers but from the taxes the city collects from the hotel, its guests and nearby businesses -- "tax increment financing." In addition, the convention authority would make a $25 million loan to the developer and a $22 million "investment" in the project that turns out is really more like a loan that may or may not be repaid.

Moreover, the city is offering the developers a 99-year land lease on extremely concessionary terms, including a century of rent payments that, in terms of net present value, add up only to the current value of the land. Rent payments are waived for the first three years of operation, while a "subordination clause" in the lease allows the developer to pay the annual rent only if there is money left over after paying all of its other expenses, including the management fee to Marriott.

I understand there may be reasons to subsidize a convention center hotel that agrees to set aside 80 percent of its rooms during peak season for low-margin convention business. But if the hotel really requires this much of a subsidy, then it raises a serious question about the economics of a project that, at best, is expected to increase convention spending in the city by $100 million a year. Right now, it looks as though the benefit of all those subsidies will be fully captured by convention attendees, the convention hotel's developers and perhaps the owners of the city's other hotels. If all goes well, the taxpayers will get their money back, but not much more.

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