Auditors report that the long-struggling Hilton Baltimore lost $5.5 million last year and had to dip into its hotel occupancy tax account – whose revenues are supposed to go to the city – to fund a semi-annual bond payment in March 2017.
The audit by CliftonLarsonAllen was submitted today to the Board of Estimates, but was not released by the mayor’s office this morning.
The Brew obtained a copy of the audit, which shows that the city-owned hotel increased its revenues to $64 million last year, but expenses grew to nearly $70 million.
As a result, the hotel directly lost $5,471,608 in 2016 – up from $5,226,021 in 2015.
But the more significant figure is the hotel’s “unrestricted net deficit” that includes past operating losses and depreciation. CliftonLarsonAllen said this figure reached $84.4 million last December – up from $78.9 million at the end of 2015.
Taxes Used to Pay Bonds
Also notable is the fact that the 757-room aluminum edifice on West Pratt Street pays next to no property taxes.
Last year, $3.9 million of the $4.2 million collected in city property taxes were rebated back to the hotel.
Even so, the hotel was unable to meet its bond obligation in March 2017.
As a result, the Baltimore Hotel Corporation, the government entity that owns the Hilton, withdrew $828,520 from its hotel occupancy tax account to fund the payment.
CliftonLarsonAllen flagged this payment, saying that winter months are slow in the Baltimore hotel industry and, as a consequence, the Hilton “was unable to fully fund the payment strictly with Hotel operating cash flows.”
Saying that “the draw does not violate the terms of the bond agreement,” the report nevertheless added that “management is working diligently to increase operating revenues to prevent the need to draw on reserve funds in future years.”
Red Ink from the Get-Go
City Hall’s venture into the hotel business has been fraught with problems.
Designed to promote and expand the use of the city-owned convention center, the Hilton was financed by $300 million in bonds issued at interest rates of up to 5.9%.
The hotel never achieved the occupancy rate projected by the Martin O’Malley administration, which strong-armed the project through the City Council.
Since opening in 2008, the Hilton has directly lost more than $70 million. According to the city’s original projections, the hotel should be earning $7 million a year in profits.
To defuse the hotel’s slowly-ticking financial deterioration, the Pugh administration plans to take advantage of historically low interest rates and issue up to $330 million in new bonds to retire the old bonds.
UPDATE: The Hilton bonds were sold on May 24, but the transaction won’t be finalized and settled until the end of June, Steve Kraus, deputy director of finance, said.
The switch-out, it is believed, will save between $3 million and $4 million a year in interest.
But that will still leave the hotel with a yearly deficit. To combat that, the city hopes to boost the hotel’s current occupancy rate of 69% to 72% by fiscal 2019.
Updating an Aging Hotel
A critical problem not underscored by the auditor is that the Hilton is getting old. For example, guest rooms have not been refurbished since the 2008 opening.
Kraus told The Brew that there are plans to direct $11 million for a “refresh” of the hotel’s rooms.
The city also plans to renegotiate its 15-year pact with the Hilton Hotels Corporation to gain more efficiencies and cost-sharing.
Hilton currently is responsible for managing the full-serve restaurant, lobby bar, convenience store, meeting space and room service.
Last year, the company received $2,009,552 in base management fees and slightly more than $1 million in “subordinate” and “super-subordinate” management fees, according to the audit.