Credit today’s low interest rates with breaking, at least for now, the cycle of losses that have plagued Hilton Baltimore, the city’s financially fraught venture into the hotel business.
This summer’s refinancing of $300 million in bonded debt is expected to save the hotel $6 million a year, an official told the Board of Finance on Monday.
Combined with a new agreement with Hilton and reduced insurance premiums, the city entity that owns the building should be able to avoid raiding the hotel occupancy tax (HOT) or other city reserves to cover its bond payments, deputy finance director Steve Kraus says.
Every year since it opened its doors to guests in 2008, the Baltimore Hotel Corp. has had to scramble to cover its debt payments.
Last March, for example, the Hotel Corp. raided its HOT account to meet its semi-annual bond payment. This came despite the city rebating $3.9 million in property taxes to the semi-private entity. (The hotel, at 401 West Pratt Street, has paid virtually no property taxes since opening.)
The latest audit by CliftonLarsonAllen reported a loss of $5.5 million in 2016 and a cumulative deficit of $84.4 million.
“Clearly if no action was taken, the way the debt was structured, it would have created additional stress,” Kraus said.
“This transaction provides some breathing space,” he added.
The Hotel Corp., however, is not yet out of the woods. The city can’t sell the Hilton because its current bond debt of $299,854,938.20 far exceeds what the property would fetch on the open market.
One reason why the debt remains so high is because the original premise for the hotel’s construction – to augment and share a rising tide of business from the adjacent city-owned convention center – was wrong.
Financial losses at city-owned Hilton pile up (6/7/17)
The Hilton has never matched the room prices and occupancy rates promised by former Mayor Martin O’Malley, who pushed the project through a reluctant City Council five months before he left City Hall to become Maryland’s governor.
For example, a consultant projected a 74% room occupancy at an average price of $242 per night for the hotel last year.
Instead, occupancy was 69% and the room price averaged $175 a night, which yielded roughly $12 million less income than expected.
The city can’t sell the Hilton because its current bond debt of $299,854,938.20 far exceeds what the property would fetch in the open market.
Improving the occupancy rate is complicated by the fact that, in order to pay its mounting bills, the Hotel Corp. has scrimped on maintenance and capital improvements.
None of the 575 guest rooms, for example, has been refurbished since the hotel opened.
In short, the hotel is “tired,” in the words of Mayor Catherine Pugh last spring, and its value is that much more diminished than if it were maintained at a high standard.
Now about $11 million, coming from the lower bond costs, have been allocated for a “refresh” of the hotel’s rooms.
Future savings will be put into the pocket of the Hotel Corp. “to keep its reserves funded for unexpected expenses and to keep the hotel in that much better shape because right now [the amount for improvements] is zero,” Kraus said.
Another problem has been the management contract with the Hilton chain.
“The city paid a fixed fee based on a projection of what the city assumed the hotel’s performance would be,” Kraus said. But since the hotel underperformed, “we were overpaying [Hilton] around $1 million annually.”
This issue has been rectified by a new contract that pays Hilton a variable rate. In addition, the hotelier has agreed to “forgive” $6 million in unpaid fees from the city, Kraus said, largely wiping out the prior overpayments.
In return for these concessions, the city has agreed to extend Hilton’s contract 20 years beyond its original termination date.
Maybe in another 10 or 15 years “we will have amortized this hotel enough to be able to sell it and maybe make a profit.”
But by that time, Kraus indicated that Baltimore may be out of the hotel business.
“Our hope and expectation is that in about 10 or 15 years, we will have amortized this hotel enough to be able to sell it – and maybe make a profit out of it,” he told the board.
The five-member Board of Finance is responsible for city bond issuances. It is chaired by the mayor and includes the city comptroller and three citizens.
With Mayor Pugh holed up in Las Vegas on Monday, her place at the meeting was assumed by Finance Director Henry Raymond.