Convention Hotel: Linchpin or Boondoggle?

The site for the proposed convention center hotel is between Pascagoula and Pearl streets.

by Lacey McLaughlin
October 26, 2011

A convention center and accompanying hotel may seem like a foolproof economic tool for many cities trying to boost tax revenue by bringing visitors to their downtown area. The idea is that if you build it, tourists will simply come to the city eager to spend their disposable income.

But an academic expert who has extensively studied this model says it is flawed. Harvard-educated Heywood Sanders has research that doesn't back up those claims.

City leaders advocated for an adjoining hotel to foster economic growth long before completion of the Jackson Convention Center in 2009. But relying on future revenue projections and financing such lofty developments can be a sticky situation. Cities such as Baltimore, Md., Savannah, Ga., and Denver, Colo., are building convention hotels—using similar public/private partnerships.

In 2006, Mark Small, president of MJS Realty in Dallas, formed TCI-MS, a limited liability company, as a partnership with the publicly traded Transcontinental Realty Investors, also based in Dallas, to purchase the property located between Pearl, Mill and Pascagoula streets in downtown Jackson for $1.5 million and to build the hotel. The company also used a $7 million Department of Housing and Urban Development grant, allocated through the city, to acquire the land. They agreed to pay the loan back with revenue generated from the hotel.

TCI is closely connected with Basic Capital Management founder and former CEO Gene Phillips, whom former Mayor Frank Melton championed for high-priced development in Jackson. The JFP reported as early as April 2006 that Phillips has a history of controversial business involvements. His company, Phillips Development, filed bankruptcy in 1973, showing $30 million in debt. A second company that Phillips chaired, Southmark Corp., went bankrupt in 1989 during the high-profile savings-and-loan scandal. The FBI also indicted Phillips in 2000 for his participation in an alleged Mafia bribery scheme, but he was acquitted of those charges in 2002.

In September, Standards & Poor's gave TCI a "C" ranking, stating for the second quarter of 2011 TCI reported a net loss of 40.79 million.

Small is still the president of MJS Reality, but he is no longer in charge of the Jackson project. Earlier this fall, TCI Vice President Alfred Crozier took a lead role in the project.

The city is in the midst of securing a public-private ownership of the hotel with Transcontinental Investments. It seems that city and business developers all agree on one thing: The convention center needs a hotel.

But just how to finance that hotel and who to trust to carry out the deal is an ongoing topic for debate.

Earlier this month, Jackson City Council members expressed frustration over the lack of details they received on the financing structure for the hotel. But they expressed that frustration more than a week after passing a resolution that allows the city and TCI to issue $70.1 million in tax-exempt Gulf Opportunity Zone bonds through the Jackson Redevelopment Authority and $22.5 million in taxable bonds to help pay for the project.

Total funding for the hotel would be $96.1 million with the developers contributing some private funds. The majority of the council's questions involved the city buying back the land from the developers for $14 million. Those details are still being worked out, city spokesman Chris Mims said.

Mayor Harvey Johnson Jr. assured the council Oct. 3 that the city isn't writing the developers a check for the property.

The city will be responsible for paying 50 percent of the bond debt payments (totaling $96 million) through revenues the hotel generates, and the developers will be responsible for the remaining 50 percent. In the event that the hotel does not generate enough revenue to pay off the debt service, the city and the developers will split any losses, city financial consultant Porter Bingham of Malachi Group told Jackson Redevelopment Authority board members last week. Bingham predicted a lawsuit could come into play if the developers do not pay their portion of the debt.

Heywood Sanders, author of "Field of Schemes: How the Great Stadium Swindle Turns Public Money into Private Profit" (University of Nebraska Press, 2008, $19.95), is critical of publicly financed convention centers and hotels. He says that city leaders will typically voice overwhelming support for convention centers, saying it will save dying downtowns. But his research has shown that convention centers only do about half the business they promise over the long run. That's when the call for a hotel usually comes in as leaders cite the additional business they could have if they had a hotel, Sanders says.

Over the last year, convention centers have seen business decline by 20 percent or more. Sanders, a University of Texas public administration professor who got his doctorate at Harvard University, says convention centers are "a flooded, oversupplied" market.

"Lost business doesn't mean that they would come if you had a hotel," he said. "It just means that they chose not to come to Jackson. In this market environment, convention center hotels are giving away their spaces for free in order to get business."

In a 2005 Brookings Institution report, "Space Available: The Realities of Convention Centers as Economic Development," Sanders found that from 1995 to 2005, public spending on convention hotels doubled to $2.4 billion while demand for conventions decreased.

Sanders said events booked at convention centers in the South have also declined. For example, the New Orleans convention center booked more than 800,000 events in 2007 compared to just 495,000 in 2010.

The Jackson Convention Complex reported last year that attendance at the Jackson Convention Center increased over last year, with 146,635 people visiting the complex, compared to 128,590 visitors the previous year. The complex also extended its event days from 323 days in 2009 to 343 days in 2010.

Kelvin Moore, general manager for the Jackson Convention Complex, has worked in several convention centers throughout the country. He disagrees with Sanders' criticism and said that right now Jackson can't compete with other cities without an adjoining convention center hotel. He said that with the Farish Street Entertainment District coming online soon, Jackson could be a big attraction for visitors and conference organizers.

"There are no blanket statements that I would say for every city that you go to," Moore said. "Every market is unique. Every market has its individual circumstances. For Jackson, what I have been able to determine, for our downtown area and economic development strategy, the convention center is a focal point of that. ... A headquarter hotel for a convention is key."

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