Rooms to grow: City council to consider deal for Omni headquarters hotel

By Steve Lackmeyer

The Oklahoman

 

The Omni sign soon could glow atop a sleek glass 19-story tower hovering over the Chesapeake Energy Arena, the new convention center and park.

 

The hotel, however, comes with a cost.

 

Oklahoma City Council members will be asked Tuesday to pursue a deal with Omni to build the 600-room headquarters hotel to tie into the city's future $288 million convention center.

 

The proposal calls for $85.4 million in public assistance, with Omni financing the remaining $150.1 million of the $235.5 million hotel. In addition to the Omni deal, the city council also will see details of a proposal submitted by Marcus Hotels and Resorts and Mortenson, two parties that initially competed separately for the project but joined together earlier this year.

 

The second proposal by Marcus/Mortenson pitched a 600-room Marriott with a $248 million cost estimate that includes $105 million in subsidies.

 

Cathy O'Connor, president of The Alliance for Economic Development of Oklahoma City, led negotiations with what initially started out as seven competing development teams.

 

A committee appointed by City Manager Jim Couch that included council members David Greenwell and Larry McAtee met with the two finalists for 90 minutes each this week before picking Omni as their recommendation.

 

“The initial public subsidy proposed by Omni is significantly less than what was proposed by Marcus and Mortenson,” O'Connor said. “That's a big consideration. The other appeal is the ownership structure proposed by Omni where they are providing the equity financing for the remainder of the hotel cost and that gives the city a simpler structure to work with.”

 

The Omni proposal meets the city's request for a headquarters hotel with 600 rooms, an upper upscale brand and at least 50,000 square feet of ballroom and meeting space.

 

Omni, a privately held company based in Dallas, owns and operates 43 hotels throughout the United States, and operates nine others involving partners and other owners. Only two hotels, located in Mexico, are franchised — deals struck before the company was bought by Texan Robert Rolling in 1996.

 

Mike Garcia, chief financial officer and senior vice president over acquisitions and development at Omni, told The Oklahoman that his company is committed to long-term ownership of the hotels it builds and manages. He said Omni frequently declines requests to build hotels in various markets.

 

Garcia said Oklahoma City has had Omni's attention for the past few years as plans progressed for the convention center and a large city park across the street.

 

“We like the city,” Garcia said. “We like the trajectory the city is on with the new convention center and park. We see the city diversifying from what it was historically as an oil and gas community. We see diversification coming into the area, and long term, we like how that plays for Oklahoma City.”

 

The plans submitted to the city by Omni show a hotel that follows the company's move to creating hotels “inside out” from the old traditional model of creating destinations for travelers and not for locals.

 

The company is building a similar size convention hotel in Louisville, Ky., that includes shops, cafes and restaurants that open up to the street on the ground floor. Instead of adding a Starbucks coffee shop at the Louisville hotel, Omni did a deal with a popular local operator.

 

“We want it (the Oklahoma City hotel) to be a part of the downtown area, and not an isolated hotel that is contained within four walls,” Garcia said. “We want to be a part of the park. We want to be a part of the convention center. We will be inviting people in.”

 

Garcia said he hopes if a deal is approved that construction can start in late 2017 with an opening in late 2019. Construction of the convention center is expected to start in late 2017 and be complete in 2020, while the north half of the park is set to be built and opened by early 2019.

 

A report to be delivered to the city council lists an array of options for funding the subsidy that include property, hotel and sales tax increment financing, a ground lease and revenues from the city's mortgage and lease with Marcus Hotels for the Skirvin Hilton.

 

Those sources, along with potential funding from the city's economic development bonds are estimated to total at least $72.9 million.

 

“The majority of the subsidy will come from taxes generated by the hotel itself,” O'Connor said. “That will be the first thing we will look at.”

 

If authorization is given to begin negotiations with Omni, O'Connor's priority will be to lower the requested subsidy.

 

“We're very confident Omni is interested in this market and willing to work with us to reach a conclusion that is agreeable to both of us,” O'Connor said.

 

The subsidies requested for the hotel weren't unexpected.

 

Long-term plan

 

A convention center hotel was first suggested in 2008 as part of a report commissioned by the Greater Oklahoma City Chamber. A summary of the report suggested a hotel of at least 650 rooms would be needed to ensure success for a new convention center.

 

After funding for the convention center was approved by voters in December 2009 as part of MAPS 3, outside experts, including the Urban Land Institute, suggested the city likely faced a minimum subsidy of $50 million to complete a hotel deal.

 

Some debate is expected with the requested subsidy. Ward 2 Councilman Ed Shadid has been a frequent critic of the convention center and hotel, questioning whether the business model is still viable and worth public investment.

 

Advocates for the project, including Mike Carrier, president of the Oklahoma City Convention and Visitors Bureau, respond that the Cox Convention Center is more than 40 years old and will hit its 50th anniversary shortly after a new convention center is expected to open in 2019.

 

The Cox Center, Carrier said, cannot accommodate one convention starting on the same day another one ends, and it doesn't have enough space to handle existing and potential customers.

 

O'Connor said the market's attractiveness was proved by visits by top officials with Omni, and with Marriott, the brand proposed by the Marcus/Mortenson team. She also noted the Omni proposal includes a $150.1 million investment in Oklahoma City.

 

“Both teams demonstrated that they were very interested in Oklahoma City as a market and they are confident in the city's ability to perform and meet expectations,” O'Connor said.

Frequently Asked Questions:

 

Q: Why is a 600-room hotel needed when downtown’s hotel room count is topping 2,400 with those open and those set to open or be built over the next two years? 

 

A: Many of the groups interested in our new convention center require a dedicated room block in the headquarters hotel of at least 500 rooms. The hotel also must have rooms to sell to corporate guests, loyalty club guests, and other contracted business as well.

 

The convention center will often be booked by concurrent or overlapping consecutive meetings, each of which will require room blocks in the headquarters hotel. A hotel market study commissioned last year by the city forecast a 13.6 percent increase in demand for hotel rooms in 2019 because of the convention center, followed by an additional 12.2 percent increase in demand in 2020. The study also showed that current hotel space can’t accommodate the increased room demand.

 

Q: Why is a public participation needed?

 

A: To close the gap in the project cost after the investment by the private investor. Convention center hotels are part of the investment of a new convention center and they are not self-supporting. They almost always require participation by the municipality due to their size and expectations of luxury and amenities such as full-service restaurants and meeting room space. This project will likely require public participation in the same ratio of comparable projects in other cities, as a percentage of total development cost.

 

Examples of other convention center hotel public participation include Fort Worth and Nashville. Other deals are underway in Kansas City, Austin, Portland. Pittsburgh and Salt Lake City didn’t have a hotel associated with convention center, and have had diminished returns on their convention centers.

 

Q: Will the public participation result in increased taxes?

 

A: The city has not yet determined the funding sources for public participation. We’ll be evaluating various funding sources and expect to have recommendations to the city council in the next few months.

 

Q: Will the use of tax increment financing hurt funding for schools?

 

A: The funding sources for any public participation on this project have not yet been determined. With TIF districts, the two work hand in hand. TIF districts are used only where private investment wouldn’t otherwise occur. New tax revenue is created for the jurisdiction — not diverted or taken away.

 

Q: What is the downside of not building a convention center hotel?

 

A: We would not optimize the investment we are making in the new convention center and the opportunity to grow tourism for Oklahoma City. We would also lose the $150 million investment in our downtown by Omni. A convention center hotel is essential to the success of our convention center. Denver built a convention center but not a headquarters hotel and consistently lost business to other cities. After building the Hyatt, their business increased significantly and numerous other hotels have been built in close proximity creating a major convention district and consistent valuable business for the city.

 

Q: Why is the city building a new arena and exhibit space at State Fair Park while it is building a new, larger convention center downtown?

 

A: The proposed new arena at State Fair Park would replace the aging Norick Arena and maintain our position as a premier horse show destination. The new Bennett Exhibit Hall is an enlarged replacement for aged exhibit facilities that were below industry standards for consumer and trade shows. The two types of facilities serve very difference purposes.

 

Q: How can the city ensure its investment in the hotel is protected?

 

A: The city plans to have a ground lease with the developer, which will allow the city to have input during the design and construction process and will receive rent over time. In addition, the public participation will only be provided when certain performance benchmarks are achieved by the developer.

 

Q: Can Oklahoma City book a 600-room hotel 52 weeks a year?

 

A: No, and that is not the intent. As with any hotel, the business will be a combination of groups coming to Oklahoma City for conventions, and business and leisure travelers. On an annualized basis, our downtown hotels ran 71.7 percent total occupancy for the year in 2015 and the overall city ran 63 percent.

 

Comparable cities in the region that we compete with like Kansas City (65.2 percent), St. Louis (65.4 percent) and Louisville (65.2 percent) are running numbers very similar to ours. Industry standards tell us that hotels are profitable at approximately 60 percent. Remember, hotels are open 365 days a year.

 

SOURCES: The Oklahoma City Convention and Visitors Bureau, The Alliance for Economic Development of Oklahoma City and Public Financial Management