Clang Clang Clang Went the Trolley, Broke Broke Broke Went the Convention Center Hotel…

With headline apologies to Judy Garland (and consequently to Eric Celeste), you can meet me in St. Louis, but it probably won’t be at their taxpayer-owned convention center hotel. No one goes there.

From the Oct. 30 issue of Bond Buyer, we learn that the St. Louis convention center hotel is not just broke, it may be going bankrupt.

Holders of $98 million of senior-lien revenue bonds issued for a St. Louis convention center hotel complex, along with its operator and developer, are scheduled to meet Nov. 11 to discuss the project’s future amid warnings of a $1.4 million shortfall in hotel revenue available for December debt service payments.

“The rapidly declining economic environment has contributed greatly to this previously unforeseen deterioration in the project’s performance” leading to the $1.4 million shortfall in the $3.5 million interest payment owed Dec. 15, wrote A. Thomas Leonhard Jr., president of project developer Historic Restoration Inc., in a letter to bond trustee UMB Bank NA.

At the Nov. 11 bondholder meeting, set up by the trustee at the request of HRI, hotel operator Marriott Corp. will present its financial forecast for the remainder of the year and a budget for next year, which is expected to show further deterioration in hotel operations. HRI also will present a forbearance option for bondholder consideration, according to the letter.

The St. Louis Industrial Development Authority issued the senior-lien revenue bonds in 2000 as part of a complex financing scheme to acquire and renovate the $266 million hotel complex at the city’s convention centers. The 165-room Renaissance Suites opened in 2002 and the 918-room Renaissance Grand opened a year later.

Yeah, it's like that.

Yeah, it's like that.

So let’s talk about the St. Louis convention center hotel complex. The city was sold on the idea of building an attached convention center hotel paid by city-issued bonds — with St. Louis taxpayers on the hook if the hotel didn’t generate enough income — after a study by HVS Global Hospitality Services said it would be a great investment for the city and a Borat-style big success.

This is the same HVS that conducted a study in 2007 for Dallas that says the same thing. But that was after HVS’s 2004 study that said it wouldn’t be viable. So they against it before they were for it.

The St. Louis taxpayer-owned hotel has performed pretty badly, despite the promise from HVS and convention hotel backers that it would bring tons of new conventions to the River City.

In September 2000, a division of HVS International…said the St. Louis convention center accounted for 460,000 room nights in the city annually. “It is expected that with the addition of the subject properties, the city will be able to accommodate over 800,000 room nights in future years,” HVS reported

Instead, from a peak of 500,000 convention room nights in 2000, the total fell to 400,000 in 2003. It is now projected to be 470,000 in 2007.

Read more about that here.

Any of this have any bearing on Dallas?

Well, aside from the obvious — that the projections for the performance of Dallas’ proposed $550 million convention center hotel are wildly optimistic, just like St. Louis’ were — let’s consider how much plumb confidence this will give the bond buying market. (And what a stable market we are in.) The St. Louis city bonds have fallen “deep into junk bond territory.”

The city of Dallas plans to dive headfirst into this shallow pool and start selling bonds to pay for construction of the convention hotel in January, despite the fact it’s a sure thing the issue will go to voters in May and may very well get shot down. This on a project type that has a less-than-stellar track record, and for an industry — conventioneering — which is stagnant and, over the long-haul, shrinking.

Would you buy those bonds? Do Dallas taxpayers want to be on the hook if the hotel doesn’t perform (highly likely) and the bonds can’t be serviced?

St. Louis taxpayers are only on the hook for a portion of the $266 million hotel complex; Dallas taxpayers get the bill for the whole $550 million. Keep in mind that $550 million is a rough reckoning — they don’t even know how big they want the hotel yet, so it’s not exactly a truthsome figure, and there’s no guarantee construction costs won’t go up. Which, come on, a city construction project without cost overruns?

You can jump for the full Bond Buyer report. It’s downright morbid. It’s what the city of Dallas’ future probably holds if Mayor Leppert insists on going ahead with this boondoggle in spite of 60,000-plus citizens who demanded a chance to put this project to a vote.

CHICAGO – Holders of $98 million of senior-lien revenue bonds issued for a St. Louis convention center hotel complex, along with its operator and developer, are scheduled to meet Nov. 11 to discuss the project’s future amid warnings of a $1.4 million shortfall in hotel revenue available for December debt service payments.

“The rapidly declining economic environment has contributed greatly to this previously unforeseen deterioration in the project’s performance” leading to the $1.4 million shortfall in the $3.5 million interest payment owed Dec. 15, wrote A. Thomas Leonhard Jr., president of project developer Historic Restoration Inc., in a letter to bond trustee UMB Bank NA.

“Neither the project owner nor any of their respective affiliates are prepared to fund such a shortfall,” he wrote in the letter posted on UMB’s bondholder Web site .

HRI further says in the letter that it remains committed to working “cooperatively” with bondholders on a plan that would result in the “best outcome for the project.”

At the Nov. 11 bondholder meeting, set up by the trustee at the request of HRI, hotel operator Marriott Corp. will present its financial forecast for the remainder of the year and a budget for next year, which is expected to show further deterioration in hotel operations. HRI also will present a forbearance option for bondholder consideration, according to the letter.

News of the looming shortfall and the forbearance proposal mark the latest turn in the hotel complex’s ongoing struggles, and a first in that the obligated group has in the past stepped up to cover previous deficits in debt service payments.

HRI earlier agreed to cover a $2.2 million shortfall in the last payment due in June as part of a deal struck for HRI to purchase the majority ownership in the project owned by Kimberly-Clark Corp. The outright transfer of ownership, however, was blocked by Marriott. However, HRI still took over $18 million in subordinate notes, taking control of the ownership group.

HRI currently acts as a managing member of the group – known as Gateway Hotel Partners LLC and Gateway Tower Partners LLC – but it was Kimberly-Clark, through its subsidiary Housing Horizons LLC, that originally held a majority stake of 85%.

Housing Horizons had previously covered the debt service shortfalls. Kimberly-Clark had significant incentive to subsidize the shortfalls as it received tax credits that exceeded its extra support for the project. Those credits ended this year.

HRI’s commitment to fund the June shortfall provided just temporary salve for bondholder concerns amid rating agency warnings that it might be difficult for the project to avoid bankruptcy unless the debt was restructured or an infusion of capital received.

At the time, HRI said it was hopeful the hotels could generate sufficient funds to cover the December payment. Consultants have warned that if various upgrades – such as increased ballroom space – are not made to the complex, it will not generate enough cash on its own to cover debt service until 2012.

The St. Louis Industrial Development Authority issued the senior-lien revenue bonds in 2000 as part of a complex financing scheme to acquire and renovate the $266 million hotel complex at the city’s convention centers. The 165-room Renaissance Suites opened in 2002 and the 918-room Renaissance Grand opened a year later.

The bonds initially garnered a low investment-grade rating from Moody’s Investors Service, but have since fallen deep into junk-bond territory as hotel revenues have failed to meet projections after a convention slump following the 2001 terrorist attacks.