Liar Hotels

San Diego — Economists say that when you tax something, you get less of it. When you subsidize something, you get more of it. San Diego County is on the fast track to subsidizing cannibalism.

A proposed Chula Vista hotel and convention center will be subsidized, possibly by 20 percent or more. The Port of San Diego and City of Chula Vista, or both, will shell out welfare checks to a money-losing Nashville company, Gaylord Entertainment -- the folks who bring us high culture such as Grand Ole Opry. The Chula Vista center would drain business from the downtown convention center and/or nearby hotels that are port tenants. The downtown convention center warns that if it loses business as a result of the Chula Vista center, it, too, will seek a government handout.

And you wonder how the city could underfund pension pay-ins while boosting payouts and not foresee a deficit.

On the last day of 2002, the port lost a cash cow: San Diego International Airport-Lindbergh Field, which went under the control of a regional airport authority. "This could be a way for [the port] to recover a portion of the funds from their loss of the airport," says April Boling, chair of the San Diego Convention Center board. The port, whose commissioners overwhelmingly favor the Chula Vista project, replies that it is always looking for new revenue streams. Boling says the port will likely take money from one pocket and put it in another: what it gains from Chula Vista it will lose from money it would receive from the downtown convention center and adjoining hotels on port property.

The subsidized cannibalism is part of a larger tapestry: "What San Diego faces is lots of competition from lots of places," says Heywood Sanders, expert on convention centers and professor of public administration at the University of Texas at San Antonio. Convention centers are so overbuilt that "in city after city, convention centers are being given away at very discounted rates or rent-free. Cities do one thing and it doesn't work, then try another and it doesn't work, then spend more money to market and promote and incentivize their convention center."

Boling warns that more than half the events now using the downtown center could go to Chula Vista. As downtown loses business, "we would need to discount our rents" to attract substitute meetings and conventions, she says. "We need a public agency to help us with that rent discount."

Gaylord executives concede that convention centers are overbuilt and cities are losing money on subsidized convention centers. However, the company continues building combined hotels and convention centers (65 percent of its business) to serve groups that may want to avoid big cities and don't want to put their people in different hotels. Because Gaylord uses this approach, Sanders thinks the Chula Vista center, if it gets built, may not take too much business from the downtown center and will attract attendees who wouldn't ordinarily come downtown. "The most serious impact will be on the hotels near the downtown center," he says.

Sanders believes that the downtown center inflates its statistics, particularly the facility's impact on the local economy. He is not alone in this belief. In the city manager's report of February 15, 1996, the city estimated that the convention center expansion would boost annual convention-related hotel room nights from 610,000 to 986,000. But on its website, the center admits that last year, room nights came to only 714,519.

"This exposes the great lie that the convention center has been so successful," says former councilmember Bruce Henderson.

Rejoins Boling, "Part of the reason we are not where we thought we would be is because the Campbell Shipyard hotel didn't come online. We have lost business because we didn't have the hotel rooms. We are running four to five years behind schedule on that hotel, but I believe that within six months we should have the financing."

But Sanders and Henderson say the opposite is true. The hotel has not been built because the center is not doing that well in the teeth of a saturated national market. "The natural operation of the marketplace has not produced a Campbell Shipyard hotel and probably won't without heavy government subsidies," says Henderson.

"Denver just expanded its convention center. The city financed an 1100-room hotel that will open at the end of this year; now the convention and visitors bureau is proposing a tax increase to have more money to market Denver," says Sanders. "Baltimore is debating having the city build a hotel fully owned by the city, with no private investment in it whatsoever." A new convention hotel anywhere is seldom considered a good investment.

Gaylord financed its Opryland convention center itself many years ago. Then it got what it calls small subsidies for two hotel/convention centers it built in Florida and Texas. However, Chuck Pinkowski, a tourism consultant in Nashville, says Gaylord got "pretty strong subsidies" in Florida and Texas. He and Jerry Morrison, San Diego tourism guru, agree that Gaylord will demand a major subsidy in Chula Vista -- something Gaylord doesn't deny.

Gaylord is now building a hotel/center along the Potomac River in Prince George's County, Maryland. The county is floating a $65 million bond to take care of infrastructure. A bond worth $95 million, and some of the tax money generated by the project, will go to Gaylord. That's a hefty taxpayer participation in a $500 million project. The subsidies have "lowered our cost on the project," the head of the company's hotel operation told a Tennessee newspaper last month. "And we've made it pretty clear that that's the type of partnership with communities that we think is necessary to bring a Gaylord hotel to the community."

The Chula Vista project could be larger and more expensive -- up to 2000 rooms, with a 400,000-square-foot convention hall and a price tag of possibly $600 million. It would appear any subsidy would be around 20 percent of that. And some governmental body will probably pick up infrastructure costs.

Gaylord's new management "has different expectations for our properties on return on investment," explains spokesperson Greg Rossiter. "We want more public participation."

He notes that discussions with Chula Vista and the port are in "very preliminary stages." At one point, it appeared that the project would be sole-sourced to Gaylord, but city councilmember Donna Frye, head of the city council's committee on government efficiency and openness, raised questions about that. Now, other developers are welcome to apply, but the port has given Gaylord "prequalified" status; it has no need to reapply. "Gaylord is in the lead. It is setting the bar that everyone else will have to meet or reach," harrumphs Boling. Gaylord looks like a shoo-in.

If it's any consolation, Gaylord appears to need corporate welfare. The company has lost money in four of the last five years and for the first six months of the current year. "We have a significant amount of debt," the company conceded in its 2004 annual report to the Securities and Exchange Commission. That debt is $576 million. Morningstar, Inc., a stock-rating agency, gives the company a grade of F for its financial position and D for its profitability.

The stock has done surprisingly well of late -- one reason that Standard & Poor's gives it its one star (lowest) rating. The stock has been selling at double its fair value, as computed by Standard & Poor's. The company says that most of its profit problems stem from its holding of stock in Viacom. The losses are "accounting noise," claims Rossiter. However, Gaylord has had substantial hotel preopening costs that have depressed profits, along with some diversification that has gone awry.