Cleveland-Hilton-convention-hotel-entrance-May-2014

A rendering shows the Lakeside Avenue entrance to the planned 600-room Hilton convention hotel in downtown Cleveland. Cuyahoga County is playing the role of developer on the $272 million project, set to open by June 2016.

(Cooper Carry)

CLEVELAND, Ohio -- A bond-financing deal for the planned Hilton convention center hotel is scheduled to close this month, generating cash to support construction of one of downtown Cleveland's largest projects.

U.S. Bank expects to issue certificates of participation - investment vehicles similar to bonds - on behalf of Cuyahoga County within the next few weeks. That transaction will generate roughly $230 million, supplying much of the necessary cash for the publicly developed and financed hotel.

With foundation construction well under way for the 600-room Hilton, being built at Lakeside Avenue and Ontario Street, the county's plan to pay for the unusual project is becoming more clear. On top of proceeds from the bond deal, the county is setting aside leftover cash from the new Cleveland Convention Center complex, a $465 million public project largely completed last year. The city of Cleveland is kicking in $8 million from a separate bond transaction.

The county decided to tackle the hotel after private developers expressed little interest in building anything but parking on the project site, which sits next to the convention center and the Global Center for Health Innovation. With the city trying to re-establish itself on the convention circuit, tourism boosters doubted Cleveland's ability to win major shows without lodging tied into the complex.

County officials had two options: Dangle enough public subsidies to entice a private developer to build a hotel. Or step into the role of developer and sign a contract with an operator like Hilton Worldwide - a model that other cities, including Columbus, have used with varying degrees of success.

The county chose the second path. A demolition crew cleared the site, where the county's longtime administration building stood, early this year. If everything goes smoothly, the Hilton is set to open by June 2016.

A nighttime rendering shows the planned Hilton convention hotel in downtown Cleveland.

"There's always an element of risk in a big project," said Matt Carroll, chief of staff to Cuyahoga County Executive Ed FitzGerald. "All indications have been positive about the outlook. I think the people involved on the finance side, they take a very conservative approach to revenue projections and the overall financial strength of the project."

On Tuesday, the board of the Cleveland-Cuyahoga County Port Authority signed off on the last piece of the complicated transaction, setting the table for the bond deal.



The Port isn't providing financing, as it has for other real estate projects. Instead, the agency will be the middle-man, the owner of the Hilton during the 30-year life of the bonds. That's a role a county can't necessarily play under state law.

"This is a unique structure that differs from a lot of our other financing arrangements," said Brent Leslie, the port's chief financial officer, adding that the deal poses minimal risks for the agency.

The county will lease the hotel from the port. Instead of rent, the county will make debt payments to the port, which will pass the money along to the bond trustee. In exchange for acting as a conduit, the port will receive a $375,000, one-time fee from the county. The FitzGerald administration also agreed to support the agency's recent application for a federal grant for maritime projects.

Investment bank Stifel, Nicolaus & Co., the lead underwriter on the bond deal, expects ratings agencies to weigh in on the bonds next week. Based on that schedule, the certificates could be sold during the week of May 20th.

Tim Offtermatt, who oversees public-finance deals at Stifel's Cleveland office, wouldn't comment on the deal terms. But during an April 22 Cuyahoga County Council meeting, attorney Jeff Appelbaum said the bonds were projected to carry an annual interest rate of 4.37 percent.

Conservatively done - but not cheap

There are a few things worth noting about the hotel-funding plan.

First, the financing scheme shouldn't hamper the county's ability to borrow money for everyday government purposes. And Offtermatt said he doesn't expect the bond deal to impact the county's overall credit ratings.

Second, the county expects to pay off the debt using money from a few sources: Revenues from the hotel itself; hotel bed taxes generated by the Hilton; leftover money from sources, including a quarter-cent sales tax, implemented to pay for the convention center project; and a tax-increment financing deal, which redirects a portion of the new property-tax revenues from a project to cover debt.

"What we've always said was that we will not tap new revenue-generating sources," said Appelbaum, who represents the county on the project.

A demolition crew tears into Cuyahoga County's old administration building in January. The site has been cleared to make way for the 600-room Hilton convention center hotel. Construction workers are putting in deep foundations for the new building.

"The revenue will come from what already existed from the convention center and whatever comes from the hotel itself," he added. "We have something here that builds an extraordinary building, and we use nothing other than those revenue sources. And we see significant risk-mitigation built in."

On its own, the hotel won't generate enough revenue to cover debt service on the bonds. But financial projections prepared by Stifel lump the hotel in with the convention center complex, blending tax revenues and other funding streams earmarked for both projects.

Those projections show that the combined revenues should cover debt payments for all of the buildings, with enough money left over to budget for repairs and provide a buffer, or reserve. That's assuming no increase from 2012 revenues generated by the hotel tax and the quarter-cent sales tax hike - income streams that actually have been growing as consumers spend more and downtown hotels benefit from higher occupancy and improved rates.

"In every way, this thing is conservatively done," Appelbaum said of the hotel financing. "But that doesn't mean it's cheap."

The total budget for the hotel project comes to $272 million. Roughly 80 percent of that represents construction. The rest of the money will cover everything from furniture to tablecloths to consultants, with several layers of wiggle room.

Foundation costs, parking plans change



The project's price tag has grown since June, when FitzGerald and Cleveland Mayor Frank Jackson announced their plans to push forward on the hotel and broader public-space improvements downtown. At that point, officials were talking about a $260 million budget.

Since then, though, architects have refined designs for the 32-story building. And deeper digging at the site revealed that workers would need to drive supports deep into the dirt, instead of constructing an above-ground foundation. That change, due to challenging soil conditions, could have delayed the project. To meet the June 1, 2016 opening date, the county is paying extra to get the work done fast.

In other areas, though, consultants have found ways to cut costs or bring in extra cash. Hilton increased its commitment to the project to $4.75 million, from approximately $2 million early on. Added features, including a rooftop bar, will generate more revenues. And interest rates are lower than the bond underwriters expected a few months ago.

Cutting underground parking out of the hotel plans also saved money - potentially $15 million to $20 million. Between foundation complications and design challenges, it became clear that parking at the hotel was impractical, if not impossible. Instead, the county plans to renovate the old Huntington Park Garage, north of Lakeside, and allocate 400 spaces there for the Hilton.

The garage has 1,100 spaces, with a shrinking pool of monthly users thanks to the county's upcoming move to a new headquarters building on East Ninth Street. Appelbaum estimates that at least 550 spaces will be available for the hotel and convention center, with the addition of valet parking that will make it possible to cram more cars into the same amount of space.

The county is evaluating the condition of the garage, which needs to be renovated regardless of the hotel project. Officials also are looking at whether it's possible to connect the garage to the hotel, using an underground tunnel or other passageway. The costs of those projects aren't clear yet.

"It is our hope and expectation that the convention center is wildly successful, these hotels are wildly successful and we do generate more parking need," Appelbaum told county council on April 22. "And if we generate more parking need, then there's opportunity. And we've already been talking with private developers on West 3rd [Street] who are interested in developing parking on West 3rd. That doesn't mean subsidized parking by the county. It means a development deal, which may have different components."

"But that's a conversation not for today," he added. "That's for the future."