Article published by BizJournals.

Over the past several months, public officials have described — often in the same sentence — the proposed Loews Hotel and the Memphis Cook Convention Center renovations as the two-pronged key needed to open up Memphis for the big convention business it’s been missing out on.

But, the confidential analysis from 2017 that the City of Memphis commissioned showed there are risks to a second, big convention center hotel. The study questioned how many more rooms Downtown Memphis could support in light of the hotels already planned or in the pipeline to be developed as of November 2017, and it noted the lack of direct flights to Memphis International Airport and existing, strong convention competition from other cities.

The November 2017 study was performed by Chicago-based PFM Financial Advisors and Providence, Rhode Island-based HotelAVE.

That document and others obtained by the Memphis Business Journal show how Mayor Jim Strickland’s administration, Memphis Tourism, and the Downtown Memphis Commission evaluated the three pitches it received for a large new hotel and how much in incentives it should consider awarding such a project. It also sheds light on a process that eventually landed Memphis in a legal battle.

The city awarded the project to Loews, in development with Townhouse Management Co. The two other pitches the city received for a second convention center hotel were from Denver-based Swerdling & Associates and Schulte Hospitality Group, the owners of the Downtown Sheraton, who have sued the city over the Loews deal.

About 42 percent of the $411 million Loews/ THM project will be subsidized with public funds. That entails $114 million in subsidies, plus an additional, $60 million PILOT (payment-in-lieu-of-taxes), following the donation of city-owned property, according to a December 2018 projection by the developer.

The PFM study showed that the $200 million Memphis Cook Convention Center renovations and plans for a new hotel are inextricably linked in the effort to boost the city’s tourism and convention center business. Renovating the convention center wouldn’t dramatically increase the city’s convention business without a second convention center hotel, the studies asserted.

Memphis made its decision to renovate the Convention Center and heavily subsidize the North Main Street project by Loews/Townhouse based on the potential of losing business to other cities if didn’t do so, the city explained.

“There are always going to be challenges and competition. We knew that if we did not renovate the convention center, we would continue to lose business,” said city COO Doug McGowen in an interview Friday, Jan. 18. “There was significant opportunity cost to not renovating that. We also understand that from at least three independent pieces of work [studies] that for our existing convention center, even without renovations, we were under-hoteled by a few thousand rooms.”

Consultants outline weaknesses, strengths

Consultants helped Memphis pick a winning second convention center hotel, documents show.

The city chose the Loews/Townhouse pitch based at least partly on the recommendation from the PFM study.

Memphis paid PFM about $72,000 for its services, according to city records. The consulting contract reveals that Memphis Tourism and the Downtown Memphis Commission were also expected to pay the firm a combined $85,000.

The November 2017 PFM and HotelAVE report, which is marked with the words, “Confidential: Draft for Discussion Purposes,” analyzed the strengths, weaknesses, opportunities, and threats to development of such a hotel.

The weaknesses include:

• Limited airlift
• Lack of new demand generators Downtown
• Limited ability to capture larger conventions without building meeting space to support convention center expansion

The threats to a new hotel included:

• “Strong competition from other cities with new convention centers and hotels”
• “Significant new supply for Downtown in planning stages”
• Generational decline among Elvis Presley fans

The PFM report said that two previous studies — a 2010 analysis by Hunden Strategic Partners (HSP) and April 2017 research by Chicago-based C.H. Johnson Consulting Inc. — hadn’t properly justified projections for how such a convention center hotel would bring in more demand, or hotel visitors, than it would supply in hotel rooms.

Historically, one strength is how well Memphis has absorbed new hotel capacity, PFM noted.

In the time since the study came out, MEM has also added direct flights and increased the total number of passengers flying into and out of the airport.

“The market is filling in that vacuum,” McGowen said of the increase in flights and passengers the airport has seen over the past several years.

Legal battle

When Strickland took the stage Thursday, Jan. 17, in front of a sleek, billboard-sized rendering of the Memphis Cook Convention Center, he said, “This renovation is emblematic of everything that is happening in the City of Memphis right now. Memphis has momentum.”

That momentum and push to change the face of Downtown and bring bigger conventions to town has pitted the City of Memphis against the hotel already attached to Convention Center, the Downtown Sheraton — the building that loomed over Strickland’s left shoulder as he spoke.

Schulte Hospitality Group, the Sheraton’s owners, have alleged in a lawsuit that the Loews project will harm Downtown hotels and that the Memphis City Council acted illegally in authorizing the city’s administration to seek tax incentives for the project.

In a Jan. 18 court filing, Schulte claimed that the city’s decision to incentivize the Loews project shaved $17 million off the Sheraton’s market value and would decrease its profits by $1 million a year.

“The unlawful subsidy of a direct competitor will reduce the Sheraton’s net operating income, conservatively, by $1 million annually,” Schulte alleged in a response to the City of Memphis’ filing to dismiss the suit. “Unless the Resolution is declared invalid … [the Sheraton] will be irreparably damaged.”

Schulte’s attorneys, Martin Tate, have also claimed Loews’ presence could devastate the Memphis hotel market. In an October letter to state officials, they questioned whether a market with a 65 percent occupancy rate could withstand the addition of 1,700 hotel rooms in the pipeline, including the Loews. The convention center renovation isn’t adding more space, Schulte’s representatives said, and Memphis International Airport is bringing far fewer passengers to the city than it did a decade ago.

“Oddly, Memphis did not undertake an RFP process in connection with the Loews Project, and, to our knowledge, has not provided any studies evaluating the economic feasibility of the Loews Project and its potential economic impact on the Memphis market,” Schulte’s attorneys wrote.

While the lawsuit may question the market’s ability to withstand more hotel rooms and the city’s decision-making process, Schulte pitched — during the same informal process it is now legally critiquing — themselves renovating the existing Sheraton and potentially adding 300 rooms in a separate JW Marriott hotel.

McGowen said the city asked the Sheraton’s ownership if it would be interested in expanding after receiving two other proposals, but, because the expansion would have only added 300 rooms, compared to the 550 that Loews wants to bring, the same level of subsidy wasn’t available.

The PFM study includes projections — conducted by comparing Memphis to competitors — that show a new convention center will harm existing hotels’ business in the short-term but, as the new hotel penetrates the market over a five-year span, it will boost overall occupancy rates across Downtown.

‘Bold decision’

Other proposals the city considered would’ve had a smaller subsidy cost than the 42 percent Memphis is providing for the Loews Hotel.

McGowen said that level of subsidy isn’t unheard of and is something that Memphis is comfortable with. A second PFM study, dated March 2018, showed that of eight recently constructed or proposed convention center hotels in major cities, two of them, in Nashville and Kansas City, had a higher projected public subsidy. Another, in Louisville, had an equal public cost.

“It’s not inconsistent with what we’ve seen in other cities,” McGowen said. “We entered into this with our eyes wide open. Part of that was the reason the state gave us the opportunity for convention center hotel legislation within the [Tourism Development Zone].”

He noted legislation passed last year that allowed Memphis to extend the Downtown TDZ (Tourism Development Zone) in order to help incentivize the Loews project. The city received final approval for that subsidy in mid-December 2018.

“This is about making decisions,” McGowen said. “The city has to make a bold decision about what to do to move this city forward. That’s what this is about. We understand that a 40-year-old convention center is out-of-date and needs to be update and renovated.”

The option the city chose provided flexibility compared to building a new convention center, he said.

“There was a lot of pressure to [build a new convention center],” McGowen said. “We knew that was $600 million or more to do. That would’ve taken every bit of capacity in the city and mortgaged our ability to do anything else.

“This is about making an informed decision,” he continued. “There’s always risk. I’ll use my analogy from flying: The best way to make sure you don’t crash an airplane is don’t fly any airplanes. The best way to make sure you don’t have any risk in your Convention Center is to do nothing. But, there’s an opportunity cost there.”