Heartbreak Hotel

There's a debris-filled hole, where a former Teamsters union hall was demolished last week; a ramshackle office building with a couple of tenants; and a parking lot dotted with wrappers from an adjacent Burgerville.

It is here that Barry Schlesinger, the struggling developer who owns the 3-acre property, envisions a gleaming hotel tower crawling with conventioneers.

Metro Council President Tom Hughes, whose agency operates the nearby money-losing Oregon Convention Center, sees the property as a route to respectability for his agency—and a second term for himself.

And the secretive financier Gordon Sondland sees a heavily subsidized threat to his downtown hotel empire.

Those visions will collide this week at City Hall.

Schlesinger's land is at the center of a heated battle over whether to build a hotel adjacent to the convention center. For more than a quarter of a century, politicians, developers and tourism promoters have wrestled with that question.

It is finally decision time, as the rising clamor of the rhetoric surrounding the issue shows. At a Labor Day speech, for example, Hughes accused opponents of the proposed 600-room Hyatt hotel of engaging in "class warfare."

The City Council will consider a measure Metro has already approved: pumping $80 million of taxpayer money into a proposed $198 million hotel. The transaction would give the multibillion-dollar Hyatt Hotels Corp. ownership of the hotel and all potential profits, while counting on public funding to repay the project's debt.

On Thursday, Multnomah County commissioners will hold their first hearing on the issue. Metro, the city and the county all need to approve any convention center hotel.

The hotel question underscores the challenge facing Hughes, Portland Mayor Charlie Hales and other elected officials tackling economic development.

On one hand, taxpayers have already spent $200 million building the convention center, which operates at a large and growing loss. Tourism boosters say a new hotel is necessary for the convention center's success and for the continued development of the city's convention trade.

On the other hand, local government's recent results in subsidizing businesses in Portland—such as wind turbine-maker Vestas, solar panel-maker SoloPower and bankrupt battery-maker ReVolt—have been failures.

Sondland, who has invested heavily in downtown hotels, is deploying his wealth and connections in an attempt to make sure the hotel subsidy never happens.

Elected officials fear being labeled anti-business, but citizens are notoriously reluctant to hand cash to large, profitable companies such as Hyatt.

Pollster Adam Davis recently conducted a survey of more than 3,000 Oregonians.

"When you get to public subsidies," Davis says, "Oregonians don't like them. People just feel that the best thing you can do for economic development is to keep government out of it."

Mark Williams, who ran the convention center for eight years, says the 1 million-square-foot facility will never flourish without a hotel.

"If you want a convention center to succeed, you have to have a convention center hotel," Williams says. "But people are ready to believe the worst about government, and unfortunately they are often right."

The Oregon Convention Center's twin glass spires may not be Portland's proudest architectural monument, but they are a landmark in a section of Northeast Portland characterized by empty lots and fast-food joints.

Then-Mayor Bud Clark oversaw the building of the convention center, which opened in 1990. In 2003, then-Mayor Vera Katz used $116 million of tourism taxes to expand it. But the center has never had an adjacent first-class hotel.

Today, the Metro-operated facility loses $10 million a year. Debt service costs another $6 million annually. Metro's consultant, the Strategic Advisory Group, says the convention center generates tax revenues equal to those costs and hundreds of millions in spending that would not otherwise occur.

The number of annual events at the convention center is declining, however, and the center is increasingly oriented toward low-budget trade shows. Boosters say a hotel would reverse the slide.

"A new hotel will change the game," says Jeff Miller, executive director of Travel Portland, whose mission is to generate tourism.

Conventioneers want to lodge within a short walk of convention facilities, Miller says. 

Despite their reputed benefits, convention center hotels typically cannot be built without significant subsidy.

"The last large convention hotel to be built, outside of Las Vegas or Orlando, without public participation was the Chicago Sheraton that opened in the early 1990s," according to a 2012 Metro consultant's study. "Today, on average, private investors can achieve their return on investment in a convention center hotel only if their basis is approximately two-thirds of the cost to develop."

That's because convention business is sporadic. The hotel must block out at least 500 rooms and include more meeting rooms and expensive amenities than the market would otherwise support. And Hyatt promises union wages for hotel workers.

Opinions on the issue are mixed. The Portland Business Alliance wants the hotel.

And Greg Goodman, whose family owns 25 blocks of Portland real estate, says a new hotel would spur activity in the underdeveloped area between the Burnside and Broadway bridges.

"It will be a catalytic investment like light rail," Goodman says.

But Tim Duy, director of the Oregon Economic Forum at the University of Oregon, disagrees. He says the economic benefits that tourism boosters claim are notoriously unreliable, and the jobs a hotel would create are marginal.

"If there were a real shortage of hotel space in the community," Duy says, "the private market would fill that need. There's no public benefit there. It's not a useful expenditure of public dollars."

Barry Schlesinger, 64, is more rumpled than many Portland developers. He's got the meaty hands and bad back of a commercial fisherman, the job he had before joining his family's real-estate business.

Most days, Schlesinger would still prefer chasing salmon than sitting through another meeting on the proposed convention center hotel.

But along with his brothers, Paul and Mark, Schlesinger owns or manages 1 million square feet of commercial real estate.

In 2009, records show Schlesinger bought land next to the convention center for $10.75 million. The purchase was highly leveraged—he borrowed $9.7 million and agreed to pay it back in 18 months.

Then-Mayor Sam Adams was pursuing a hotel project in which the city, rather than Metro, would issue bonds and the hotel would be publicly owned.

That deal collapsed amid the recession.

Meanwhile, Schlesinger came under pressure. In December 2010, his company lost a high-profile contract to run the city's parking garages.

Then last year, court documents in a family dispute showed the family's parking company had lost millions of dollars.

With interest costs mounting on the short-term loan he used to finance the hotel property—and has had to extend three times—Schlesinger worked behind the scenes to help Metro resuscitate the project and aligned himself with Mortenson Development of Minneapolis and Chicago-based Hyatt Hotels. The development team hired Gallatin Public Affairs, an influential Portland lobbying firm.

"It's very important to our family to get this deal done," Schlesinger says. "It's a fair deal that minimizes public risk."

The person who really got the deal moving, however, was Hughes.

"In Tom Hughes, we found a champion who understands the job and economic impact we create," says Travel Portland's Miller.

As mayor of Hillsboro from 2001 to 2009, Hughes, 70, helped Intel expand and was key in luring SolarWorld and Amgen to Washington County.

Hughes then made job growth the center of his 2010 campaign for Metro president. That was a shift—Metro's core functions are land-use and transportation planning and disposing of the region's solid waste.

As Metro president, Hughes' penchant for globe-trotting economic-development missions is as incongruous as his Waylon Jennings-like appearance is out of step with the typical undernourished, bike-riding Metro planner. Despite his foreign travel ("Metro-À-Go-Go," WW, Aug. 15, 2012), Hughes found his biggest target a block from Metro headquarters—the convention center.

"It's a tremendous opportunity for Portland and the whole region," Hughes says.

He put Metro's staff to work figuring out an approach that could win political support (see sidebar, page 18).

Schlesinger says Hughes' deal will bring some balance to economic-development spending. For decades, City Hall has used urban-renewal subsidies to develop downtown, the Pearl District and South Waterfront.

"At some point," Schlesinger says, "the east side ought to get something, too."

Travel Portland's board endorsed the Hyatt deal despite a deep split in the group's membership.

Travel Portland's board members include the manager of the city's largest hotel, the 800-room Hilton, which opposes the new Hyatt project.

But no critic possesses the clout of downtown hotelier Sondland (see below), who declined to be interviewed for this story.

His spokesman, lobbyist Len Bergstein, has been beating back headquarters hotel concepts on Sondland's behalf for a decade.

"It does not make sense on any level," Bergstein says. "The public provides a giant subsidy but gets all the downside, while Hyatt gets a brand-new hotel very cheaply and gets all the upside."

Industry figures show the hotel occupancy rate downtown, where Sondland operates, is about 78 percent, 15 points higher than the national average.

The risk to Sondland is that a subsidized hotel on the east side, next to the convention center, could undercut downtown's high-occupancy rate. In other cities such as Phoenix, convention center hotels have offered bargain-basement rates of $60 a night when there are no conventions in town.

Portland already has one publicly subsidized hotel—the Nines, in the downtown Macy's building. For a time after it opened in 2008, the Nines discounted its $260 rooms to $99 a night. The Nines is thriving now, but city records show it has failed to make any payments since 2009 on $17 million in city loans.

Bergstein says it's unfair to subsidize a convention center hotel at the expense of privately financed westside hotels.

"It's not a level playing field," he says.

For a hotel to be built, the City Council and county commission must approve the deal.

Their approval is necessary because all three governments—Metro, the city and the county—share in the hotel taxes that would be used to help finance the hotel's construction.

So far, the deal hasn't generated much excitement at City Hall or Multnomah County headquarters. But no elected official is out to kill it.

Hales regards the convention center hotel as an Adams leftover.

"I have been fairly ambivalent about this one," Hales says. "But I'm leaning toward supporting it."

City Commissioner Amanda Fritz, who provided the only "no" vote when the city decided to subsidize Jeld-Wen Field, is more positive.

"I think it will bring in a whole host of taxes and revenues beyond what's needed for debt service," Fritz says. Commissioner Dan Saltzman agrees. "I've still got some questions, but I'm pretty comfortable with the deal," he says.

Commissioner Nick Fish says he wants assurances if the projected hotel taxes don't materialize, Metro bears primary responsibility.

"I'm concerned about protecting taxpayers in the event that Metro's rosy projections don't pan out," Fish says.

Commissioner Steve Novick is the most probable "no" vote.

"I cannot support taking all the revenue from the hotel to subsidize Hyatt," Novick says.

At Multnomah County, Commissioners Judy Shiprack and Diane McKeel have expressed enthusiasm for a project that promises to create 2,000 construction jobs and 900 permanent jobs. Commissioners Loretta Smith and Deborah Kafoury and acting Chairwoman Marissa Madrigal are less enthusiastic but are probable "yes" votes if they get assurances that no public money will go into a proposed private parking garage and the price paid for Schlesinger's land is not above appraised value. (The projected purchase price is very close to Schlesinger's cost.)

Although both sides are lobbying officials hard, neither side is spending much on contributions. Schlesinger gave Hales $1,700 in 2012 and one of Sondland's companies contributed $5,000 to Saltzman's Portland Children's Levy last year, but otherwise, their contributions are small.

The transaction Hughes drew up makes it easy for others to vote yes.

First, he's got financial projections that suggest the city and county would have little risk even if the hotel flopped. Second, the deal provides new cash to both governments.

The incentives start at $250,000 each for the city and county in the first year, and escalate to $1 million for the county and $650,000 for the city by the 10th year.

Bergstein says that new money amounts to institutional bribes.

“It’s just there to get elected officials to vote yes,” he says. 

Metro's projections show the hotel will have to attain about a 75 percent occupancy rate at $125 per night to repay the $60 million.

A leading critic of convention subsidies, professor Heywood Sanders of the University of Texas at San Antonio, thinks that's unlikely. Sanders says many cities, including Baltimore, St. Louis and Phoenix, have invested far more than Metro wants, only to end up attracting far fewer conventioneers than projected.

"It's an arms race that never ends," Sanders says.

However, Metro consultant Tom Hazinski told a City Club audience during a debate Sept. 6 that Portland is different from other cities.

"There's a sense of vibrancy and place other cities have a hard time manufacturing," Hazinski said.

Metro ordered an independent financial evaluation that simulated declines in travel like those that followed 9/11 and the 2008 recession, concluding even in such downturns there would be sufficient hotel taxes to repay hotel debt.

Dan Anderson, a retired Portland banker who has tracked the hotel deal closely, is skeptical of Metro's due diligence.

"They've gone out and hired multiple certified smart people," Anderson says of Metro. "But how good are the forecasts? We're not going to know until it's too late."

Even if city and county officials green-light the hotel, the decades-long dance probably will not end there.

That's because opponents, led by Sondland, are prepared to refer the issue on the election ballot next year.

"Do the voters of this region want to give a multibillion-dollar corporation tens of millions in subsidies?" Bergstein asks. "Probably not."

Tall, tanned and well-tailored, Gordon Sondland, 56, is a controversial figure. His investment group owns stakes in five downtown Portland hotels—the

,

,

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and

—making him an opponent of a subsidized Oregon Convention Center hotel.

Sondland is both media-shy (he declined to be interviewed for this story) and eager for recognition. He negotiated hard to get a staircase named after him and his wife, Katherine Durant, at the Portland Art Museum. (Durant is a member of the Oregon Investment Council, which oversees the management of $70 billion in pension and public funds.)

Sondland subsequently became chairman of the art museum's board and chairman of the Oregon Governor's Office of Film & Television.

A Seattle native, he irked Portland's establishment in 2008 when he built a house on Ocean Avenue in the coastal town of Gearhart.

Homes there typically do not obstruct the views of others. Sondland ignored that practice when he built his $1.2 million beach house.

"There's an unwritten rule that you don't punch your house out and block views," says another homeowner. "He punched out and pissed off the neighbors."

In Portland, Sondland funded parks bureau concerts and contributed to school-bond campaigns. But a Jantzen Beach building he owns attracted the scrutiny of police and state officials in recent years for its high concentration of lottery delis.

In 2010, The Oregonian put a story about Sondland's sharp-elbowed lending practices on the front page.

Borrowers said Sondland's Gregory Funding knowingly extended rescue loans to people who could not afford them. An unusually high percentage resulted in Sondland's group taking over the properties.

The state investigated Gregory and a subsidiary. In a 2011 internal memo, David Tatman, administrator of the Oregon Division of Finance and Corporate Securities, called Sondland's mortgage company "an enterprise that has chosen to engage in an activity that [the state's lead investigator] describes as 'unsavory' and I would characterize as bottom feeding, that serves to take advantage of people's misery and take even more money from those that are financially distressed."

In December 2012, the state fined Gregory Funding $50,000, the largest fine it levied that year against a mortgage lender.

Although Sondland's lobbyists complain about the proposed Hyatt subsidy, Greg Peden, a spokesman working for the Hyatt hotel team, says Sondland's downtown hotels benefit from historic-property tax reductions. Such tax breaks, which are good for up to 15 years, have already saved Sondland and his partners nearly $3 million, according to a Multnomah County assessor's estimate, and will eventually save at least twice that amount.

And if Sondland really cared about taxpayers, Peden says, he'd stop claiming to be a Washington resident. Sondland chairs two Oregon boards, his children attend school in Portland and his wife lives here, but records show his legal address is a Seattle hotel.

Washington, of course, charges no personal income tax. In Oregon, the top rate is 11.5 percent.

"Where he chooses to claim he resides," Peden says, "speaks for itself." —NIGEL JAQUISS.

The Numbers: $197.5 million

Here's where Metro says the money is coming from for the proposed $197.5 million Oregon Convention Center hotel:

The way the deal is structured, Hyatt will pay about $120 million for a hotel that will cost nearly $200 million.

"They're buying a brand-new asset for 60 cents on the dollar," says Bob Scanlan of Portland real-estate investment firm SKB. "That's an attractive proposition."

But the most controversial part of the deal is the $60 million Metro Council President Tom Hughes wants to borrow to help fund construction.

Currently, local hotel taxes go into a pot that pays interest on previous public borrowing, including bonds for the convention center, Portland Center for the Performing Arts and Jeld-Wen Field. But the taxes generated at the new Hyatt would be used only to repay Metro's debt.

This method is called "but for" financing, because the taxes would not exist "but for" the new hotel.

Portland economist Joe Cortright says there are two problems with that approach.

The first is fairness.

"There are a lot of people and a lot of companies who'd come to Oregon tomorrow if we let them keep the taxes they'd otherwise pay to use for investment," Cortright says. "That would be unfair to all other taxpayers."

The second is the idea that the hotel taxes would not otherwise exist. In a market with occupancy rates as high as Portland's, private developers will continue to build hotels.

"That's tax money that could go to other uses," Cortright says. "Not to debt service on a hotel we probably don't need."

WWeek 2015