Hotel tax breaks warrant scrutiny Downtown: Council should probe need for taxpayer money if private funds are available.

March 09, 1998

DEVELOPER Harvey Schulweis' intention to build a 600-room Westin hotel downtown without public subsidies challenges the basic economic assumptions of Baltimore's highly politicized quest for more hotel rooms.

Why would two competing builders need big favors from taxpayers, if Mr. Schulweis can finance a 28-story hotel from private sources?

This is a question the City Council must probe Wednesday when it meets to consider a request by builders of the $134 million Inner Harbor East Wyndham hotel for $40.9 million in public aid, mostly in tax breaks. Developers of another proposed hotel, the Grand Hyatt adjoining the Convention Center, are expected to ask for inducements on the same scale.

Over the past decade, subsidies have become an expected construction sweetener in most big cities.

More than a year ago, when Mayor Kurt L. Schmoke began courting developers for what then was envisioned as just one taxpayer-aided hotel, public aid was seen as a prerequisite to make the numbers work. After he selected the Wyndham, and its distant location prompted a rival proposal for a Convention Center hotel, tax breaks and city grants became a financial assumption of that plan, too.

The Wyndham development team is led by bakery king John Paterakis, a fund-raising rainmaker for Mr. Schmoke and many City Council members. He plans to sell the hotel to the multibillion-dollar Patriot American real estate investment trust. The force behind the Grand Hyatt plan is Peter G. Angelos, principal owner of the Orioles.

Those developers say they need public aid because room rates otherwise would be too high for leisure travelers and conventioneers. In the case of the Wyndham, a standard room would cost $165, and an hour of parking $11.04. With tax breaks and other aid, those costs could be lowered to $134 to $145 and $7.36, respectively, according to the city's projections.

But do tax breaks and subsidies indeed determine room rates? Or are those rates set by market demand, cachet and amenities?

Once the Wyndham and Grand Hyatt are built, the downtown hotel market is in for a shake-up.

The bulk of the heavily discounted group and convention business is not likely to go to those new hotels but to gravitate to such older facilities as the Omni and the Hilton (formerly, Lord Baltimore). If that happens, subsidies and breaks to build the new hotel would have been meaningless -- except to the developers.

For example, the proposed Wyndham deal -- the only one for which financial details are available -- maximizes the developers' return. In contrast, the proposed profit-sharing agreement relegates the city to secondary partner. The city would share in proceeds only if the hotel showed a bookkeeping profit. But the Wyndham owners would receive a guaranteed return on their investment even in bad years. And as operators of the hotel, they would take a wide assortment of management and licensing fees.

Mr. Schulweis, president of the publicly traded Town and Country Trust, declined to comment on his rivals' need for tax breaks and subsidies. "The economics of our hotel and our location are different than the other hotels," he explained, describing his market niche as affluent business travelers.

Subsidies and tax breaks are valuable tools that, properly used, can play a decisive role in making economic development possible. But with Mr. Schulweis scrambling to build here without aid, the question must be asked whether Baltimore is past the point where hefty taxpayer handouts are needed to produce more visitor rooms.

Pub Date: 3/09/98

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