Palm Beach County Administrator Joe Abruzzo will ask commissioners this month to approve a deal with Related Ross to develop a second convention center hotel in downtown West Palm Beach, a project that he and Related Ross say could generate as much as $7 billion in revenue for the county over the life of a 97-year lease.
Related Ross is proposing to build an 18-story, 400-room hotel across Rosemary Avenue from the Palm Beach County Convention Center and the center's existing hotel, the Hilton West Palm Beach. The Curio would rise to 204 feet in height at 900 S. Rosemary Ave. and would feature a two-story meeting space area and a 7,300-square-foot restaurant.
Eric Silagy, vice chairman of Related Ross, said the developer has already spent $16 million
preparing plans for the second convention center hotel.
"If we get approved, we can have this hotel open in about two years," he said during an interview with The Palm Beach Post on Aug. 17. "We are ready to begin building."
West Palm Beach city commissioners approved plans for the second hotel on Aug. 31, greenlighting the project that tourism officials say will help the city draw larger conventions and conferences.
City commissioners had voted earlier to rescind a previous pact with the county that required property tax payments to the city from any development on the land that is to house the hotel.
Related Ross has insisted its proposed hotel be exempt from property taxes. Without that concession, Silagy said, a second hotel would not be built. He argued the additional hotel is needed to lure larger conventions and support expansion of the convention center.
A 2020 study commissioned by the county found that additional room inventory was needed to bring in more conventions and that meaningful business was being turned away.
It concluded that the share of the national convention market that the convention center could compete for would nearly triple, even without an expansion to the existing facility. Related said it expects its second convention hotel to result in an expansion of the convention center.
Meanwhile, Silagy said every other major convention hotel that has been built in the United States has obtained major upfront subsidies. New Orleans paid $80 million, and Miami Beach and Raleigh, North Carolina, $75 million, Silagy said.
The county is paying $26 million to buy the land where the hotel will be built, but the county will own the land and the hotel, Silagy said, adding: "That is not a subsidy."
Abruzzo hailed the agreement.
“This is a good deal for everyone, including the city, the county and the Convention Center,” he said. "This is the best hotel convention center deal that has ever been negotiated."
Report: Convention center revenues will skyrocket if conditions materialize
The county hired BAE Urban Economics, an real estate advisory consulting firm, to evaluate the arrangement. Its report confirms what supporters of the hotel have said: The additional lodging capacity will generate more business and dollars at the convention center.
But just how much more profitable, the study concluded, depends on certain variables becoming realities.
BAE, for example, noted in its 12-page report that the estimate of the top-line $7 billion benefit is premised on the developer’s projected 5% annual revenue increase, which may not always be sustainable, and that the lease itself might not last the full 97-year period.
The consultant noted that the total projected payments appear so large partly because of the lengthy lease and long-term revenue growth assumptions embedded in the developer's financial projections.
Abruzzo and Related Ross: West Palm would still reap millions from the convention center
Silagy said the benefits of the second convention hotel are enormous. Taxpayers, he said, are projected to receive:
- $3.7 million in bed and sales tax annually.
- The benefits from $16 million in new spending.
- The benefits of 832 new convention center jobs.
- An opportunity to expand the convention center.
Abruzzo said West Palm Beach wanted part of the county's revenue but that the city will obtain about $3 million in permitting and mobility fees from the project, a figure that dwarfs the $4,300 a year it currently gets in property taxes.
For the county, there is no loss of tax revenue since the site is in a Community Redevelopment Agency area that results in the the CRA receiving all property tax revenue, according to Abruzzo. Under the proposal, the county would buy the land from Related Ross for $26 million, then lease the property back to the developer. The deal requires a $4 million upfront payment from Related Ross before construction begins.
The annual base rent would start at $1.2 million. Related would agree to lease 590 parking spaces from the underused convention center parking garage. Its annual parking rent would begin at $708,000.
What the county hopes to cash in on is 6% of annual hotel gross revenue above $77 million. With the convention center set to expand and convention demand expected to grow, the county and Related Ross believe it is reasonable to expect annual gross revenue increases of 5%.
Why the second convention center hotel deal is different from the first
Initially, Related Ross wanted a deal similar to the one approved by the county for the first convention center hotel. That deal has resulted in the county receiving no money because it was linked to net revenue. The current proposal is linked to gross revenue instead.
"We were not going to do that same deal," said Abruzzo. "We made that clear. And negotiations became contentious at times, but at the end of the day, they agreed to make us a partner. The better they do, the better we do."
Another feature of the second hotel contract is that if there is an economic collapse, such as one caused by a pandemic, Related Ross would still have to pay the county the base fees.
But the BAE report also found that applying discount rates substantially reduces the project's estimated value to the county. The report notes that a large revenue stream over a potential 97-year lease term shrinks dramatically when discounted because a dollar received today is worth more than a dollar received 97 years from now.
While the undiscounted net benefit is projected at about $7.2 billion, BAE estimated the value falls to about $654 million using a 3% discount rate and roughly $145.8 million using a 5% discount rate, a rate that accounts for the reduced value of future dollars over time.
But BAE concluded that under all three scenarios, revenues would exceed projected county costs.
Silagy questioned that part of the BAE report that lowered the revenues generated for the county, noting that base rent increases 3% a year, which should often be enough to match the rate of inflation, and if certain targets are reached, the percentage increases should even be much larger.
The compounded revenue growth rate at the first hotel from 2018 to 2025 is nearly 7%, according to Related Ross, although the developer acknowledged that nobody can predict the future.
Palm Beach County is already designing the next phase of its convention center expansion, a roughly $200 million project that would double the facility's size. Chief Deputy County Administrator Patrick Rutter said at a recent West Palm Beach Community Redevelopment Agency meeting that construction could begin around the time Related Ross opens its proposed second hotel.
Related Ross is chaired by Stephen Ross, who also owns the NFL's Miami Dolphins, and has helped to reshape downtown West Palm Beach. Related Ross owns much of the area's premier office space and has led a wave of new office, residential and hotel development. The company has helped bring a Vanderbilt University graduate campus and a Cleveland Clinic hospital to the city.
Mike Diamond is a journalist atThe Palm Beach Post, part of the USA TODAY Florida Network. He covers Palm Beach County government. You can reach him at mdiamond@pbpost.com. Help support local journalism. Subscribe today.
This article originally appeared on Palm Beach Post: County convention hotel profit hinges on revenue growth | Exclusive
