CONJECTURE: Marriott Hotel likely profitable

By Robert Edwin Field

Despite massive public subsidies for the Marriott Hotel, information concerning its profitability is  proprietary and confidential.  Yet its financial condition is pertinent in considering ways to offset the financial difficulties of the Lancaster County Convention Center.

A new inner city hotel would normally require about 68% in occupancy and an Average Daily Rate of say $120 in order to turn profitable.  That assumes the payment of real estate taxes and  market interest rates, which over the past couple of years have hovered around 7% for prime hotel financing.

However, since Penn Square Partners (PSP), a limited partnership of subsidiaries of The High Group and the Lancaster Newspapers, Inc., technically leases The Lancaster Marriott Hotel from the Redevelopment Authority of the City of Lancaster (RACL), the hotel is exempt from County, School District of Lancaster, and Lancaster City real estate taxes.   Nevertheless, PSP is the  equitable owner since it has the right to purchase the hotel for a nominal sum when the bond debt is paid  off.

RACL’s 2011 Financial Statements reports that,  as  of June, 2011, approximately $27 million of bonds for construction financing  bearing an interest rate of 7% were converted to “variable rate” bonds averaging less than 1%  (0.79%. to be precise)  for  a  gross savings of 6%.

PSP likely pays a fee to a double A or triple A rated guarantor (usually a bank or insurance company).    Therefore, a net savings of 4 ½ is likely, which would amount to $27,000,000 x 4 ½% = $1,215,000 annually in reduced interest cost.

If the Marriott Hotel were subject to real estate taxes, we assume that Market Value would be set at say $30,000,000 (improvements plus land).   To adjust Market Value to reflect changes due to the passage of time since a county wide reassessment took place, we apply the State mandated “Common Level Ratio for Lancaster County” of 1.31, the reciprocal of which is 76%.   76% x $30,000,000 = $22,800,000 for Assessed Value.    The combined tax rates for County, School District and City amount to 4%. Thus the savings to PSP would come to $912,000 annually.  ($22,800,000 x 4% = $912,000)

The annual savings of $1,215,000 in below market interest rates for conventional financing and $912,000 annual savings in real estate taxes amounts to $2,127,000 in total.  Thus the breakeven point for the Marriott should be far less than the 68% at $120 Average Daily Rate for a conventional hotel.   We estimate  break even at 60%.

(Not taken into consideration are PSP profits from several one sided terms in its agreements with the Lancaster County Convention Center Authority [LCCCA], one of which is the Marriott provides food for Convention Center events and only pays a small fraction of the usual industry commission rates to the LCCCA.)

Based on industry scuttlebutt concerning Marriott Occupancy and Average Daily Rate and given the interest and real estate tax savings, the Marriott should be profitable.

If the Convention Center continues short of funds for promotion, maintenance and renovation reserves and possibly even of closing, its future bookings will shrink and be less desirable, thus seriously impacting Marriott revenue and profits.

Therefore, in its own interest as well as out of civic responsibility, PSP should fully participate in Board of Commissioners Chair Scott Martin’s five year plan for contributions from PSP and the other involved parties towards offsetting the LCCCA’s growing cash flow deficit.

The following are relevant excerpts from RACL’s “Notes to Financial Statements” of June 30, 2011:

Pg. 3.    Liabilities and Net Assets …Notes payable, net of Current Portion:  $26,954,082

Pg. 12.  Note 6 – Lease Rental Receivable    The Authority has entered into a lease agreement with Penn Square Partners as further outlined in Note 18 for the hotel unit of the Penn Square Hotel and convention Center.  The Authority classifies this lease as a capital lease and utilizes direct financing lease accounting.

Pg. 13.

…the Series of 2005 Taxable Bonds, , the proceeds of which were used to finance the underlying hotel construction costs.

During the year ended June, 2011,  Federally  Taxable Hotel Lease Revenue Bonds, Series A of 2005 was paid in full.  The event triggered a change in the fixed interest rate of 7.00% of the Federally Taxable Hotel Lease Revenue Bonds, Series of 2005 to a variable rate.  The variable rate in effect at June 30, 2011 was   0.79%.

Pg. 15.   Note receivable from Penn Square Partners.  This loan of originally $2,250,000 accrued interest at 2.00% through November 2007.

Pg. 22.   In  addition, the Authority has been awarded an Infrastructural Facilities improvement Grant though the Commonwealth of Pennsylvania which is payable in annual increment of up to $1,0000,000 over twenty years to be used for debt service of equal annual amount on the Guaranteed Special Revenue Bonds, Series of 2005 Special Revenue indenture and First Supplemental indenture (note 14) on a reimbursement basis.    The Authority has discounted the future grant receipts (note 7) and offset construction expenses related to the Penn Square Hotel project in the amount of $12,000,000 with the bond proceeds.  During the years ended June 30, 2011 and 2010, $990,964 and $1,000,000, respectively was received under this grant agreement to offset debt service requirements.

Pg. 23.  The Authority has entered into a lease agreement with PSP.  In accordance with the agreement, PSP will lease the premises for an initial term, an interim term, and a base term.  In addition, PSP has agreed to make an initial investment of approximately $10,000,000 for certain fixtures, professional fees, working capital, and other pre-opening expenses for the hotel and restaurant…

Rent during the base term includes amounts required as debt service on certain bonds issued by the Authority (base rent), other charges in connection with the bonds, plus any costs incurred by the Authority relative to the administration of the lease that are not provided for in the bond financing documents (additional rent).  During the base term, PSP will also pay the Authority minimum participation rent in the amount of $100,000 for the year ended June 30, 2010, $150,000 for the year ended June 30, 2011, and $200,000 per annum for the remainder of the lease.  The minimum participation rent will be increased if certain hotel operating results, as defined in the lease agreement, are met.