How the Convention Hotel Could Drain the General Fund

The Kansas City Business Journal recently published a piece about the proposed catering contract with the Hyatt Convention Hotel. In the story, Brownie Simpson of Kansas City Catering and Steve Shalit of the Westin and Sheraton hotels at Crown Center spoke about the deal.

The pair also expressed concern that the revenue generated from the catering rights arrangement wouldn’t meet the city’s projection of $30 million a year. Even if lack of competition increases prices, Shalit said, the two areas may generate only $17 million in revenue. The Business Journal reported that if gross revenue generated from the catering rights agreement is insufficient to make the scheduled fee payment, the city will have to pay the shortfall from “any legally available” city funds.

This matches other reporting which claims that Kansas City would have to almost double their convention business in order to make the proposed convention hotel work financially.

Right now, caterers pay a fee of 18 percent of their revenue to Bartle Hall for the right to be able to work at the convention center. That amounts to $2.2 million a year and is used to pay off Bartle Hall’s bonds, plus maintenance, operations, and the like.

In the proposed deal being considered by city leaders, Kansas City has guaranteed payments to Hyatt of just over $62 million for 15 years, or about $4.1 million a year. Here’s how that would work: The Hyatt will still pay a catering fee of about 18 percent to Bartle Hall. Bartle Hall will keep 4 percent to service their bonds and provide maintenance, etc., and return 14 percent to the Hyatt to cover the city’s 15-year, $62 million catering commitment.

In order for the project to generate the $4.1 million, Hyatt would have to conduct $30 million in catering each year. (Fourteen percent of $30 million is $4.1 million.) In any year that Hyatt does not reach $30 million in catering, the city would have to make up the difference. Currently, the catering business for Bartle Hall is about $12-15 million each year. If it were to remain at that level, under the new agreement the city would be paying Hyatt $2 million a year to make up the difference, as 14 percent of $15 million is $2.1 million—$2 million under the $4.1 million commitment.

The city’s argument that a convention hotel and catering agreement won’t drain the general fund assumes that catering business will double. If it doesn’t double, the general fund will have to support not only the catering agreement with Hyatt, but probably Bartle Hall, as it’s unlikely that their portion of the catering fee is sufficient to service bonds and maintain the property. (The agreement with Hyatt also states, “City will maintain the existing Convention Center to its current standards.”)

No one is promising that building a new 800-room hotel will double business, either in room nights or catering. They would be laughed out of the room if they did. (The deal might actually cost Kansas City business.) But all the financing models make the assumption that business will double. Taxpayers and city leaders have to decide if that is a reasonable gamble.