THIS MAY SOUND vaguely familiar: A local government hands out low-interest loans to rich corporations to finance a new, for-profit venture catering to the wealthy. We’ve been down this road before, haven’t we? Wasn’t it called Pine Street?
While King County officials strenuously object to that comparison, it can hardly be avoided. Earlier this month, County Executive Ron Sims entered the politically perilous world of “public-private partnerships” with his announcement that the county intends to lend $8 million to the Westin Hotel chain to help it build a four-star hotel at Sea-Tac Airport.
The county plans to use loan guarantees from the federal government’s Department of Housing and Urban Development (HUD)—the very same eyebrow-raising technique that former Seattle Mayor Norm Rice employed to help Nordstrom move across the street to the old Frederick & Nelson building. That case drew national attention as an example of “corporate welfare,” and questions about the propriety of Rice’s conduct may have cost him the job of HUD director, for which he was being considered back in 1996.
Rice was ultimately cleared of any criminal wrongdoing. Indeed, the many “official” investigations of the Pine Street affair—both the HUD loan and the overpriced garage—all came to essentially the same conclusion: Nothing wrong had been done, but the poor public just hadn’t been kept adequately informed about the deals.
Sims appears to be deliberately avoiding that mistake. “Ron Sims has been adamant that he wants full disclosure,” says Rich Hass of Kennedy Associates Real Estate Counsel in Seattle, who has been in negotiating sessions with the executive on the Westin deal. “King County has worked hard to make sure this is all out on the table.” Sims held a news conference earlier this month to announce the project, and his staff has readily discussed its details.
The county’s private partner at Sea-Tac is Starwood Hotels and Resorts Worldwide, one of the biggest hotel and casino operators in the world, which bought the Seattle-based Westin chain last year. Based in White Plains, New York, Starwood owns more than 660 hotels in 70 countries and has more than $16 billion in assets. (Its stock ticker symbol is HOT.)
The company wants to build a 14-story, first-class hotel next to the airport’s main terminal. (It would connect directly to the ticketing level by—of course—a skybridge.) The Port of Seattle, which runs Sea-Tac, has long been interested in seeing a hotel rise on this site. The county has also been soliciting economic development projects that would take advantage of its $10 million in Section 108 loan capacity. Westin responded a few years ago, and its proposal was the only one deemed eligible for the program.
As part of the deal hammered out over the last six months, Westin has agreed to hire five welfare-to-work recipients each year; provide 6,000 hours of employment annually to at-risk youths; place 15-25 students each year in unpaid internships; and use apprentices during construction. The company will also donate $50,000 towards the establishment of an after-hours child-care facility in the Sea-Tac area. “I would be surprised if there is a 108 project that has the substantial amount of public benefits that we’ve been able to capture here,” says Ray Moser, King County’s chief of economic development. “This goes far beyond what HUD requires.”
OFFICIALS AT HUD’S home office in Washington, DC, were unable to say whether any other luxury hotels have been constructed with 108 money. In fiscal ’97, the agency guaranteed some $278 million worth of loans, but a spokesperson said it keeps no list of the projects.
According to the agency, Section 108 guarantees are intended to “help fuel large economic development projects and other revitalization activities” in areas that are “distressed.” County Executive Sims’ public policy chief, Ethan Raup, notes that the Westin project will benefit an area—SeaTac, Burien, White Center—that has some of the highest rates of poverty in the county.
Proposed 108 projects can qualify for loan guarantees by meeting one of several vague objectives. The city of Seattle, for example, was able to secure a 108 loan for the purpose of eliminating “blight” (in the form of the empty, run-down Frederick’s building). The Westin project, on the other hand, is being submitted as a boon to “low- and moderate-income families.” To qualify under that criterion, the project needs to fill 51 percent of its jobs with people of low and moderate income—which, for a hotel, should not be a problem.
Ray Moser stresses that the Westin deal does not involve money from King County taxpayers and does not put the county’s credit rating at risk. (The same was true with Pine Street’s HUD deal and the city of Seattle’s rating.) Under the 108 program, HUD will sell bonds to Wall Street investors, backed by the “full faith and credit” of the US government. These bonds, since they are guaranteed, will pay a low rate of interest, say about 5 percent. The money from the sale of the bonds will, in turn, be loaned to Starwood at that same bargain interest rate, with another 1 percent tacked on. As Starwood pays back the loans, that extra 1 percent is pocketed by King County, while the remaining 5 percent goes to pay off the investors who bought bonds from HUD. The county, in other words, does not lend its own money; rather, the developer is allowed, by means of HUD’s guarantee, to tap the public markets at about half the standard interest rate.
The savings to Starwood could be substantial: perhaps as much as $6 million on a $58 million hotel. But the county maintains that this comparison is moot because no private investor would fund the project without the county’s help.
King County’s 1 percent cut of the interest payments will generate $990,000 in income over the 13-year term of the loan. “Just on the million-dollar return [alone], it’s a good deal for the county taxpayer,” says Sims aide Raup.
However, the county is on the hook to HUD in the event of a default. The developers have signed “corporate guarantees” to pay off their loan, but if they fail, HUD will withhold some of the annual grants it normally gives to King County and use that money to pay off the debt. Moser does not believe that is a likely scenario. “This is a four-star hotel right at Sea-Tac Airport,” he says. “I would think it would have a very good chance of succeeding.”
BUT IF THE VENTURE is such a shoo-in, why is it reaching into the public till? Moser and Starwood executives argue that the economics of the project just don’t work without the taxpayer support. The project is being funded mostly by a large institutional investor called the Multi-Employer Property Trust, which manages a pot of $1.5 billion in trade-union pension money. MEPT is lending $36 million for the project and has first claim on the building. It has also linked up with Starwood to put in $12 million of equity. That leaves a financing shortfall, according to Joe Champ, Starwood’s head of North American Development.
Starwood and MEPT could have come up with more equity for the project, says Champ, but “it would not meet the return hurdles that our shareholders and the fund holders demand for their equity investment. So we wouldn’t have a project, quite simply.”
Champ also says that recent stock market volatility has cooled the real estate investment climate and made private money harder to get. The fact that Starwood is building on land it does not own also discourages investment. According to Craig Schafer, a hotel broker with Colliers Macaulay Nicolls International, whenever a developer is leasing land, especially from a public entity like the Port of Seattle, “immediately you get people turned off to the deal.” An expiring lease makes it harder for investors to get their money out.
Still, it is not clear that private funding for the project was fully examined, even back when the real estate outlook was a lot brighter. Rich Hass of Kennedy Associates, who is the investment adviser to MEPT, says that when he first talked to Westin about a year and a half ago, the HUD loan was “one of the underpinnings of the deal. It preceded our involvement. All of our assumptions and underwriting assumed the county’s participation. We’ve never done any analysis that didn’t [include it].” Hass says, “If we knew the [108] program wouldn’t have been available, we probably could have gotten [the deal] done. But at this point it would be extremely difficult.”
Champ says public subsidies are simply a fact of life in the hotel business. Of the 16 hotels Starwood is presently developing across North America, including one at the Denver airport, 10 have some kind of subsidy, usually a tax abatement. “The reason is that the capital cost of building new hotels, especially in urban areas, is so high today. And they’re such huge economic-benefit generators that there’s very compelling reason to assist them.”
The question is, how significant will those economic benefits be for the low- and moderate-income people the Westin project is supposed to assist? After all, hotel jobs in the Sea-Tac area appear plentiful already, with fierce competition for bodies to fill them. Connie Norman, head of human resources at the Sea-Tac Holiday Inn, says she’s heard of hotels recruiting out of one another’s parking lots. For the most part, these are not exactly steady career jobs, either: A recent industry study pegs annual turnover for line workers at luxury hotels at 158 percent.
At least one of the agencies that stands to benefit from the Westin partnership is resolutely dubious. The nonprofit Center for Career Alternatives in South Seattle is one of several participants in the King County Jobs Initiative, a job training and placement program that Westin has agreed to use as its “first source of referral.” Center director Al Sugiyama wonders what jobs his clients will be referred to. “Are we going to be talking about reservation people, assistant manager people, concierge? Jobs with upward mobility? I don’t think they are. It’ll be the ones they have trouble with all over: food-service workers, dishwashers, housekeepers. Or they’ll say, ‘Yes, send me your person,’ and if it isn’t someone with five years experience, they don’t hire them. So I’m a little skeptical of this kind of ploy. I’ve seen it happen too many times.”
The county argues that the Westin will provide “livable wage” jobs that would not exist without the project. What’s more, the hotel’s willingness to provide internships, apprenticeships, and to take a chance on some of the county’s most difficult people to employ (even if only a few) could be an important tool in an era when social programs run by government are out of fashion. The county is hoping to be able to turn to the private sector more and more for such help, but Ethan Raup worries that media-fostered suspicion about public-private partnerships threatens to create “an atmosphere where you can’t get anything done.”
