News Column

Convention Business Requires Millions From Taxpayers

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The Democratic National Convention will be Charlotte, N.C.'s most prestigious event, bringing tens of thousands of visitors and worldwide exposure.

It's the crowning achievement of the city's two-decade quest to become a world-class convention destination.

What's less known are the tens of millions of dollars in taxpayer money spent to compete in the convention business and the wildly inflated projections of economic impact used to justify the Convention Center's construction and expansions.

In fact, the city of Charlotte and the Charlotte Regional Visitors Authority have not scrutinized how the Convention Center has performed. Elected officials who oversee it do not understand it.

Yet they have continued to pour money into the convention business, even in the face of a national glut of meeting space and Charlotte's inability to fill its building.

The Charlotte Convention Center has cost taxpayers as much as $30 million annually for construction debt, operating losses and incentives worth of hundreds of thousands of dollars to win business. The promised payback from the investment hasn't materialized.

Meanwhile, Charlotte residents pick up much of the tab: Most Convention Center funding comes from a countywide 1 percent tax on restaurant and bar bills -- a majority of which is paid by Mecklenburg County residents who dine out.

Consider:

--Since its 1995 opening, the center has fallen dramatically short of projections.

When the Convention Center was being planned, it was forecast to produce 528,800 hotel-room nights a year to fulfill its mission of putting "heads in beds." That would have been about 20 percent of all rooms sold in the county.

It has never come close to that.

In fiscal year 2011, it produced 142,000 room nights -- 2.7 percent of all rooms sold in Mecklenburg, according to an Observer analysis of hospitality industry data.

It would take hosting five Democratic conventions a year, every year, to meet the original projections.

--The Charlotte Convention Center is usually empty, with its exhibition halls used 35 percent of the time last year. The average for similar-sized convention centers is 57 percent.

Charlotte struggles to fill its center in part because there is so much competition with other cities, which have made large investments in convention centers even as the meetings industry has been in a slump.

The result is too much meeting space and too little demand.

--Charlotte has joined a common practice among second-tier tourism cities in offering deep discounts to groups to win their business.

To land the American Bus Association's annual trade show in 2009, for instance, the CRVA paid the group's rent at the Convention Center, worth $136,000; it paid the group more than $200,000 to help sponsor ABA conventions in 2007 and 2008; it spent $100,000 on a party for the group at the Charlotte Motor Speedway; and it offered $125,000 on other expenses, including $8,000 in limo rides for convention VIPs.

The American Legion, coming in 2014, is penciled in for $440,000 of discounts, including $360,000 in free rent.

But even opening the checkbook doesn't mean Charlotte gets the best conventions.

A majority of the city's high-profile events -- which have required large subsidies -- are part of an industry category called SMERF, which stands for social, military, educational, religious and fraternal.

Unlike a medical convention or a trade show, most SMERF attendees pay their own way.

And most are on tight budgets.

--In estimating what convention attendees spend, the CRVA has routinely made erroneous claims, sometimes contradicting itself.

When Charlotte landed the 2010 National Rifle Association convention -- one of the city's biggest-ever meetings -- the CRVA estimated gun enthusiasts would spend $10.3 million.

After the NRA left, the CRVA inexplicably increased that total by 600 percent -- adding tens of millions of dollars of spending that was trumpeted to the public.

In other events, the CRVA said some conventions were attended by thousands more people than actually showed. For the recent Shriners convention, the tourism authority overestimated attendance by 40,000 people.

In interviews with the Observer earlier this year, the CRVA's research department adamantly defended its spending formulas.

Recently, however, the CRVA acknowledged that many of its past spending estimates were erroneous. It is now using a new formula that more realistically reflects visitor spending -- and has cut most estimates in half.

"We owe it to the community to be as accurate and as conservative as possible," said Kimberly Meesters, who became CRVA spokesperson this spring as part of a reorganization by new chief executive Tom Murray. "We plan to take a much more disciplined approach in the future."

The CRVA, which manages the center, and the city, which owns the building, argue that the center's economic benefits remain crucial for the growth of Charlotte.

Murray acknowledges that the Convention Center loses money, which is the case in many cities.

"Not all businesses are designed to make a profit," Murray said. "The real mission is to create economic impact."

He says he believes it's a moneymaker for the city. The convention business pays off, he said, in jobs and new tax revenue for the city.

"The wonderful secret is that for every $1 in tourism tax ... (it yields) $1.10 in general fund tax," Murray said.

That's only true, however, if roughly $25 million of Convention Center expenses are ignored, including nearly $22 million in annual debt payments.

In fact, there is no evidence that the city makes its Convention Center money back in new taxes from visitor spending. The city of Charlotte, Mecklenburg County and the state may make as little as 35 cents for every dollar they spend on the convention business.

Convention origins

Cities across the country, including Charlotte, believe convention centers are must-haves, like stadiums or museums. They argue that conventions give their cities nationwide exposure, making it easier to attract businesses.

One of Charlotte's earliest forays into the convention center business came at the turn of the last century.

A group of eight businessmen built a privately financed civic auditorium at Fifth and College streets and a hotel where the Marriott Center City is now.

But there was a problem: The building lost money, and the original investors were soon in bankruptcy court. The city ultimately bought the building in 1911 and jumped into the convention center business.

Fast forward to the late 1980s, when business leaders, including Hugh McColl, lobbied to build a new publicly financed convention center to replace the old city-owned center at the site of what is now the EpiCentre entertainment complex.

The city hired consultants who projected a dramatic increase in attendance, room nights booked and tax revenue generated.

When the center opened in 1995, the results were disappointing.

Instead of more than 500,000 hotel-room nights, the center booked 170,000 in its first full year in 1996. That was about 5 percent of Mecklenburg County's hotel market.

A headline from the Charlotte Business Journal captured the city's disappointment: "We built it, they didn't come, so now what?"

Advice to expand

In the summer of 1997, the Charlotte City Council listened to a presentation from a new consultant about why its center was underperforming.

The consultant, Jeff Sachs, who is managing partner of a Georgia-based firm, Strategic Advisory Group, told council members they were "one-third of the way there" and that they "have some work to do regarding this and they need to step in the right direction."

That work included building a hotel nearby so convention attendees wouldn't have far to walk. The city decided to invest $16 million in building the 700-room Westin, which opened in 2003. That was about 10 percent of the hotel's construction cost.

The city's deal with the Westin included a parking deck and required the hotel to set aside rooms each month for conventions, ensuring the Convention Center would have room blocks to offer clients.

The opening of the Westin produced some short-term increase in business, though nowhere near projections. Bookings then receded to levels before the hotel opened.

One of the consultants who proposed a new hotel was Charlie Johnson, now with Chicago-based C.H. Johnson Consulting.

Asked why the center missed its targets, Johnson said the city was a victim of its own success.

"You were so successful with the banking business, and the rooms were consumed by commercial uses," Johnson said. "(Conventions) probably had difficulty getting room blocks."

Asked why the Westin didn't do more to improve convention business, Johnson said the Westin's rooms were also gobbled up by the city's banks, even though the city's deal reserved rooms.

The CRVA's conundrum of finding enough hotel rooms raises a question: If one of the tourism authority's goals is putting heads in beds, what does it do when the beds are already full?

The race for space

Three years after the Westin opened, Atlanta, Kansas City, Daytona Beach, Fla., and Charlotte were in a competition to land the NASCAR Hall of Fame.

Charlotte's bid for the hall included the construction of a 40,000-square-foot Crown Ballroom, which would be part of the Convention Center.

The hall would, in part, make the city more attractive for meetings and trade shows because it would give attendees something uniquely Charlotte to do. It would distinguish Charlotte from other second-tier cities, like Indianapolis.

Charlotte won the hall, but on exaggerated attendance projections.

The CRVA's first-year visitors were only one-third of what was originally projected. The CRVA had trouble getting convention attendees to pay to visit the hall, and now offers them half-price admission.

Unlike the NASCAR hall, the ballroom is part of the Convention Center and is paid for with Convention Center funds.

There are many cities with more convention space, like Chicago, Orlando, Fla., Dallas and Las Vegas.

But Charlotte's 400,000 square-foot convention center has more than enough space for the DNC, which will use the building primarily for media. For the 2008 DNC, Denver built a 220,000-square-foot temporary building to house media.

Debt payment rises

The construction of the Westin and the Crown Ballroom pushed up the city's total debt payment on the Convention Center to roughly $22 million annually.

In fiscal year 2011, if the center's costs were divided by the total number of hotel rooms booked, the taxpayer cost per room would be $210.

That means each time a convention attendee booked a hotel room for one night, taxpayers had essentially paid for that room.

And for meetings in which hotels lowered their rates significantly, which is common, taxpayers also bought their breakfast, lunch and dinner.

Heywood Sanders, a University of Texas-San Antonio professor who has studied and criticized the economics of convention centers, said Charlotte is a case study of a city sticking with its vision of becoming a top-tier convention destination -- even if previous efforts haven't worked.

To underscore his point, he asked, half in jest, if the city is spending more than $200 for each hotel night booked, "Why not just buy everyone's hotel room?"

Despite the center performing below expectations, the Charlotte hotel industry supports the CRVA and its efforts to generate business.

"Because of that building, and those hotel rooms that came with it, we can attract bigger and bigger meetings," said Sid Smith of the Charlotte Area Hotel Association.

Smith said only looking at hotel room nights booked doesn't tell the whole story of the center. The building helped land the DNC, he noted.

1,000-room hotel coming?

In the last several years, groups and associations have told convention and visitor bureaus nationwide they would like a 1,000-room hotel near a convention center to make it easier for all of their delegates to be under one roof.

In a written report four years ago, a consultant told the city of Dallas that building a 1,000-room hotel is the "next step" in what it called a convention center "arms race."

Cities such as Dallas, Indianapolis and Washington have recently built taxpayer-subsidized 1,000-room hotels. St. Louis also built a 1,000-room convention hotel, but it went into foreclosure in 2009.

In Charlotte, the CRVA has discussed the need for expanding the Westin or building an entirely new hotel, which could cost more than $300 million.

This year, the city's debt payment on the Convention Center drops to $16 million, which frees money for a hotel.

Murray, the CRVA chief executive, said that would ease what he sees as Charlotte's scarcity of hotel rooms for conventions. He also said: "1,000-room hotels don't get built without public assistance."

The Convention Center -- and any subsidized 1,000-room hotel -- would be paid for, in part, with the current 3 percent tax on hotel and motel rooms, a cost primarily borne by visitors.

But two-thirds of Convention Center funding comes from a 1 percent tax on prepared food and beverages, which is mostly paid by Charlotte-area residents. By state law, the money must be directed toward the center or "tourism promotion."

In practice, the money flows to the Convention Center each year with little scrutiny.

It's a substantial investment. Compared with the $30 million the city and CRVA spend on the Convention Center, the city spends $7.5 million a year building sidewalks.

It spends between $10 million and $15 million every two years building affordable housing.

Competition with other cities

As Charlotte expanded its convention center by building the Crown Ballroom, other cities were doing the same thing.

The amount of exhibit space nationwide increased from 52 million square feet in 2000 to 70 million in 2010, a jump of 35 percent, according to data compiled by Sanders, the University of Texas-San Antonio professor.

Raleigh, for instance, opened a new $225 million convention center five years ago. Nashville is building a nearly $600 million center. Indianapolis, another Charlotte competitor, finished a $275 million expansion in 2010.

While Charlotte and other cities expanded, the value of hosting meetings and conventions didn't grow as it did in the 1990s.

The industry slumped after the attacks of Sept. 11, 2001. That dip deepened after the 2008 financial crisis.

Atlanta's Georgia World Congress Center in 2000 hosted 716,000 people for major trade shows and conventions. That fell to just under 540,000 in 2011.

Seattle saw an even bigger decline, from 180,000 out-of-state guests in 2005 to 85,500 in 2010.

On paper, the Charlotte Convention Center's decline isn't as stark.

But that's because the CRVA counts the CIAA basketball tournament as a Convention Center event because it hosts a fan fest. The CIAA produces 41,000 hotel-room nights, according to the CRVA. That's more than 25 percent of the center's hotel business.

James Rooney, executive director of the Massachusetts Convention Authority, said even the most optimistic growth forecasts for the meetings industry is 2 percent a year.

"Clearly, that's not enough to accommodate the supply," Rooney said. "This is a mature market, and there will be winners and losers."

In a draft copy of its sales plan for the coming year, the CRVA said the opening of new convention center hotels and expanded centers in other cities makes those cities "hungry for business, further putting us at a disadvantage."

The CRVA is already concerned about a huge drop in business for 2015, as bookings are far below its target.

Republican City Council member Warren Cooksey, who has supported the CRVA, remembers last decade a Auditorium-Coliseum-Convention Center presentation showing the amount of convention space nationwide was increasing significantly faster than demand.

The message, Cooksey said, was that the city needed to spend more to stay competitive.

"No one wanted to go through the analysis that perhaps this is a business that Charlotte shouldn't be engaged in," Cooksey said. Researcher Maria David contributed.

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