If it weren’t for taxpayers, the Hilton Omaha hotel attached to downtown’s convention center and arena might not have gotten built. Private developers didn’t want to take a risk on the venture, so the city stepped in.
Now, with the CenturyLink Center drawing big-name acts and a solid slate of conventions, the city says it can take steps to get out of the hotel business and eventually get taxpayers off the hook for about $140 million in debt attached to the hotel.
The city announced Thursday that it had reached a deal with Freestone Capital Management for the firm to take over the Hilton Omaha. The city isn’t selling the hotel outright — it’s entering into a 30-year lease-purchase agreement with Freestone, which is based in Seattle.
“I’ve never really felt like the city should be in the business of owning and operating a hotel,” Mayor Jean Stothert said during a press conference Thursday afternoon.
City leaders have looked to get the Hilton Omaha off their hands for a number of years. Initially, they wanted to sell it in one fell swoop. But such a sale wasn’t in the cards, largely because the hotel is only valued at $105 million but the city owes about $140 million in debt tied to it, Stothert said.
Steve Curtiss, the city’s finance director, said, “It became clearer and clearer that the price we wanted for a full sale was beyond what we could get.”
In the lease-purchase agreement, which still needs City Council approval, the city expects to be able to pay off a $37 million bond issue with an initial payment from Freestone. That debt was issued for an expansion of the hotel that was completed in 2013.
The asset management firm would then take over payments on $95 million in additional debt tied to the hotel. That debt was issued for the original construction of the hotel. Freestone could buy the hotel at any time during the 30-year agreement.
“One of the greatest benefits of this deal is it will reduce the city’s debt obligation to the Hilton Omaha,” Stothert said in a statement.
The management company is expected to maintain the hotel’s current standards and update it when needed. Should Freestone default on any bond payments or fail to maintain the standards outlined in the agreement, the city would take back management of the hotel. That means that the city still ultimately assumes the risk associated with the hotel.
“It’s still connected to our convention center, so we have a lot of incentive to make sure it’s run the way we want it to run,” Curtiss said of the city-owned CenturyLink Center.
If the city should need to take back the hotel from Freestone, the firm will have already paid off the $37 million bond. “So the debt we’d owe would be much less than it is today,” Stothert said.
According to the bond payment schedule, the city is taking steps to offload the hotel just as payments on the $95 million bond jump from about $1.6 million annually in principal and interest to $4.4 million annually. By 2047, the bond payments will reach $10.7 million annually.
Jason Fisher, a real estate executive and investor in another future downtown hotel, said the sale of the Hilton to a private company seemed a good deal for taxpayers and a “natural progression” for the property.
“Cities develop something amazing to spur development and attract conventions — and then they privatize it,” he said. “Civic development stuff should always be privatized at some point — that’s a sign the market is healthy.”
The city’s deal comes at a time when numerous hotel developers are joining the Omaha market, attracted by steady business growth and executive travel as well as national annual events such as the College World Series.
A national report on the hotel industry shows that the number of Douglas County hotel rooms has leaped about 56 percent since right before the downtown Hilton opened in 2004.
The travel research firm STR Inc. shows about 6,225 rooms then and about 9,740 rooms available today, said Keith Backsen, executive director of the area’s Convention and Visitors Bureau, which also is known as Visit Omaha and is the agency that markets the city and Douglas County.
That’s not counting the more than 1,000 rooms that currently are in some stage of planning or construction today, he said. (In the larger Omaha metropolitan area, covering three counties, there are more than 15,000 hotel rooms.)
“Our market is attractive to developers, which is why we see a lot of hotel development occur,” Backsen said.
He cited job and research expansion at places including the University of Nebraska Medical Center, growing commercial districts such as Blackstone and Aksarben Village, and downtown activity related to events at CenturyLink Center and TD Ameritrade Park.
The 450-room Hilton opened at 10th and Cass Streets in early 2004, not long after the debut of the CenturyLink Center Omaha, then called the Qwest Center. After some lackluster early years, the city launched a major update to the hotel in 2011, adding 150 rooms, a new ballroom and more parking. The $37 million expansion was completed in 2013.
Omaha City Attorney Paul Kratz acknowledged that building the hotel was a gamble for the city at the time, but he said it’s worked out.
“We weren’t sure about the convention center — how that’d perform,” Kratz said. “We weren’t sure about the hotel, either ... the risk has paid off.”
The deal will go before the City Council on Tuesday. Councilman Ben Gray, who represents the hotel’s district, didn’t immediately return calls seeking comment.
Mike Moylan, developer of the downtown Capitol District, which includes the new Marriott Hotel next door to the Hilton, said that while he was not privy to all city details, he sees the move to sell the Hilton as a benefit to taxpayers.
He called the city’s investment in the hotel business back in 2004 a “smart” and “commonplace” thing to do. “They (city officials) could not get it built privately under the economic times and conditions of the time.”
Those times have changed, he and others said, and developers are attracted to downtown Omaha’s hotel industry.
“Now, if the city has a chance to sell and get their money out, it’s very appropriate on behalf of taxpayers.”
World-Herald staff writer Dan Golden contributed to this report.
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