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August 8, 2006

You just knew this was coming

Magnolia2.jpgFollowing on posts here and here from last year regarding the City of Houston's ill-advised investment in several downtown hotel properties, this Matt Stiles/Chronicle article reports that the City had decided to "restructure" (translated: Can you please pay us something?) $15 million in second lien loans on the Magnolia and the Crown Plaza hotels in downtown Houston rather than attempting to foreclose on the properties and deal with the messy business of attempting to eke out a profit from the two highly-leveraged properties in an overbuilt downtown hotel market.

As noted in this previous post, the Magnolia and Crowne Plaza are poster projects for why local governments should rarely get involved in financing projects that private financing sources will not support. In reality, the City is nothing more than a preferred equity investor in these highly-leveraged properties and, thus, its entire $15 million investment is at serious risk of being lost. That type of loss is not going to break the City of Houston finances, but the quality of the City's investment decision should give one pause when considering the amount of money the City is throwing around in regard to these equally dubious investments.

Posted by Tom at August 8, 2006 6:21 AM |

Comments

Tom,

You certainly know a lot more than I do about this kind of deal, but it seems to me that it wouldn't be right to call the City much of an investor here.

The article seems to say that the City lent federal money, and the City is temporarily repaying the non-performing loan with other federal money. In the sense that those monies could have been used for another project, that's a waste.

But in keeping with your focus on the problems of agents responding to incentive and regulatory regimes, wouldn't you say this has worked out nicely? Those properties got develped and leased, the bank got someone else who doesn't seem to want to collect any money to provide %25 percent of the capital for its project, the operator has presumably been making enough money to keep the place open, and the employees and suppliers are likewise presumably happy.

If we foreclose, the City gets to be even deeper in the hotel business as it tries to pull $15 million dollars out of everybody else, so that we can promptly return that money to DC, right?

I know that federal money is ours just as much city money, but doesn't that mean we should be criticzing HUD, and not the City?

Thanks,

---Adam

Posted by: Adam Block Author Profile Page at August 8, 2006 8:53 AM

Adam, all good points, assuming that we are getting the straight scoop from the City on the nature of the underlying debt (i.e., is it really non-recourse debt to the City?). My sense is that at least a portion of that debt must be recourse to the City or there would not be much of an incentive for the City to futz around with managing the loans.

At the end of the day, though, the real question is whether the city should be facilitating such financing for projects that are in competition with privately-financed hotels? Is it truly in the long-term interests of the city to be making it harder for privately-financed hotels to make it in the downtown area? It seems a wiser policy would be to do exactly the opposite.

Posted by: Tom K. Author Profile Page at August 8, 2006 9:16 AM

but doesn't that mean we should be criticzing HUD, and not the City?

As Tom K points out, the city didn't have to pursue these deals, but the Lee P. Brown administration charged full speed ahead. It was questionable from the start, like so many initiatives of former Mayor Brown and the downtown crew that surrounded him. Unfortunately, those decisions continue to handcuff the current administration, although it has its own (smaller) set of questionable priorities.

Posted by: Kevin Whited Author Profile Page at August 8, 2006 9:42 AM

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