Anne Linehan over at blogHouston.net alerts us to this Chronicle article that updates the situation facing the City of Houston in regard to its investment in two downtown Houston hotels, The Magnolia and the Crowne Plaza. This earlier post examined the City’s problem investments in the hotels, while this post addressed the soft market for hotel rooms in downtown Houston.
As Anne notes, not much has changed in regard to the situation since the prior report on the hotels’ financial problems. The hotels are still not generating enough revenue to service the City’s subordinated debt on the hotels, and it is not at all clear from the article that the hotels are even generating positive cash flow from operations exclusive of debt service. Thankfully, the City’s total investment in both hotels is under $15 million, which is a drop in the bucket compared to this other dubious investment.
Nevertheless, after throwing a few $15 millions around, you could be talking about some real money, so the City needs to address the situation responsibly. As noted in the earlier post, despite its notes on the properties, the City is really just a preferred equity investor in these hotels. Consequently, the main issue at this point is whether the hotels are being managed properly and whether there is a reasonable chance that they can generate enough revenue to break even from an operations standpoint. Assuming a “yes” answer to those two questions, then the City simply needs to look at these properties as long-term (make that very long-term) investments that need to be monitored as a part of its long-term investment portfolio. The hotels could also be productively used as poster children from time to time whenever some City official floats the idea that it is good economically for the City to loan money on a project that private financing will not support.
On the other hand, if either of the answers to the foregoing questions is “no,” that raises additional issues that a City government is institutionally incapable of handling well. In that event, some second or third buyer of one of these hotels might just be able to turn a profit on the City’s dime.