The Hyatt Hotel: a Classic Public-Private Partnership
In order to create the successful recreation and leisure
project that was envisioned by the Inner Harbor Master Plan, in the
1960's and '70's, Charles Center-Inner Harbor Management, Inc. had
to recruit a top-of-the-line hotel. This took more time and effort
than any other aspect of the project, because the existing hotels
in Baltimore were failing for lack of business — the effect of the
decline of the central city. This turned out to be the most demanding
and dramatic of all our tasks.
Under the urban renewal program, all acquired land
had to be disposed of in a competitive fashion; so I went to all
of the national hotel chains to see if they would participate in
a competitive offering of the hotel site. I was turned down by all
of them, until we finally combined the hotel opportunity with a prominent
office building site — with the idea that a successful office building
would subsidize the hotel development.
That worked, and we did attract the interest of prominent
developers, but it was still a hard package to create. Before we
found a commonality of purposes with the Hyatt chain, we had gone
through competitions that resulted in conceptual deals with two other
high-profile development teams, who brought in top-of-the-line architects
but failed to perform. I was finally told to talk to the owners of
the Hyatt chain because, as one hotel executive told me, "they're
more sporting than the rest of us."
That turned out to be true, but it still took almost
an entire year to put a workable deal together. That was done through
the genius of the City's attorney, Eugene Feinblatt, combined with
the acumen of A.N. Pritzker, the patriarch of the Pritzker family
who owned the Hyatt chain. The Pritzker interests could obtain a
mortgage for 2/3 of the cost, because of the large amount of business
they did with Equitable Life. We finally put together a financing
package that lacked only a third party to come in with the risk capital.
That turned out to be the Federal government, in the
form of an Urban Development Action Grant (UDAG) under an ingenious
but short-lived program set up by the Carter Administration. It didn't
hurt that the program was administered by Robert C. Embry, the former
Baltimore Housing Commissioner, who was then Assistant Secretary
of the Federal Department of Housing and Urban Development. His staff
understood the Hyatt project, and the benefits it would bring to
In the Charles Center-Inner Harbor project, developers
always paid full city and state taxes, plus the fair market price
for land. The city would not donate the land for a private development.
We were able to create a fair market ground rent, which didn't have
to be paid until there was net cash flow to cover it.
The difference between the Hyatt deal and the deals
BDC is making now (2008) is that in the Hyatt deal the City actually
invested the UDAG grant in the form of the equity capital that made
it possible to develop the hotel. It was invested as a $12 million
Second Mortgage loan: $10 million from the UDAG grant to the city,
and $2 million that we recovered from a previous developer who didn't
The city's investment was made in the form of a pioneering "soft
second" mortgage, on the same payment schedule as the first mortgage -- meaning that
the second mortgage payments were not due unless there was cash available
after payment of all the operating costs, taxes and first mortgage
payments. This was projected to take 13 years to repay.
However, the thing that made it acceptable to the
City was that when all of the operating costs and taxes and both
the first and second mortgage payments were made, if there was still
cash available from the hotel profits, it had to be applied to accelerate
the repayment of the city's second mortgage — before the developer
would realize any profit.
The Hyatt garage was a "whole
nother" deal, as they say in Baltimore. The voters had approved an Off-Street Parking
Loan of $5 million for that portion of the Inner Harbor, and so we
loaned the bond money to the Hyatt Development Corp., and they paid
the debt service on the loan, plus 1% to cover the city's expenses.
As in the case of the hotel, if the garage made a profit over and
above the debt service plus 1%, the excess had to be applied to accelerate
the repayment of the city's second mortgage on the hotel.
The two Hyatt deals meant that I could go to the Mayor
and the Board of Estimates and say truthfully that the city would
get its investment back with interest before the developer would
receive any profit. That was a true public-private partnership: both
sides put their investment at risk, and both shared in the profits.
To be candid, the reason that A.N. Pritzker accepted
this was that he didn't think the profits would ever be significant.
He was counting on the value of the income tax shelter that would
be created when the ownership of the Baltimore hotel was combined
with his other hotels. For the same reason, I was able to persuade
him to give the city 2/3 of the ultimate profits, after the second
mortgage was repaid.
As it happened, the attendance at the critical mass
of attractions around the Inner Harbor exploded after Harborplace
and the Aquarium opened in 1980 and 1981. The Hyatt was so successful
from the start that it became the most successful hotel in the Hyatt
chain, and the city's second mortgage was repaid with interest in
three years instead of 13. The city has been receiving up to $3 million
a year in profits ever since, and the developer has tried several
times to buy back the city's interest, but without success.
I got to know the Pritzker family on my frequent visits
to Chicago to negotiate the deal, and our soft second mortgage has
been imitated by many other public-private partnerships around the
country. The success of the Hyatt justified the purpose of the Federal
grant many times over: in the years immediately after the Hyatt was
built, we had successful developers building or restoring 12 other
hotels in the Inner Harbor area — without any government participation.
All told, the Hyatt development agreement sets up
a sequence of 26 different priority claims on cash flow from the
hotel and garage. Under the conditions of the Federal UDAG grant,
the city's share of the profits must go into a separate UDAG account,
which has to be spent on costs which benefit the deteriorated residential
neighborhoods of the city.
Today, the city's investment more often involves direct
loans or tax abatement, etc. — where justified by the benefits received
by the city in terms of new jobs and taxes created (which would include
the piggy-back income tax for residents who move in from the county),
plus the acceleration of spending downtown in general. That also
leads to a cycle of re-spending by the people with the new jobs,
which is described as an indirect benefit, but which can be more
than the increase in direct benefits. The question becomes whether
the city's investment is needed to make a project successful, and
whether that is essential for the well-being of the city as a whole.
Profit-sharing is often put in place to cover the
possibility that the city's investment might make a project so successful
that the developer reaps an excessive profit. In that case, the city
would be justified in sharing in the excess profits. There is usually
one point in the deal that the media reporters do
not understand: does the city's profit-sharing come after the developer
has received a return on the total amount of private financing, meaning
both debt and equity, or just the developer's equity investment?
It can make a huge difference.
Martin L. Millspaugh