From the cover
Conroe leaders talk hotel's future
BY NICHAELA SHAHEEN
How we got here
The background
Key moments in the project’s timeline Here’s a look at the key milestones that have shaped the Hyatt Regency Conroe project and its nancial path.
Those nancial pressures are now driving a debate over whether the city should keep the hotel or pursue a sale. Construction on the hotel began in October 2021. The rst guaranteed maximum price placed the construction cost at about $69.2 million; however, by completion, the total cost rose to nearly $108.6 million, Gibbs said. The project reached substantial completion in April 2023, and, in the days before opening the following month, the city transferred a $5.1 million cash infusion from its general fund reserves to help the project’s nances. Roughly $2.45 million of that support remains to be spent. Since April 2022, the CLGC has made interest payments on the bonds each April and October, with principal payments on the rst and second liens starting Oct. 1, 2025. The third-lien bonds are set to begin principal payments in 2028 and run through 2051. Council member Howard Wood, who joined the council in 2022, said the size and structure of the debt have shaped how he views economic development projects. “I had to learn a whole lot about hotel nancing in a short amount of time,” he said. “The big lesson? Cities shouldn’t gamble with taxpayer money. That’s not our job.”
The Conroe Local Government Corp., which is run by the city, owns the hotel facilities and is the project’s borrower. The city owns the land and the convention center. The CLGC nanced the hotel through three separate lien revenue bonds, with the rst and second liens repaid from hotel and city-facility revenue. The third lien revenue bond—used alongside other support and certi cates of obligations to pay for the convention center, parking garage and public spaces—is backed by the Conroe Industrial Development Corp.’s sales-tax support if hotel revenue falls short, Conroe Chief Financial O cer Ariel Khann Gibbs said. The bond debt totals around $77.1 million in principal across the three bonds—about $28.7 million, about $27.2 million and about $21.2 million, respectively. Initially, a market study from CBRE, a rm that provides commercial real estate services, estimated the hotel could gross about $7.1 million by scal year 2026. The latest budget now puts that gure closer to $1.9 million, per city documents. City documents and consultant reports also project that the hotel won’t generate surplus revenue until around 2050, leaving public entities, such as the city, responsible for covering debt payments in the meantime.
1 The Conroe Local Government Corp. is formed by the city to develop, own and operate a full-service hotel and convention center. 2 Construction starts on the 250-room Hyatt Regency Conroe and the connected convention center. 3 The CLGC begins making semiannual interest payments on rst-, second- and third-lien hotel revenue bonds. 4 The hotel opens with a nal construction cost of $108 million , with a $5.1 million cash infusion approved by Conroe City Council to support hotel operations.
2019
1
2021
2
2022
Initial cost projection $69.2M
Final cost $108M
3
+56.1%
2023
5 City Council approves consulting services for the hotel, contracting an outside rm to assist with nancial oversight and performance analysis. 6 S&P Global Ratings issues its rst downgrade. 7 The CLGC begins drawing from debt service reserve funds to help cover bond payments due to insu cient hotel revenue. 8A S&P Global Ratings issues its second downgrade and 8B third downgrade. 9 At a joint council and CLGC meeting, Conroe City Council members review Jones Lang LaSalle’s $22.5M–$23.8M valuation of the hotel and begin discussing options for the project’s future.
4
5
2024
6
Hyatt project at a glance Breaking ground in 2021, the city of Conroe’s Hyatt Regency Conroe and Convention Center—which was nanced in part through revenue bonds—exceeded its initial construction budget by nearly $40 million.
Initial proposed guaranteed maximum price:
$69.2 million
7
Total project cost: $108.6 million
2025
Hotel base valuation $22.5M
Final cost $108M
*Total lien cost: $77 million
-79.16%
8A
A downgrade is when a credit rating agency lowers its assessment of a borrower’s ability to repay debt, signaling increased nancial risk and making future borrowing more di cult or costly. $22.5 million-$23.8 million 3 Current estimated market value: S&P downgrades since opening:
8B 9
NOTE: THIS TIMELINE IS NOT COMPREHENSIVE. SOURCES: JONES LANG LASALLE, CITY OF CONROE, S&P GLOBAL RATINGS COMMUNITY IMPACT approximately $1.61 million in interest, per S&P Global Ratings. 10 A second-lien debt service payment is due, totaling roughly $632,956 in interest, which S&P Global Ratings believes the CLGC will be unable to meet without outside support, therefore defaulting on the debt. 11 First-lien senior debt service payment due, including
2026
10
11
2027
The seven-story Hyatt Regency Conroe and Convention Center opened to guests in May 2023.
*THE LIENS ARE NOT THE ONLY SOURCE OF FUNDS THE CITY USED TO PAY THE HOTEL CONSTRUCTION COST. SOURCES: JONES LANG LASALLE, CITY OF CONROE, S&P GLOBAL RATINGS COMMUNITY IMPACT
NICHAELA SHAHEEN COMMUNITY IMPACT
CONTINUED ON 14
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CONROE MONTGOMERY EDITION
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