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Thursday, July 24, 2014 |  Madison, WI: 72.0° F  Mostly Cloudy
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Millions more for Monona Terrace
Is the convention center worth another huge taxpayer investment?

The JDS proposal would turn the Madison Municipal Building into a hotel.
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The way Mayor Paul Soglin sees it, the city's investment in Monona Terrace, which he spearheaded two decades ago, has paid off in all sorts of ways for Madison. But not all of them can be measured in dollars and cents.

The investment, Soglin argues, caused a boom in downtown development and confirmed Madison as a happening place that people want to visit.

"The thing to keep in mind, in any public investment in infrastructure, is you cannot solely look at the silo of the expenditures and the revenue for the facility itself," Soglin says. "We know that's true from everything from transportation systems to convention centers. You have to look at the externalities. The externalities are sometimes financial; sometimes they are not."

The mayor makes that argument as the city prepares to invest heavily on behalf of Monona Terrace. The Judge Doyle Square project, whose primary purpose is to give Monona Terrace more hotel rooms, could require as much as $80 million in public support.

Ald. David Ahrens, who has emerged as the leading opponent of the project, finds the mayor's reasoning weak.

"It's a mystical explanation," says Ahrens. "Just because we can't attribute a dollar figure to the good will that's developed by Monona Terrace, that doesn't mean its value is infinite. It has a value.

"And it's great that we have 20,000 to 30,000 people a year coming to downtown to be conference participants," Ahrens adds. "But are we willing to spend another $45 million -- or really more than that -- attracting another 5,000 people a year downtown?"

Madison has been fighting over Monona Terrace for decades. The Frank Lloyd Wright-designed structure took some 60 years to build and required a referendum, $67.1 million, a maverick Republican governor, Madison's "hippie" mayor and buy-in from the local business community.

The dispute over its value to the local economy and the downtown's vibrancy continues. Now the city is preparing to invest even more in the facility with Judge Doyle Square, which will approach $200 million and include a hotel, offices, retail, roughly 1,000 stalls of parking, and upscale housing. Two developers have made proposals to the city, one of which seeks $80 million in public investment. The other wants $45 million but would turn the city's Municipal Building into a private development.

Will this expensive strategy pay off for Madison?

Jails with a lake view

When Frank Lloyd Wright proposed Monona Terrace, he didn't envision it as a place where business and trade groups would gather to talk shop over coffee and croissants.

Wright's idea -- formally pitched at a Madison Lion's Club meeting in 1938 -- called for the building to house city and county offices, courts, a railroad station and even a jail.

"Jails with a lake view," quips Fran Puleo, Monona Terrace's manager of community and public relations. "The running joke is that maybe Wright thought he'd one day end up in jail here."

It took some 60 years for Monona Terrace to get built. In the 1990s, Soglin formed a commission to look at altering the design into a convention center. In November 1992, city voters narrowly approved constructing it.

In a 1995 New York Times article about Monona Terrace's groundbreaking, Ron McCrea wrote that it took a communal effort by Soglin, Gov. Tommy Thompson and the local business community to get Monona Terrace off the ground.

The cost had climbed considerably since Wright envisioned it, to $67.1 million. The city paid $29 million, while the state kicked in $18.1 million, Dane County $12 million and private donors $8 million.

The city will pay off one of the two loans it took out to build Monona Terrace next year, says city finance director Dave Schmiedicke. The city is slated to pay the final $694,800 payment on a $12 million bond in 2014. It owes another $5.2 million on a $14.3 million bond, which it is scheduled to pay off in 2021.

At the time Monona Terrace was built, it was the most expensive city project ever. If successful, Judge Doyle Square will easily raise the bar.

Hotel dreams

From the onset, Monona Terrace was expected to reap millions in economic benefits for the city. George Nelson, the broadcast executive who was instrumental in getting the business community on board, told The New York Times: "The money that the city will make off of this -- in the economy and the jobs created -- will be enough to pay every bill that Frank Lloyd Wright stiffed people for many times over. People said he never paid his debts. He's paying them now."

In its 2012 annual report, Monona Terrace reports that it hosted 32 conventions and 33 conferences last year. It calculates the economic benefit from those at more than $52 million. Those figures have been disputed because they include some questionable assumptions and show wildly varying estimates of conventioneers' spending habits (see "Calculating Monona Terrace's Economic Benefit," 8/1/2013).

Despite the claims of economic benefit, there is a feeling that Monona Terrace isn't living up to its potential with only the Hilton Hotel next door.

"We need more hotel rooms to attract conventions," Soglin says. "Monona Terrace is large enough to attract conventions, but the Hilton Hotel doesn't have enough on-site rooms. Generally speaking, an on-site hotel has to be within two blocks of a convention center."

Two consultant studies, one in 2008 and another in 2012, make the same claim: that if Madison had a bigger hotel close to Monona Terrace, it would win more conventions.

There's evidence that claim is exaggerated. A survey by the Greater Madison Convention & Visitors Bureau of the 474 conventions that turned Madison down as a location between 2008 and 2017 found only 19% rejected the city because of a lack of nearby hotel rooms or a headquarters hotel. Forty percent passed because of reasons like weather or demographics.

Needed: Lower rates

Other evidence suggests that proximity isn't the issue. Monona Terrace reported in February 2012 that the most popular hotel among convention attendees is not the Hilton next door to Monona Terrace, but the Inn on the Park, three blocks away, which offers lower rates.

Heywood Sanders, a professor of public administration at the University of Texas at San Antonio and a critic of publicly funded convention centers, says a bigger problem facing Madison could be that the Hilton's rooms are too expensive for most of the conventioneers Madison draws. A new hotel, because of the high construction costs, is likely to charge similarly high rates.

And if the hotel is popular, like the Hilton (which has an 82% occupancy rate), there's no incentive to lower rates for conventioneers. "If I can sell rooms at $200 a night for much of the year, why would I sell them at $150 a night [for a convention]?" Sanders asks.

Gregg McManners, Monona Terrace's executive director, agrees that Monona Terrace gets pinched in this way. He says the Hilton is bound by contract to provide the convention center a block of 150 rooms, but it doesn't have to lower its rates.

"Most event planners probably want a room rate that's less than what [Hilton's] average daily rate is," McManners says. "They can legally say 'We'll give you 150 rooms, but we want $165.' But the [convention planner] is asking for a rate of $130."

McManners says the Hilton refers conventioneers seeking a lower rate to the Sheraton Hotel on John Nolen Drive, more than two miles away.

To address this problem, McManners says the city intends to negotiate with the developer of the new hotel to secure not just a block of rooms, but also a favorable room rate. "The city will be in a strong position to actively negotiate both points based on the level of public investment required for this hotel development."

A little more business

But there are challenges the city can't negotiate over. Sanders has documented extensively how cities around the country are building fancy convention centers and hotels even as the number of conventions stays flat (see "A New Hotel Wouldn't Necessarily Solve Monona Terrace's Problems," 1/17/2013).

In Wisconsin alone, at least three other cities -- Milwaukee, Green Bay and Appleton -- are either already expanding or contemplating an expansion of their convention facilities. In that buyers' market, it's unlikely any city will see a spike in convention business, no matter what it does.

"Can you get a little more business? Of course," says Sanders, who will speak in Madison next week at Ahrens' invitation. "Can you consistently double your business? That seems implausible."

McManners agrees that the convention center industry is fiercely competitive. But since the hotel market is clearly booming downtown (see "The Downtown Hotel Boom," 5/30/2013), he says it makes sense to use public funds to steer a new hotel close to Monona Terrace.

After the Hilton opened in 2001, McManners says, Monona Terrace saw an increase in conventions and conferences from about 25 a year to 70 a few years later.

"Do we expect that kind of jump [with a new hotel]? Absolutely not," McManners says. "But do we see it as being a way of increasing that portion of our business by 15% to 20%? Absolutely, yes."

Rival developers

Although the desire for a new hotel is driving the Judge Doyle Square project, it has many other elements. Two developers have made proposals to the city; a committee will recommend one of them, with the Common Council expected to vote on the issue in January. After that, city staff would begin negotiating contract terms.

The Texas-based Journeyman Group proposes a $179 million project that would include a 352-room Marriott hotel (including 18,000 square feet of meeting space), 1,275 underground parking spaces, 11,680 square feet of retail (including a Trek store and bicycle center), 52,000 square feet of office space, and 134 residential units. The company is seeking $80 million in public support, including $47 million in tax incremental financing (TIF) and $30 million from the parking utility.

The company also wants the city to rent its hotel meeting space for a handful of days annually for $700,000 a year for 10 years. It does not say for what purpose the city would rent space. City staff note that this rental arrangement would reduce the company's stake in the project to $2.3 million.

The rival developer is JDS Development, headed by Bob Dunn of Hammes Co., who spearheaded the controversial expansion of the Edgewater Hotel. JDS offered two proposals. Dunn's preferred option would turn the Municipal Building into the headquarters hotel with 308 rooms. It would include a public food court on the bottom floor (Dunn favors the term "food emporium"), 10,000 to 15,000 square feet of meeting space, a rooftop restaurant and outdoor terraces on Martin Luther King Jr. Boulevard.

He would also build 911 parking stalls, 80,000 square feet of office space (much of which he proposes the city use to replace offices now in the Municipal Building), and up to 85 housing units.

Dunn is asking for less public investment. He wants $17 million in TIF and $27 million from the parking utility. Much of the savings comes from the fact that Dunn would build his parking above ground, avoiding the high costs involved with underground parking. He also argues the city will save money because it will no longer have to renovate the Municipal Building, at a cost of $20 million.

City staff note that Journeyman's proposal would greatly deplete the parking utility's reserve fund, leaving it with only $13.9 million in 2023, when the utility is slated to rebuild another parking ramp. Dunn's proposal would leave the utility with $25.5 million in 2023, in part because he would let the parking utility manage the parking and keep the revenue. Journeyman, by contrast, wants a cut of the parking revenue.

'An extraordinary civic purpose'

Aaron Olver, the city's economic development director, says neither team was completely clear about how it would finance the project or how much equity it would bring to the table.

In real estate deals such as this, investors look at how much return they can get. A project that has potential for a high rate of return will attract more investors, willing to put up more money, Olver says. The return on a project like this isn't likely to create a high enough return to attract enough lenders to cover its cost -- so the developers have to figure out a way to make up the difference, usually through tax credits, public aid or their own money.

"I think the question that will be before the community is, 'Does the city want to make an extraordinary investment for an extraordinary civic purpose?'" Olver says. "That purpose is not only supporting the growth of Monona Terrace, but creating a destination downtown and strengthening the value of real estate downtown. That's the policy question."

City staff expect to have a more detailed analysis and recommendation in mid-November, Olver says.

Soglin says he is waiting for staff reports before weighing in on either proposal. "I've looked at the two proposals," he says. "I've got my own, unprofessional opinion about designs."

He says it will take "a lot of convincing to persuade me that city offices should be outside the Municipal Building."

The hefty city investment is also a concern. "I'm concerned about costs as it pertains to both proposals. And the more expensive, the more concerned I am. I assume everything is negotiable. If not, the Journeyman proposal may have some real challenges."

Subsidizing the competition

Ahrens is skeptical about various parts of the Judge Doyle Square project. He notes that the city would be subsidizing office construction at a time when there's excess office space downtown. Downtown Madison Inc., in its annual report, finds there's currently a 17.2% office vacancy rate downtown, up from 13.9% the year before.

Says Ahrens: "That's as high as it's ever been, and now we're talking about increasing its supply by tens of thousands of square feet."

There's also plenty of condos and high-end apartments downtown as a boom in construction continues, with new projects in the works for State Street, Wilson Street, East and West Washington Avenue, Webster Street and many other places.

Ahrens also worries that the hotel -- which could include up to 20,000 square feet of meeting and banquet space -- will siphon business away from Monona Terrace. Is the city subsidizing competition for weddings, business meetings and luncheons?

Ahrens notes that the availability of meeting space has grown dramatically since Monona Terrace opened. Places to hold community events include UW Union South, the Wisconsin Institutes for Discovery and the soon-to-be-renovated UW Memorial Union. The city itself has created competition, funding the Overture Center and the newly renovated Central Library, which is now equipped to host meetings and banquets on the third floor.

McManners says there is concern about competition from a new hotel. "Monona Terrace will probably never be expanded," he says. "Is it wise to allow the hotel to be your expansion, when you know, in fact, they could be competing for the events you're hosting, the smaller ones?"

But he thinks there's a sweet spot of event space the hotel could offer to complement Monona Terrace events, as when conventions need smaller rooms to hold breakout meetings.

"We have to work closely with our consultants to determine what is the right amount of square footage that complements Monona Terrace but doesn't go into a full-blown competition," McManners says.

Ahrens also fears that the project will create mostly low-wage jobs.

"Building this hotel poses a real choice for the city," he says. "Are we going to invest in high-tech jobs for the future or depend on low-wage, cyclical tourism jobs?"

Chauvinism?

Despite his criticism of Monona Terrace's business model, Ahrens wants to make one thing clear: He doesn't want the facility to fail.

He agrees it benefits Madison in lots of ways and is committed to ensuring its success. In September, he sounded the alarm about a state proposal to strip the city of the power to decide how to use hotel room tax revenue, the main mechanism for funding Monona Terrace.

"One can support keeping Monona Terrace open and viable, but not this hotel complex," Ahrens says. "If the city wants to invest money in it, they can improve it, create more meeting rooms and make better use of the space."

He simply sees no evidence that Monona Terrace is going to do substantially better attracting conventions with a new hotel than it does now.

Soglin disagrees. Madison, he says, is better than most cities, and lots of conventions want to come here. "We're simply a much more interesting city," he says, ticking off the Farmers' Market, State Street, the lakes, the UW, the Capitol Square, the bike trails and Monona Terrace itself, which he says is unlike any other convention center in the country.

"If you're an academic group, a civic group or an environmental group, would you rather be in Madison or...," he asks, pausing to carefully decide which city he will slight, "would you prefer to be in Springfield? Nine times out of 10, Madison is going to win that battle."

Ahrens calls this attitude "municipal chauvinism." "Every city thinks it's special and the best: Rockford, L.A. and Lake Wobegon," he says. "That's what these convention center and hotel hustlers play upon. We all think we're above average.

"It's as if the only thing stopping people from coming here is somehow the lack of hotel rooms; otherwise everyone would want to come to Madison no matter what time of the year. The reality is that we live in a very cold climate with a secondary airport. People are blinded by the chauvinism."


Judge Doyle Square meetings

Want to give your two cents about Judge Doyle Square or hear more from a prominent skeptic of taxpayer-funded convention centers? Meetings will be held next week about the project.

  • The Judge Doyle Square Committee, which is evaluating development proposals, will take public comments on the proposals at 6 p.m. Monday, Nov. 11, in room 300 of the Madison Municipal Building.
  • Heywood Sanders, professor of public administration at the University of Texas at San Antonio, will speak about the economics of funding convention centers in meetings with media, business leaders and city officials. Details are being worked out for some meetings, but he is scheduled to give a public presentation at 6 p.m. Thursday, Nov. 14, in room 201 of the City County Building.

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