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Self-defeating hotel subsidies

It's like throwing water on a drowning man.

As I report in today's Buffalo News, the city has subsidized the construction of five downtown hotels since the 1980s, four of which have struggled. (The other hasn't been in business long enough to run into trouble.)

Hyatt_hotelSome of the hotels are still losing money, starting with the Hyatt Regency, pictured at left, which has been a financial sinkhole since it opened 24 years ago. Two other downtown hotels sold this year for less money than their owners had sunk into them.

Downtown's hotel market is searching for stability. So, naturally, the pols and bureaucrats are taking steps that will further destabilize it.

Three new projects are in various stages of planning, with one under construction. A proposal for yet another project was floated in Sunday's paper.

It would be one thing if the projects were being funded by investors on their own dime, but this being Buffalo, that's not the case. No, they're all banking on subsidies.

Case in point is the Embassy Suites under construction as part of the rehab of the former Dulski federal office building on Delaware Avenue. The state kicked in a $7 million grant and there's a $19.2 million tax break package from the Erie County Industrial Development Agency. Next up are more tax breaks through the state Empire Zone program. When it's all said and done, project is probably going to enjoy benefits north of $30 million.

Assign half those benefits to the hotel, which will occupy seven of 15 floors, and you're talking subsidies of at least $100,000 per room. By contrast, a quarter century of subsidies for the Hyatt work out to about $70,000 a room.

The operators of downtown's two largest hotels, the Hyatt and Adam's Mark, are unhappy with the prospect of more competition for what is now an insufficient pool of customers.

Hart_davidDavid Hart, left, owner of the downtown Holiday Inn, is really ticked off. Hart is a rare breed in Buffalo - a genuine capitalist - who hasn't taken subsidies to buy or acquire any of his five hotels in Western New York.

"If the market is really there, you don't need public assistance. And if it's not there, don't build," he declared in my story in today's paper. "All you do is hurt the hotels already in the market, and that's what's been happening for 20 years."

Unfortunately, this is what passes for economic development in Western New York. Don't base public investments on rigorous analysis or strategic goals. Nope, subsidize whatever comes along and hope it works.

What's particularly troubling is that Mayor Byron Brown is basing his push for more subsidized hotels in the belief the convention/tourism industry needs them.

"There has been very strong interest and, with some of the convention opportunities the city has, we need more hotel rooms in downtown Buffalo," the mayor said at last month's meeting of the ECIDA.

That notion is rejected by a guy who ought to know, Richard Geiger, president of the Buffalo Niagara Convention and Visitors Bureau.

"We have a sufficient number of rooms in the downtown core," he said.

Better, Geiger said, to work on shoring up the existing hotels and boosting demand by improving attractions and doing more to market the region.

Of course, the pols have cut funding to Geiger's shop. Go figure.

So, the way this is unfolding, tax dollars and tax breaks first used to overbuild the hotel market are now being used to further overbuild the market.

What City Hall, the ECIDA and Empire State Development Corp. are doing is using new public investment to undermine the old public investment.

This is smart public policy?

(In the next day or two I'll examine the city's use of Empire Zone benefits to subsidize the planned construction of a hotel in the Erie Basin Marina. Some of the local blogs are buzzing over another element of the story. Start by going here.)

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Economic Development
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