City approves Gateway plan; hotel owners take issue
McKinney city staff and the McKinney Community Development Corporation (MCDC) have approved a letter of intent (LOI) to move forward with the stalled Gateway Hotel and Conference Center project -- much to the dismay of some local hotel owners.
The MCDC on Monday approved the LOI, three weeks after voting against the initial document, which the McKinney City Council approved June 5. Both entities' approval gives the go-ahead for developers Champ Hospitality and Beck Development to take on the project.
"What we have is a failed hotel project, one that's been that way for years," City Manager Jason Gray said. "It's a problem we're trying to solve, and this method to solve it gives the city a realistic opportunity for a return on its investment."
The LOI sets forth non-binding shared understandings and binding agreements between Champ Hospitality, Beck Development, the city and MCDC, which currently owns the site's property, located on the northeast corner of U.S. Highway 75 and Sam Rayburn Tollway.
It concerns the development and operation of a 186-room, full-service hotel, an adjoining 20,000-square-foot conference center, a three-meal restaurant and a lobby/bar.
And it's a significant step toward reviving an anticipated $35 million project in which the city has already invested about $12 million -- one stalled in 2008 due to financial constraints and now marked by a partly finished structure at McKinney's "front door."
"This is a missing piece that we need to fulfill," Mayor Brian Loughmiller said when council approved the LOI. "We have a structure out there that's unfinished, which is, quite frankly, an eyesore."
The plan outlined in the LOI calls for an additional $18 million in public funding, including $6.5 million from MCDC, $6 million in CO debt funds and $5.5 million from the city's cash funds.
Moments before council approved the LOI earlier this month, council members expressed their optimism of finally moving forward with the site's development. District 1 Councilman Don Day said, "I can't tell you how many hundreds of hours that we have spent on that project. I have been screaming and kicking for years about this one project because the numbers just did not work, and the numbers have to work for me. But, this time, this one works."
At-large Councilman David Brooks said of the LOI, "I am glad we got this one across the finish line."
But it wasn't across, yet. When initially shown before MCDC the following morning, the board rejected it. The council-approved plan proposed a Sheraton or other comparable brands for the site, a proposal MCDC told city staff was too broad, Gray said.
MCDC Executive Director Cindy Schneible said the board's initial rejection, a 3-2 vote against it, was due to "a few questions and clarifications" they wanted resolved in the plan. And two board members were not present for the June 6 vote.
A list of 13 possible hotel brands for the site was added to the LOI, answering one such question, and with all board members there this week, they voted 5-2 in favor of the plan. Board member Jason Burress, initially a dissenting vote, this time voted his approval.
Still not in favor of the project, particularly how it's outlined in the LOI, are some local hotel owners and managers, a few of whom have questioned its viability, funding sources and fairness of development incentives. Charles Helm, owner of the Holiday Inn and Suites in McKinney, and Matt Dalrymple, the hotel's general manager, both expressed their concerns to Gray and the council in recent weeks.
In a letter written "on behalf of Concerned Hotel Owners in McKinney," and in documents addressed to Gray and the council, Helm aimed to convey "how fragile the current lodging environment is in McKinney and how adding this 185-unit Hotel & Conference Center will only further undermine revenue at existing hotels and subsequently bring property values down," adding that "the McKinney market is not ready for such a project."
Their documents state the city's lodging market is running at 57 percent occupancy, about 6 percent less than that of Frisco, Allen and Rockwall, meaning that, on average, there are more than 370 empty rooms every night in McKinney.
Included in the documents they presented to council were past market studies for the project, one conducted by Colliers PKF Consulting USA, and another that HVS prepared in March. Within the studies are markups that point to possible lapses in reasoning and un-based assumptions for the project's potential, according to members of Helm Hotels Group (HHG), which runs Holiday Inn and Best Western hotels in McKinney, Denton, Greenville, Forney and Lufkin.
The group admits that such a hotel and conference center could benefit the city, but only after, not before, office-retail and adjacent businesses are developed, stating in the letter that existing conference meeting spaces in McKinney, Allen and Frisco are already under-utilized.
"I am very much in favor of growth, but some things must happen first to ensure the growth is healthy and can survive," Helm stated in one letter to council. "A company is not going to move to McKinney because we have a hotel convention center. They move here for the workforce and quality of life."
Gray said this week that while he understands and appreciates the hotel owners' concerns, he is confident the Hotel and Conference Center will "help existing hotel businesses," and that McKinney is "losing business to areas with a hotel-conference center because we don't have one."
But HHG members aren't convinced the project will foster the return on the city's investment of which Gray and council are confident. Dalrymple said council hasn't showed them how or from where they've come up with the numbers for the project's potential.
HHG members' other major objection to the plan stems from what they see as unfair development incentives. Under LOI terms, the city will be rebating almost every tax possible, Dalrymple said.
The tax incentive agreement calls for 10 years of property tax abatements, and states that MCDC and the city will refund the developers for the 6 percent State Hotel Occupancy tax (a tax on room-per-night sales) and for taxes on alcohol, food and beverage sales. It states MCDC and the city will also seek to fully reimburse all McKinney ISD taxes assessable against the project for the first 10 years.
The agreement calls for a subsidy return, after the first 10 years, through which the city would receive 50 percent of all "reimbursements, abatements, rebates, and refunds." But Dalrymple said the tax incentives were still "the most shocking part of the document."
"It reads like the developers wrote it and the city just signed it," he said of the LOI. "They're going to pocket almost every penny, and basically not pay anything but their electric bill."
Under its lease agreement, the LOI calls for a 99-year term, and for the first 10 years, Champ and Beck would pay $2 per year to rent both the hotel and conference center units. Their rent pursuant to the lease would "escalate commencing with the 11th year of the Lease Term to reflect a market rental based on the current land value of $5.00 per square foot," the LOI states.
Gray said such incentives are often necessary when attracting new businesses "in order to jumpstart development in an area."
"We feel it will generate substantial increases in property value around the site," he said. "It comes down to a fundamental issue of do we try to enhance the value of the community, or not do anything and let the economy take its course."
The LOI allows for any party -- the developers, MCDC or the city -- to abandon the project at the end of the current 90-day negotiation period if "the Definitive Agreements have not been executed and delivered by the parties."
The LOI does not constitute any legally binding obligation until "fully integrated definitive agreements and other related documents" are authorized and executed by all parties. Thus, nothing is set in stone.
But McKinney has moved out of a Gateway standstill. It's taken the biggest step in years toward finishing its "front door."
"We're in the business of developing a community as a whole, not just one industry," Gray said. "We've spent, literally, hundreds of hours to figure out a way to move forward. And I think we have."