The expected net operating income for a hotel can be estimated with a
market feasibility study. The capitalization rate is the investors’ weighted
cost of capital which, as will be detailed later, can be influenced greatly by
a variety of publicly enhanced debt instruments. With those two figures we
can arrive at the estimated value of the asset to the investors.
Given the aforementioned challenging business model that most convention
hotels face, there is typically a gap between the value of the asset
to the investors and the cost of developing the project. Public sector assistance
can narrow and eliminate this gap, thereby making the development
feasible. The question that is fairly, and more frequently being asked is, why
commit public money to support development that many feel should be left
to the private sector? The answer is that there are considerable returns that
come from the development and operation of large headquarter hotels that
are captured by the public sector. To the extent that municipal and state
governments can achieve a reasonable return on their investment while creating
jobs and an amenity in their city, these types of partnerships can be a
win-win for both private sector developers and the taxpayers.