Heading Upscale: Knoxville's Convention Center Gets a Posh Hotel Boost

To the extent it's possible to make a silk purse out of a sow's ear, Nick Cazana's plans for converting the drab state office building on Henley Street into a sleek hotel will succeed in doing so.

About the only thing that's distinguished the seven-story office building up to now has been its strategic location just across Clinch Avenue from the Knoxville Convention Center. Assuming Cazana completes the $16.5 million transformation into a 120-room upscale hotel, he will also have succeeded in making Knoxville a more attractive convention destination.

Together with the adjoining 286-room Holiday Inn World's Fair Park, which Cazana spent $8 million to upgrade after acquiring it for $10.5 million in 2009, the city will finally have a convention-centric guest venue with more than 400 rooms—a size it has sorely lacked.

True, the transformed office building will have a separate identity as the Tennessean and its rooms will be larger and higher-priced than the Holiday Inn's. But the two will have a shared restaurant, lounge, and parking garage. And Cazana envisions erection of a covered walkway spanning Clinch Avenue and connecting both hotels to the Convention Center.

"The new Tennessean hotel will be a great addition to downtown," says Kim Bumpas, president of Visit Knoxville, the recently rechristened tourism promotion entity that's funded by both the City of Knoxville and Knox County. "The new property will add a variety of amenities to our downtown package that will be helpful as we work with groups and conventions looking to Knoxville to host their events."

The city has been a good officer in facilitating acquisition of the office building through its Industrial Development Board. Cazana's firm was the sole respondent to the IDB's request for proposals to purchase (at a price of $550,000) and develop the property.

It's unclear how much city financial assistance for the project may be sought or provided. Cazana says, "We haven't decided yet" whether to seek a tax abatement, which could take the form of a PILOT or TIF. However, financial pro formas accompanying his proposal to the IDB assume property taxes of $30,000 a year during the Tennessean's first three years of operation. If the full $16.5 million investment were subject to city and county property taxes, they would amount to more like $300,000.

Cazana also hedges on the cost of a covered walkway connecting his hotels to the convention center, and who should pay for it. But he notes that, "The Visit Knoxville folks tell us that a concern is getting from covered parking to the convention center without getting wet." This admonition also implies yet another covered walkway over Clinch Avenue connecting the city's Locust Street garage to the existing covered link between the Hilton Hotel and the convention center. And inclusion of this span would make the covered walkways all the more a public project.

Providing city assistance is a sensitive subject because of the prohibition city voters approved in a 2004 referendum against the use of any public funds for construction of "any new structure...including buildings or a garage or parking facilities or pedestrian connection or bridges... to be used primarily to support or assist a new convention center hotel in the City of Knoxville."

Ironically, the prime mover in getting this proposition on the ballot and approved was the then-owner of the Holiday Inn, Franklin Haney. He was fighting a quest by former Mayor Victor Ashe to get a new 400-room hotel built near the convention center with city subsidies. Yet Haney was among the respondents to the city's RFP for such a hotel with a plan for, guess what, enlarging the Holiday Inn to 400 rooms-plus via acquisition and conversion of the state office building.

So Haney crafted his prohibition against erecting "a new convention center hotel" with care so as not to preclude city backing for the expansion of an existing one, which he was seeking but didn't get when the city scrapped its efforts.

If Cazana were proposing an addition to the Holiday Inn, he too would clearly avoid the prohibition. But even though he's substantially upgraded it, his business strategy is to position the Tennessean as a yet more upscale albeit smaller property.

Cazana insists that "120 rooms would never be considered a convention center hotel." While he may be walking a fine line, in my view city backing is clearly warranted for the boost his project should give to the convention center's prospects.

After 10 years of operation, the convention center hasn't begun to live up to its potential. Operating losses continue to run at the rate of about $2 million a year even as the economy improves—not to mention the $11 million in annual debt service on its construction cost with which the city continues to be saddled.

Moreover, the city's hotel business isn't growing as it should be with all the ancillary benefits to be derived from greater visitation. In fact, revenues from the city's 3 percent hotel occupancy tax so far this fiscal year are actually down 3 percent from the year before.

On the other hand, Cazana claims the Holiday Inn's occupancy rate has increased from 38 percent to 60 percent since he took it over. And here's betting that when the Tennessean opens in September 2014, it will do so with a bang. Indeed, its first event already booked for that month is the National Congressional Medal of Honor Convention, which most of the 80 living (as of now) recipients of that highest honor are expected to attend. What better tribute.