Thursday, October 24, 2013

Lessons From An Era

It is a bit disingenuous for the landlord of Research Triangle Park in Durham, North Carolina to call the only hotel actually located there an an “eyesore” during an announcement that it has been purchased with the objective of closing and imploding it by year end.

A word spoken in haste, I suppose.

When the Governors Inn was built in 1972 by Durham’s famous Teer Family, ownership did not include the land where it stood. That was retained by the Park’s landlord, making the hotel more like a concession “in holding.”

This also made it extremely difficult to leverage in order to finance improvements or replacement as hotels often must do.Governors Inn

It is a testament to its three general managers that it remains in good shape, if somewhat dated by its overall 40-year-old layout.

Selflessly, two of these individuals were also at the center of helping Durham launch its first community destination marketing organization.

When the hotel was built, Durham had about 1,500 lodging guest rooms, 38% of which were downtown and very few, if any, around RTP, which had been carved out of Southeast Durham farm and pinelands just four miles from the city center a little more than a decade earlier.

The Park exists in a special Durham County district restricted to research.  It is encompassed by the City of Durham. While it relies on Durham utilities and services, tenants there are exempt from paying a full share of property taxes.

When the Governor’s Inn was erected, both the City and County of Durham were just over 40% of their current population.

Today, even netting out the 198 guest rooms that will be lost with the closing of the Governors Inn – now called Radisson RTP - Durham has 7,500 commercial guest rooms with more than 300 set to come online next year alone and another 1,700 under development.

Within a couple of years, Durham will have nearly 9,500  hotel rooms, six times the number there were when the Governors Inn first opened.  But as savvy developers will tell you, hotels all come “out of the box” empty.

These businesses don’t generate visitation by their sheer existence, they harvest visitation generated by the community where they are built.  However, there is a good reason the number has expanded in Durham three times faster than the overall population.

In 1986 Durham officials went to the NC General Assembly to secure permission to levy a special local option tax on the hotel room rate paid by visitors staying overnight in commercial lodging.

The special tax had been pioneered a few years earlier by the General Assembly as a self-funding mechanism for promotion of Asheville and Buncombe County with 100% designated for community marketing.

Used for marketing, economists note that the special tax would act as a pump to fuel a much greater amount of local tax revenue from increased overnight and daytrip visitation.

But instead, Durham and many other communities sought the funds with no strings attached, hoping to augment general funds.  However, the legislature insisted that as a provision, Durham at least establish an official marketing arm.

With no track record in Durham at the time, it was hard for local officials to see that when used as marketing as intended, the new funds would spearhead a 17 to 1 return, 6 to 1 fueled directly by the new marketing agency alone.

Many in government at all levels fall into the trap of thinking only in terms of slicing up the pie and that revenue generation comes merely from raising the rate of taxation.  But it doesn’t.

So inclined, local officials often fail to reap the bounty that can be leveraged by promotion of visitation. They also misread the medieval proverb about “a bird in the hand.”

It doesn’t confer wisdom on taking the funds out of promotion.  In fact, it refers to falconry and that a hunter is worth far more than any amount of prey.  Community marketing is the hunter that will bring back a far greater return than can be wrought by cannibalizing it.

Durham Representative Paul Pulley, who passed away earlier this month, insisted that until the Durham Convention & Visitors Bureau became operational at the very minimum, at least 25% of the special tax be set aside for start up after which time the rest of the tax could be then be moved over for its intended use.

Within a year, a committee chaired by Karl Lack, the first general manager at the Governors Inn, recommended that DCVB, as Durham’s official marketing arm, be chartered as an independent, public authority.

Less than a year later a joint-city-county formation of the new marketing arm’s governing board was announced and less than a year after that,  I was been brought on to oversee its start-up, which I had already accomplished in part for two other similarly-sized communities.

However, by then, 3/4ths of the new funds meant to prime the pump to generate revenues for Durham from visitors had disappeared into general funds of local government where local officials had grown too reliant.

Start up took on the task of also rallying private and public support to persuade the General Assembly to partially re-compensate for the revenues lost to general purposes by increasing the rate Durham could levy.

Frustrated, while increasing funding for DCVB, Durham legislators, Kenneth Royall and George Miller hardwired its use this time. Legislators correctly anticipated that there would always be a group of three or four individuals including a complicit official or two who would scheme to pry it away.

Because this was often the case not only in Durham but statewide, they also worked with other legislators to embed legislative guidelines to restrict the use of future funding of this type across the state.

And they warned local officials that the next time Durham’s legislation came before the General Assembly, its overall use of the tax would be conformed to use guidelines with 100% going back to its community marketing organization, no less than two-thirds to be used for marketing and up to a third eligible for other tourism purposes including capital projects.

Until such time, all of DCVB’s existing funding was legislatively restricted to only marketing.  It even went so far as to define marketing in order to dissuade work-around artists.

But less than a decade later, this surprised and frustrated local lobbyists desperately attempting an end-run to increase the special visitor tax meant for promotion to get funding instead for the Durham Performing Arts Center.

After demonizing DCVB, deriding its board, chasing members down on hospital gurneys, lobbyists learned to their chagrin that Durham’s marketing organization would need to write a letter to the legislature on behalf of the project requesting an exemption and a delay in the conformation of Durham’s use of the tax.

Otherwise, the intriguing project would have no chance of approval.

DCVB’s credibility and track record, by then well proven, withstood the assaults and to the credit of its governing board, they were not distracted from giving the project full  and dispassionate consideration.

But DCVB proposed a different calculus, one that would be far more win-win.  Those responsible for establishing the special tax as a way to leverage far greater taxable spending were also aware that the question wasn’t about the theater itself but about the funding.

If, as eventually authorized, $1.4 million in funds intended for community marketing were used for debt service instead, the facility could possibly be an ingredient in leveraging about that much in local tax revenue.

But if the amount was used as originally intended, to increase community marketing, it would generate five times that much local tax revenue, enough to fund the proposed theater plus another $7 million each year to help assist other cultural facilities and events.

Proponents of the project, as Durham officials did so long ago, pushed instead for the money up front, shorting the community of at least $210 million in local tax revenue by short circuiting the economic model upon which the special tax had been founded.

Seeing how stubborn the skepticism is among local officials everywhere regarding the strategic fruits of community marketing, other industries vigorously oppose adapting the special assessment formula to self-fund other uses.

As one local official threatened in a closed door session, if the legislature tried to conform use of the tax meant for marketing, local officials would just repeal it entirely and moth-ball Durham’s community marketing organization.

This “nuclear option” gives new light to the proverb about “cutting off your nose to spite your face,” as does leaving $210 million on the table.

The taunts and slights are long forgotten and I don’t regret that decision to request a waiver,  except for the fact that Durham again walked away from reaping revenue so desperately needed for other uses.

A more strategic calculus could have so easily been both/and.

Durham’s marketing arm has now long been recognized as a best practice worldwide.  Its the first in North Carolina and among the first two dozen anywhere to  receive International accreditation.

That doesn’t mean there aren’t still a few individuals as there always will be angling to undermine it or pressure officials to try and siphon off funds for pet projects.

Ironically, funds from the tax that would be eligible for grants are right there in local government general funds.  If those aren’t growing fast enough, well they can only blame themselves.

A pump can only generate so much at less than half power.

Helping DCVB garner unparalleled approval ratings among local stakeholders, including opinion leaders, are many such as Governors Inn executives who have helped safeguard the integrity of Durham’s community marketing now for 20 of its soon-to-be 25 years.

Now among its most ardent supporters is Wib Gulley, a friend and former mayor who after serving two terms on DCVB’s governing board including four or five years as an officer and two as chair, proclaims to other officials that while he was among the most skeptical when it was founded, he finds no other use of public funds as well spent.

DCVB earned that accolade the old fashioned way.  I remember meeting with Wib the month I arrived.  I was given a few minutes to explain how destination marketing works to fuel the business climate and tax revenues while Wib juggled his baby boy Paul, now grown.

I had to talk over some great rock and roll at Satisfaction’s which was in Lakewood at the time, not in Brightleaf Square where it has been for many years.  Wib has become a a good friend but not because we hang out or golf on weekends or see each other socially.

It is the type of friendship based on principle and trust.  In all, over the years, we’ve probably exchanged less than a thousand words, usually when Durham’s marketing arm was under duress.  I could always count on Wib to help me see beyond the sliminess of a given circumstance to a win-win outcome.

So when they start swinging the wrecking ball in the next month or two, I’ll be toasting the Governors Inn and all that it has symbolized for Durham including Research Triangle Park.

There are now more than 25 hotels in the portions of Durham encompassing the Park.  Many legitimately use RTP as a locator because they are within two miles.

But they all owe a great deal to the old Inn.

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