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Bleeding red

A couple of years back, N.C. State decided to bet $80 million in public funds that it could profitably build and manage a first-class hotel, conference center and golf course. Though the venture seemed to fall outside the typical purview of a public university, Chancellor Marye Anne Fox and other school officials offered soothing assurances: The hotel wouldn't compete with existing private-sector hotels; the financial forecasts were very conservative, meaning the risk was practically zilch; the primary purpose of the project was to serve the university community.

Today, those assurances are evaporating in the wake of new information, including a consultant's report commissioned by N.C. State. The response of university administrators and the Board of Trustees? Full speed ahead.

The project has been on the drawing board for years, designed as the centerpiece of its burgeoning Centennial Campus "technopolis." The original plan called for private developers to build and operate the complex, a showcase facility that would attract marquee corporate tenants to the campus while drawing academics and executives from around the world. A grand vision of Global Transpark proportions.

The vision remains intact. The conference center will be the envy of universities across the nation, according to its backers, and the hotel will rank as the finest in the Triangle. The professional-grade golf course will carry Arnold Palmer's prestigious name. The latest incarnation of the complex has been trimmed and tweaked to save a few million, though most of the amenities remain intact.

But key details have changed. In 2000, the private developers hired to build and run the center notified N.C. State that they wouldn't finance the venture without substantial guarantees by the university. Rather than scale back the plan, however, school officials decided to pay the $65 million tag, plus financing costs, themselves. This, rationalized Fox, would allow N.C. State to reap the profits without substantial increase in risk.

That sounds perfectly reasonable, at least in a vacuum. But the risk is substantial enough: The project will have to generate a $4.6 million annual profit to cover the debt, and the university must cover any shortfall, plus any operating losses if business is slower than expected.

The wisdom of taking any financial risks in the current, rather shaky economic climate might be open to discussion--especially in the university system, where state budget woes have contributed to recent tuition increases, faculty reductions and service cuts.

Beyond that, area representatives of the state hotel and tourism industries are challenging many of the university's assertions. Last April, after they became aware of N.C. State's intent to build the project, they hired attorney Gerry Hancock (a UNC-Chapel Hill grad), who began filing objections with legislators, the university and anyone else who might listen. Hancock charged that the hotel most certainly will hurt local operators, and that the plan is far too lavish for conventional academic use and will likely lose millions. "The project appears to be a manifestation of someone's runaway 'edifice complex'" he wrote in a letter distributed across the state.

University officials pooh-poohed the concerns, but agreed to revisit the 2001 feasibility study on which many of State's assumptions were based. They hired a consulting firm, HVS International, and convened a Board of Trustees review committee chaired by Richard Vaughn, a Mount Airy building contractor.

HVS finished its report in late August. Probably to the dismay of Fox, Vaughn and the rest of the boosters, the report validated many of the opponents' concerns. In order to meet the projections and pay the note, HVS concluded, the hotel will have to draw more than 73 percent of its guests from existing area accommodations, which translates into tens of millions in lost revenue. Because of the hefty cost, university use of the hotel and conference center will likely constitute less than 10 percent of its total income.

The HVS report also looked at the Arnold Palmer golf course, which will cost about $10 million to build. N.C. State had always characterized the course as primarily for the benefit of the university's turf-grass and golf management programs as well as the student golf team. According to HVS, however, the need to recoup hefty green fees from high-paying customers will limit student and faculty play to a meager 11 percent of the rounds.

The report projected that the complex could indeed make a profit after a year or two. Contrary to the university's claim that the financial projections were on the far side of conservative, however, HVS called its figures neither conservative nor optimistic, but somewhere in the middle. And that assumed the project would be reduced a bit in scope and cost, meaning the original plan likely would have been a sure loser.

That also assumed that no new, similar hotels or conference centers are built in the region before 2008. Yet just a few miles away, Raleigh and Wake County are in the midst of a full-throttle effort to site and build a new convention center, complete with sparkling hotel. Oddly, HVS made no mention of the new center in its report--even though the firm was recently awarded the contract to recommend a location, building design and financing scheme for the proposed convention center-hotel project; the firm recently called the hotel crucial to the center's viability.

It's not a stretch to imagine that N.C. State's facility would go head-to-head with a convention center and hotel for a chunk of its business. "They're going to compete with each other, there's no question about it," says Raleigh City Council member Kieran Shanahan.

Vigorous competition in the Triangle's already distressed market will in turn discourage a private developer from investing in a new convention center hotel, a fact recently impressed upon local leaders. As it is, the downtown Sheraton that serves the existing Civic Center has been unable to cover its debts.

Put simply, the N.C. State facility practically ensures that the civic center hotel will also have to be built at public expense.

The release of the report seemed to present an ideal opportunity for a sit-down session between the university and the hotel and tourism people, in the spirit of town-gown relations, regionalism and every other bit of lip service paid to the idea that compromise is preferable to conflict. But the university, city and county have never discussed their respective, overlapping projects.

Not that N.C. State's side is especially interested in dialogue. Hancock received the HVS report on Aug. 28 at 5 p.m.--the day before the review committee met to make its recommendation. He and his clients worked through the night to digest the report and draw up a response. Despite pleas to present their case, the committee declined and voted thumbs-up on the project. "We wanted a process where we had an opportunity to be heard, and that just didn't happen," Hancock says.

The battle then moved to the legislature. When the House passed a provision in its budget bill that would have required legislative approval for the facility as well as proof that it was consistent with the university's educational mission, supporters fought back on the Senate side. According to several sources, N..C. State Board of Trustees chairman and former political power broker Wendell Murphy led a lobbying effort that included former Gov. Jim Hunt. The Wolf PAC efforts were successful: The Senate leadership demanded removal of the provision in their joint budget deliberations.

As for the HVS findings, Marye Anne Fox and others are sticking to their guns. The project will make money. The university will make great use of the hotel and conference center. The golf course will be a great boon to the school's research and recreational programs.

Still, the report makes it hard to take these proclamations seriously. So do internal N.C. State documents, such as an email written by George Worsley, vice chancellor for finance and business. Asked by a faculty member about the research possibilities for the golf course, Worsley responded bluntly: "First priority of the golf course must be cash flow." After that, he continued, the university will "attempt" to accommodate the campus program needs.

Bob Geolas is a little more circumspect. The energetic Geolas serves as the Centennial Campus Coordinator and patiently answers detailed questions about the hotel and golf course. Other university conference centers with hotels have been successful, he points out, and though none of them were entirely funded with borrowed money, he fully expects to defray the risk by selling naming rights and with equity provided by the university.

He says the HVS report helped clarify the issues, but he and others involved with the project disagree with some of the report's conclusions. He believes, for example, that the university will take better advantage of the conference center than the consultant projects, and that the drain from local hotels will be relatively insignificant. Asked how they know better than their own consultants, who evaluate such projects for a living, he demurs. "I realize that we cannot give people what they want, which is a guarantee that the project will be successful, that the project won't compete, that the project will do everything we intend it to do."

On the other hand, Geolas says, "From the university's perspective, the trustees have spoken." So much for the public policy questions.

The UNC Board of Governors will consider the matter at its Nov. 8 meeting. The university system is already exempt from the Umstead Act (courtesy of the legislature), which prohibits the public sector from competing with private business. No other formal approval is necessary, though the hotel and tourism group may well pursue relief in court if the project proceeds apace. "Nothing's off the table at this point," Hancock says.

Nothing, perhaps, except the willingness of Marye Anne Fox and the N.C. State crowd to consider alternatives. But why should they? Even if the worst happens and the university is forced to eat massive losses indefinitely, they know their legislative friends will find a way to bail them out at additional public expense. After all, friends always take care of friends. EndBlock


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