Myrtle Beach has changed its contract with the company that runs the city-financed convention center hotel so it will stop paying the group based on revenue projections that were never reached and chipping in for bonuses for the hotel's top managers that weren't paid.
The city could save about $2 million during the next five years because of those changes in its contract with Interstate Hotels & Resorts, which operates the Sheraton at the Myrtle Beach Convention Center, said Grant Kuhn, chairman of the Hotel Board Corp., which oversees the hotel for the city. The City Council approved the new contract Tuesday.
The original contract had to be structured in a way that protected the tax-exempt status on the city bonds that paid for the hotel's construction, city Budget Director Mike Shelton said. The Internal Revenue Service issued a private letter ruling in 2005 that loosened some of those restrictions, prompting the Hotel Board to renegotiate the contract to take into account the recent down economy that affected the hotel's performance, he said.
So has the city been overpaying Interstate?
"Yes," Mayor John Rhodes said after the council voted Tuesday to change the contract. "That's the way it was. It could have been a better contract, but the hotel was struggling at the time and the city's main concern was finding the right company to get us moving in the right direction."
Interstate took over management of the hotel in 2005, rebranding it a Sheraton. The city, which financed the hotel aiming to boost business at the convention center from groups that demanded on-site lodging, sought a new management company after the hotel struggled in its early years under the Radisson flag. The hotel opened in January 2003.
The annual fee the city paid, set when the original contract was approved, automatically increased by 3 percent every year - even amid a down economy like the one of the past few years and even if the hotel's revenues didn't increase. Now the fee will be adjusted annually based on benchmarks of several local hotels with similar meeting space and offerings - dubbed a "competitive set." That should save the city about $1.3 million for five years, Kuhn said.
"The only way of complying with the IRS guidelines was to negotiate a fixed-fee type contract," Shelton said. Officials couldn't have predicted the recession and how it would have negatively affected the hotel's revenues and that growth wouldn't be automatic, he said.
"Based on the information the city had at the time it was a reasonable deal," Shelton said, adding officials anticipated yearly growth. "We have all been forced to realize that things can go the other way."
The city also has paid Interstate money to cover potential bonuses for the hotel's top managers that weren't earned - another payment stipulation in the original contract with Radisson management needed to protect the tax-exempt status on the city bonds, Shelton said. The new contract reduces the "executive compensation fee" based on current salaries and eliminates bonuses as part of the fixed fee. Bonuses of up to 20 percent now will be paid out of the management fee. That change should save the city between $750,000 and $850,000 during the next five years, Kuhn said.
The money for bonuses was given to Interstate - as outlined in the contract - whether the bonuses were paid or not.
"All that is irrelevant," Shelton said. "The money we had to pay ... was not being used to pay bonuses. We paid under the terms on the contract we were able to negotiate at the time."
The new contract, which the Hotel Board has been negotiating for several months, is retroactive to the start of the hotel's budget year, March 1.
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