Hotel insurance bill hits $1.8 M

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Baytown Sun
By Matt Hollis matt.hollis@baytownsun.com
July 7, 2023

It was a classic case of sticker shock at the Baytown Municipal Development District meeting Thursday when it was revealed that the insurance costs for the Hyatt Regency Baytown-Houston hotel was much more than anticipated.

City Manager Jason Reynolds spoke during a public hearing about adopting the MDD budget for the next fiscal year, saying a change had occurred that dealt with the insurance payment for the local Hyatt Regency. 

“The Hyatt Regency insurance came in at a number that was not expected and has forced a change in the entire makeup of the MDD budget,” Reynolds said. 

The figure, according to Reynolds, is $1.8 million. Councilwoman Sarah Graham asked how much the insurance payment was originally supposed to be for the Hyatt. Reynolds said the original budgeted amount was around $139,000. 

“We have a lovely hotel, and we have a very profitable model over the lifespan of the hotel,” Reynolds said. “At the very beginning of this process, it was identified that there would be a few years of a negative balance, an operating deficiency, so to speak, where the money that was coming in to help get the Hyatt up and going was in need moreof support from the MDD. One of the things that came in was the insurance for the hotel. That bill is roughly $1.8 million.

“That has forced a complete restructure of the projects for the MDD.”

Reynolds also said the board should be “viable” and prepared for any future issues. 

“Which means we have to start focusing on building a healthier reserve should more things come up,” Reynolds said. 

Reynolds advised the MDD board to begin moving on a reserve balance of roughly $4 to $5 million. To obtain this goal, Reynolds said it might take a few years to build this amount up and require less spending from the MDD. In addition, he said the $1.8 million would have to be paid this year. 

“How are we going to do that? We have to move some of the projects that have already been adopted by the MDD and to the general fund to ensure they are paid for,” Reynolds said. “Those are mostly the parks projects.”

The projects include the Thompson Area Park development, the Art in the Park project, Baytown Sports Youth League improvements, basketball courts at Pelly and Barkaloo Parks, Town Square green space improvements, a new disc golf course and a dog park in Lakewood.  

“My suggestion is that before we adopt the budget, and I do not want to consider adopting the budget today, is that these projects be considered in the FY24 general fund budget so we can ensure they will be funded,” Reynolds said. “That was the intent of this board. Once we can ensure that those projects are funded by the general fund, we can come back and adopt this budget with the insurance payment allocated in this budget as well.”

Mayor Brandon Capetillo asked when they would begin to reserve the funds. Reynolds said that would start in the current budget up for adoption. The MDD will hold another meeting Aug. 3 and could adopt the budget at that time. 

Going over the MDD budget for 2023-24, Reynolds said it has revenues of over $8.8 million, total expenditures of $8.3 million, and an ending working capital of $409,914. He added that the proposed budget includes the $1.8 million insurance payment. 

Reynolds added that the budget also includes two projects for the utility department projects - the Interstate 10 lift station debt service and upsizing for new utilities. 

“With that said, while the budget on paper looks at $409,000, we believe the money that is in there…will not be spent in their entirety, which will ultimately lead to roughly a million dollar ending working capital by the end of FY24. It is an operational belief based on historical data.”

Graham did not hold back in expressing annoyance over the insurance bill news. 

“I am extremely frustrated as an MDD board member,” Graham said. “I do not understand how a hotel was built and how we could not project $1.8 million for the insurance bill that is due today.”

Graham added that it was a “sad day” to scrub the Parks and Rec items in order to pay an insurance bill they did not know was coming.

Graham said typically, to build something in the private sector, they look to see if it is insurable and think about all of the things that could happen. 

“And that is not even playing with other people’s tax dollars,” Graham said. “I hope moving forward, as an MDD board, that we look to the future and make sure we have money put away for these unforeseeable items.”

Reynolds emphasized that the parks’ projects are not being scrapped but are being moved into the general fund so they can be financed. He added that doing so could make the park items compete with other projects.

Capetillo asked about the biggest cost driver for the increase. 

Finance Director Victor Brownlees stated the intent was for the insurance to be paid out of the pre-operating expense budget from the original bond proceeds. But, unforeseen additional expenses with Hyatt hotel depleted that account.

Brownlees said he anticipated the insurance bill to be around $300,000 based on advice he received from people that advising them on the hotel. He added that everyone was “absolutely and utterly astounded” upon hearing the news of the $1.8 million insurance bill. 

When the proposed MDD budget was presented in June, the Hyatt insurance invoice had yet to arrive, according to city officials. Since the insurance bill only covered a portion of the fiscal year, officials budgeted the amount that they thought would be spent, which was between $100,000 to $139,000, city officials said.

Brownlees said hotels in Conroe, Abilene and throughout Texas have experienced similar situations. Conroe’s city council just received news that $5 million was not budgeted for their new $107 million Hyatt Regency hotel. They, as Baytown, hired the firm Garfield Public/Private, LCC, to develop it and DPR Construction to build it. Garfield also oversees the Abilene DoubleTree by Hilton Convention Center Headquarters Hotel. 

“It is a factor of the insurance industry and is also a factor of the locations of the hotel,” Brownlees said. “And despite the fact it is the safest building by far, if anything were to hit the bay, (it would be about) 5% of the insurance cost. It is all of those factors together, and there is no easy answer. Unfortunately, it is about six times more than we anticipated.”

Brownlees added that if the insurance costs had come in at the figure he initially assumed, it would have been paid for from the proceeds within the bond trust, which he said was more than enough to cover the $1.8 million cost.

Reynolds said Brownlees and other staff members are reaching out to Conroe and Abilene and are looking into building their own insurance package with lower premiums. 

Brownlees said the city plans to receive about $1.3 million in additional revenues from rebated hotel occupancy and sales taxes in the next fiscal year. They also plan to obtain revenues from increased city HOT taxes and sales taxes. He added that it is likely that money will flow into the bond trust, which he said controls the hotel plus MDD and the HOT fund. 

“Therefore, you will see in the proposed revised MDD budget that our contribution from the HOT fund is $350,000,” he said. “This will reflect that additional monies are flowing directly to our city’s HOT fund. The rebate and sales and HOT taxes from the state, as I say, will flow through to the hotel’s operating budget. This is the best news I have for you at this stage. I hope it gets better than this.”