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Correlation or causation?

Wednesday, Apr 9, 2014

* There are two premises for this Chicago Reader article. The most important

On March 5 the City Council voted 46-3 to approve Mayor Rahm Emanuel’s proposal to spend $55 million in property taxes on a new Marriott hotel in the South Loop—part of his ambitious development plan that also features a basketball arena for DePaul University.

The vote followed a September decision by the Metropolitan Pier and Exposition Authority, a state-city entity, to award Marriott the coveted contract to run the new hotel. […]

However, what the mayor and his aides didn’t mention—and what has gone unreported until now—is that in the year leading up to the lucrative deal for Marriott, the hedge fund of one of Emanuel’s largest campaign contributors bought millions of shares of stock in the hotel chain.

That hedge fund, Citadel LLC, is run by billionaire Kenneth Griffin, whom Forbes last fall deemed the wealthiest man in Illinois. He is famous in the financial world for making a killing in high-frequency trading. […]

According to SEC filings, the firm began buying major portions of Marriott stock in late 2012. By September 2013, SEC filings showed the hedge fund owned 2.3 million shares of Marriott. As of the last SEC filings at the end of 2013, Citadel owned roughly 1.6 million shares of Marriott stock worth an estimated $89 million.

I dunno. Was this whole thing really greased a year in advance? There was, after all, a bidding battle and Mariott in the end wound up beating Hilton for the project

The board of the Metropolitan Pier and Exposition Authority approved the 10-year contract for hotel operations. Its net value to Marriott, in today’s dollars, is $13.6 million over the life of the deal, according to a spokeswoman for the authority, the state-city agency known as McPier. […]

Marriott’s proposal beat out one by Hilton Worldwide, the other finalist. That deal would have netted Hilton an estimated $15.8 million, McPier officials said.

* And after ten years, McPier will own the hotel

The $400 million hotel is part of a larger project that will include a multiuse arena that will host DePaul University basketball and a 500-room boutique hotel.

Ultimately, the authority will own the larger convention hotel, financing its construction with bonds backed by hotel revenues.

* Perhaps these stock purchases were just a good investment by Citadel.

As noted above, Citadel sold quite a bit of its stock, but that’s probably because the price has been skyrocketing since last fall. I doubt that increase has a whole lot to do with the Chicago deal.

And revenues are skyrocketing at the company. Take a look at Marriott’s 2013 annual report

We added 161 properties (25,420 rooms) and 51 properties (10,299 rooms) exited our system in 2013. These figures do not include residential units. During 2013, we also added five residential properties (301 units) and no residential properties or units exited the system.

Total segment financial results increased by $24 million to $1,197 million in 2013 from $1,173 million in 2012, and total segment revenues increased by $992 million to $12,518 million in 2013, a 9 percent increase from revenues of $11,526 million in 2012

While the 1,200 room hotel will be pretty sweet, it’s less than five percent of the total gross rooms added by the company last year alone.

However, taxpayers will pay to build the hotel, bumping up its margins. And a casino could also be built down the street. That wouldn’t be bad, either. It’s a very good deal for Marriott, without a doubt. Courtesy of taxpayers. Hooray!

* Which brings us to the second premise, which is pretty funny

In speeches and interviews Griffin has lashed out at business executives who put the needs of their companies over Illinois while accepting tax breaks and public subsidies.

“Government being involved in picking winners and losers invariably leads to a loss of economic freedom and encourages corruption,” he told the Tribune last year.

Yet the taxpayer-financed Marriott project is very much a governmentally engineered deal, siphoning public resources into a tax increment financing scheme that will underwrite a private hotel chain.

Yep. But, then again, he’s a stockholder, not a company executive.

…Adding… From Citadel…

“The Reader story is completely irresponsible. It is comprised of nearly equal parts baseless speculation devoid of any real factual grounding and preposterous conclusions.”

- Posted by Rich Miller        

  1. - wordslinger - Wednesday, Apr 9, 14 @ 12:27 pm:

    There are 30,000 hotel rooms in the downtown area alone.

    Why do Chicago taxpayers have to stake Marriott $55 million to build a hotel? Is Marriott broke? Do they not have access to capital markets?

    Do current hotels really need to have their property taxes go toward financing a competitor?

    Why is the government involved at all in building a hotel? There’s plenty of privately financed rooms coming online in Chicago right now.

    It’s gotta be a score for some insider. Otherwise, it doesn’t make any sense.

  2. - Roland the Headless Thompson Gunner - Wednesday, Apr 9, 14 @ 12:27 pm:

    A certain financial naiveté underlies this piece. One hotel is not going to make a material difference to the stock price of a company Marriott’s size. The idea that Griffin would plow that much money into the stock because of one possible hotel is silly — and shows a fundamental lack of investment understanding. Marriott has 4,000 hotels all over the world.

  3. - AnonymousOne - Wednesday, Apr 9, 14 @ 12:31 pm:

    Illinois is Broke!

  4. - PoolGuy - Wednesday, Apr 9, 14 @ 12:32 pm:

    Marriott doesn’t seem to think Illinois is broke.

  5. - OneMan - Wednesday, Apr 9, 14 @ 12:41 pm:

    Word —

    Never understood the logic of the DePaul deal in general and why the city using TIFF money specifically.

  6. - Louis Howe - Wednesday, Apr 9, 14 @ 12:52 pm:

    High Frequency trading is a euphemism for front running stock trades. In other words, getting in front of real buyers and sellers and taking a very small, but in the aggregate, very large profit. There is very little to no economic justification for allowing this hyper-trading activity, except that a few very well connected people make a lot money. Another reason why so called Democrats like Rahm shouldn’t be trusted with the public’s business.

  7. - Hans Sanity - Wednesday, Apr 9, 14 @ 12:53 pm:

    Roland — If this single instance has minimal impact, donating to political leadership around the world to reap similar benefits in multiple locations certainly would.

    But we all know that wouldn’t be going on elsewhere. It’s all coincidental.

  8. - AnonymousOne - Wednesday, Apr 9, 14 @ 1:08 pm:

    I meant Illinois is Broke only for some things,like pensions. Far more important things, like a pretty new stadium for DePaul? Not so broke. Plenty of money, just not for anything constitutionally protected.

  9. - Peters Post - Wednesday, Apr 9, 14 @ 1:11 pm:

    Perception matters. Ken and Rahm are smart enough to know that.

  10. - Will Caskey - Wednesday, Apr 9, 14 @ 1:21 pm:

    Yet another example of half finished investigative work (or possibly left out because it didn’t fit Joravsky/Sirota’s thesis).

    I’d bet the money Citadel stood to make on that one hotel is less than Griffith’s contributions.

    If you don’t like TIF spending fine whatever but that doesn’t make this insider trading or a conflict of interest.

  11. - Formerly Known As... - Wednesday, Apr 9, 14 @ 1:24 pm:

    AnonymousOne - It’s funny the way we are broke when it comes to certain things, but then discover plenty of money for other things, isn’t it?

    I’m beginning to think wordslinger must be right concerning an insider somewhere along the line. Otherwise, it makes no sense giving that type of money to a private hotel chain and private school that are both highly profitable.

  12. - Anon. - Wednesday, Apr 9, 14 @ 1:25 pm:

    ==Was this whole thing really greased a year in advance?==

    Why would it have to be a year in advance? The story could be that Citadel made what it viewed as a good investment in Marriott, and later Griffin saw this opportunity to enhance the value of the investment. The numbers quoted seem to show that Marriott just outbid Hilton. (I say “seem” because I don’t know that goes into the “net” value — if it means profits (payments from the authority minus expenses), Marriott’s bid might be costing the authority a ton of money more than Hilton’s bid, even though Marriott’s anticipated profit is smaller. Or Marriott might simply be providing a lot less value than Hilton.) Still, I don’t see a lot of smoke, much less fire.

  13. - Weltschmerz - Wednesday, Apr 9, 14 @ 1:40 pm:

    Anyone with a few years on them remembers the Chucky Swibel deal to develop the West Loop and how LBJ got pissed and plunked the Social Security building right in the middle of the plot. That land was scooped up years before anything happened and left vacant. The failure to get the Olympics left a lot of people with property on the South and West sides that needs to be upvalued (I made that up). TIF funds to the rescue.

  14. - Judgment Day - Wednesday, Apr 9, 14 @ 1:44 pm:

    “* Perhaps these stock purchases were just a good investment by Citadel.”

    Here’s the story:

    Citadel is just being smart, and ahead of the game. If they can see Google in the near future as a large player in the online travel business, it means their bookings improve, and at even a slightly lower cost, that’s some seriously BIG MONEY.

    So, if you are going to be a player, and you know you are going to be dealing with Google, it’s “go big or go home”. The hospitality business is going to change.

  15. - Walker - Wednesday, Apr 9, 14 @ 1:59 pm:

    The “high frequency trading” processes of fifteen or so years ago have since been deemed illegal by regulators. There are newer versions of it around today. It always makes money by beating regular traders to the market via technologies not widely available, and thereby gaining unfair advantage.

    It is “anti-free market” by definition.

    The instruments that led directly to the financial meltdown in 2008 also worked by gaming the markets in unfair and opaque ways. Strictly anti-free market by Adam Smith standards. Yet those who made that money still claim to be free-market Conservatives, when the topic is regulation or taxes.

    This deal doesn’t smell, except where we wonder why the city had to pay anything at all.

  16. - Jeff Trigg - Wednesday, Apr 9, 14 @ 2:16 pm:

    Everybody has been giving hotels/developers corporate welfare for far too long. Peoria just handed a wad of cash to Marriott recently. Springfield has a prime example of hotels getting handouts, and sometimes failing miserably to earn back the investment.

    Much of Marriott’s success is due to government contracts to provide in-flight meals in the 50s which helped them expand beyond drive-in diners and tamale stands. I managed in Marriott hotels for 6 years in the 90s and helped open new hotels all over the US. All of them were at least getting local tax breaks and infrastructure improvement if not subsidies.

    Chicago’s hotel tax also goes toward handing welfare to the multi-millionaires working for the Bears, White Sox, Bulls, and Blackhawks. If we are going to tax millionaires at a higher rate, its probably a good idea that we also stop giving millionaires handouts and welfare.

  17. - A guy... - Wednesday, Apr 9, 14 @ 2:18 pm:

    This kind of deal might be “the last of an era”. Or maybe not. What an odd set of bedfellows will get together and find agreement on this one. Hmmm.

  18. - Here we go... - Wednesday, Apr 9, 14 @ 3:35 pm:

    So Rich - whatchya think…will Kaas start to write about the Rauner/Griffin/Emanuel cabal?

  19. - Yellow Dog Democrat - Wednesday, Apr 9, 14 @ 10:01 pm:

    I agree, connection to Griffin is pretty thin.

    However, given that the Mayor has tipped his hand that a $250 million tax hike is on the way, you have to wonder whether $55 million on a hotel was a good idea.

  20. - BMAN - Thursday, Apr 10, 14 @ 8:27 am:

    Does this mean Kenneth Griffin gets to be the republcan candidate for governor in 2016?

Sorry, comments for this post are now closed.

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