Aug. 7, 2003 - The City of Boston is getting into the hotel financing business.

Worried that tighter bank lending has stalled momentum on a half-dozen planned hotels, city officials are moving to provide "gap financing" to speed up a few big lodging projects -- and boost the new Boston Convention & Exhibition Center in the process.

The city has set up a $40 million loan pool, tapping US Department of Housing and Urban Development funds earmarked for neighborhood economic projects. The loans will fill an approximately 10 percent financing gap for two or three hotel projects, enabling them to break ground within a year.

Gap financing is needed because traditional lenders have been scaling back on financing for hotels, city officials and developers said. Banks, which lent as much as 75 to 80 percent of a project's cost during the late 1990s, have tightened their underwriting standards, now lending only about 55 percent of hotel development costs, with investors often putting in about 35 percent in cash.

"The hotel financing marketplace is difficult right now, given the downturn in the economy and the threat of terrorism," acknowledged James E. Rooney, interim executive director of the Massachusetts Convention Center Authority.

But development officials see the hotel market picking up gradually over the next few years and returning to full strength by 2006.

"We want these hotels to be in the ground so they'll be ready when the market comes back," said Mark Maloney, director of the Boston Redevelopment Authority. The city plans to lend money at a 12 percent rate of return, on par with commercial lending rates.

Maloney stood with Mayor Thomas M. Menino and other city and federal officials to announce the hotel loan program yesterday at a mid-afternoon press conference on the convention center construction site. Menino said the loan program would spur developments that would bring about 1,500 hotel rooms to Boston, add about $12 million in annual tax revenue, and create about 1,000 jobs.

"Getting these hotel projects back on track is a good investment for our city," the mayor said.

City officials said they will choose from the six hotel projects with 150 rooms or more that have already won permits and are ready to start construction. Maloney said the city will give priority to "big boxes near the convention center," reflecting the view that the project, slated to open in South Boston next year, will need more nearby hotel rooms to be successful.

"We will definitely work with the city to submit an application that will work for them and for HUD," said Boston real estate developer Joe Fallon, one of five developers of the $240 million hotel next to the convention center.

Fallon, who is also developing the planned $135 million Marriott Renaissance hotel on the South Boston Waterfront, said Marriott International Inc. also was interested in the gap financing program but wanted to learn more details from the city.

Among other planned hotel projects that could be eligible for the financing are the $36 million Ames Building development on Court Street, the $150 million Loews Boston Hotel at Stuart and Tremont streets, the $150 million 500 Atlantic Ave. development (which includes condos as well as Intercontinental hotel rooms), and the $180 million Grand Hyatt on Fan Pier. Only two or three of these projects are likely to win gap financing, city officials said.

"This will help jump-start some hotels, no doubt about it," Fallon said.

City and federal officials said the $40 million was sought from HUD, and approved, specifically for the hotel loan fund, stressing that it had not previously been intended for another use. In the past, Boston has used this type of HUD funding, known as Section 108, for projects such as the Seaport Hotel in South Boston, the Crosstown Center mixed-use project in Roxbury, and the Grove Hall Mecca retail development in Dorchester.

This is the first time the city has used the money not for specific neighborhood projects but to create a general fund for hotel financing.

The city is structuring the loans so hotel developers will use second mortgages on their real estate and other assets as collateral. City officials described the loans as carrying minimal risk, saying they would go only to viable developments that already had substantial private financing in place.

Charlotte Golar Richie, director of the city's Department of Neighborhood Development, which will administer the fund, said the city looks forward to using interest payments on the loans for economic development in Boston neighborhoods. If the hotels are built, she said, Boston also stands to reap about $6 million in "linkage funds" from developers to invest in low- and moderate-income housing.

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