In three years, the iconic SunTrust building in downtown Durham, a defining feature of the city’s skyline, will likely be a hotel.

As expected, the Durham City Council voted unanimously Monday night to approve an incentive-laden deal to convert the 75-year-old tower into a 125-room luxury hotel complete with a contemporary art museum.

With the promise of $5.7 million in tax incentives from the city, Kentucky-based 21c Museum Hotels is closer to purchasing the building from owner Greenfire Development.

“It’s a win-win proposition,” said Ted Conner, vice president of economic development and community sustainability for the Durham Chamber of Commerce.

Conner was just one of several local business luminariesincluding representatives from Downtown Durham Inc., Durham Convention & Visitors Bureau and Durham Convention Center Authoritywho spoke at the public hearing to urge the council to approve the deal.

There are no guarantees, said Mayor Bill Bell. Yet as with several previous city-backed development projects, he said the agreement with 21c “has the chance of being very successful.”

In exchange for the financial carrot, the city will receive a tax-generating tenant for a building that has been without one since 2006, when Greenfire bought it from SunTrust Bank.

The conversion will cost an estimated $48 million, according to the latest budget. Once it’s finished the hotel will create more than 100 new permanent jobs, say city officials. And if the city’s forecasts hold, the hotel operators would generate $10.4 million in tax revenue in the 20 years after its opening.

The agreement insulates the city from significant financial risk, which may also explain officials’ enthusiasm. The prospective owners won’t receive any incentive money unless construction begins by June 30, 2013, and is completed within two years.

Even if the hotel ultimately fails, officials suggest that the city could still could come out ahead. “If that happens, we’ll still be left with a much improved, saleable building that would not have been as desirable except for the company that’s going to be pouring capital investment into it,” said Kevin Dick, the city’s economic and workforce development director.

A block away from the SunTrust building, the Marriott stands as the city’s only downtown hotel. Whether another more upscale hotel could thrive in the city center is uncertain.

In measuring the financial health of a hotel, analysts rely on a complicated set of factors that, when presented together, indicate a hotel’s success: occupancy rate, average daily per-room rate (ADR) and the all-important Rev-Par, which is the total revenue generated from the renting of rooms divided by the number of rooms available.

Dick says tourism trends demonstrate that the market for luxury hotels in Durham is fertile. “The room rates and the occupancy rates that 21c is projecting indicates that the project can succeed in this market,” he says. Asked to provide the figures, Dick declined, saying they are proprietary.

Shelly Green, president and chief executive officer of the Durham Convention & Visitors Bureau, agrees. “The demand for another downtown hotel is there,” she says. “In a city of our size, with our number of visitors, there’s a need for additional hotel rooms on the higher end.” When existing hotels are full, she says, the city is losing that business to Cary and Chapel Hill.

Statistics tracked by the bureau bear that out. Since 2007, visitor spending in Durham shot up from $755 million in 2007 to last year’s mark of $964 million, according to research commissioned by the bureau. That dovetails with an increase in one-day visits to the city. In 2007, 7.12 million people visited Durham for a single, say the statistics. Four years later, that number had risen to 8.8 million.

Buoyed by the numbers, those involved in the SunTrust project hope visits translate into hotel stays. Still, the long-term outlook is murky. According to the most recent tallies, many of the hotels within a two-mile radius of downtown Durham fall just short of the current national average in the occupancy and per-room rate.

Reports obtained from Smith Travel Research, a Tennessee firm that provides analysis of the hospitality industry, show that the June occupancy rate for the 13 hotels in the sampling was 66 percent. That’s a small increase over the June 2011 tally of 63 percent, but still below the national average of 70 percent.

To be successful, the hotel planned by 21c may have to do better. Keith Debbage teaches urban planning and tourism development at UNC-Greensboro. One of the benchmarks of the industry involves the occupancy rate, he says. To turn a profit, a hotel must fill at least two-thirds of its total available rooms. “Across the board for the industry, the break-even point is 66 percent occupancy rate,” he says. “The further removed from that you get, the shakier the proposition becomes.”

Further complicating the overall outlook, Durham’s average rental rate per room for June was $87.21, compared with national average rate of $107 in the same month.

Craig Greenberg, president of 21c, says the company has reviewed economic studies of the region. Coupled with the company’s research on future occupancy and per-room rates, the numbers have “told us that we can be successful,” Greenberg says.

Indeed, 21c has received wide acclaim for previous hotel conversion projects. The company has hotels under construction in Cincinnati and Bentonville, Ark. Each lists rates starting at around $200 per night. Greenberg says the per-night rate for the proposed Durham hotel has yet to be determined.

Currently, the Marriott charges $179–$199 a night for a room with a king-sized bed or two double beds, according to its website.

More worrisome, however, is the prospect that the hotel may take time to find its financial footing. High-end hotels typically lose money in their first year, says Debbage. “It’s got to build a niche, an identity first,” he says. “Before that, boutique hotels are in a loss-leading position in the first few years.”

Greenberg is undeterred. The company is familiar with the challenges of the hotel industry, he says. As he points out, the 21c hotel in the company’s home base of Louisville, Ky., itself a conversion project, was recently voted the top hotel in the nation by readers of Conde Nast Traveler.

“Between DPAC and Bulls park, Durham has done great things in revitalizing downtown,” Greenberg says. “We want to be on that list too.”

Councilman Steve Schewel is the president of Carolina Independent Publications, which owns the Indy.

This article appeared in print with the headline “Get a room.”