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New Orleans World Trade Center controversy

by Christopher Tidmore

For the second time in a decade, there is an attempt to convert the World Trade Center building into a hotel, but a local good government group says that the tax abatements that for which the developer has asked are unreasonable.

The World Trade Center sits upon one of the choicest pieces of real estate in New Orleans, overlooking the river and sitting at the apex of the city’s main streets of Canal and Poydras. The non-profit organization operating the property seeks to lease all but two floors of of the city-owned tower to New York-based developer Full Spectrum.

The local watchdog group the Bureau of Governmental Research objected to the deal where the city leases the property to the World Trade Center authority for 99 years and the non-profit organization then leases all but the 29th and 30th floors—locations of their offices and the Plimsoll Club—to Full Spectrum to create a mixed use facility that would include hotel rooms and apartments. The price tag would be $30 million upfront and 60% of the taxes that would be owed on the riverfront property if it was not tax-exempt.

The annual payment as well as $24.25 million of the one-time payment would go to the New Orleans Building Corp., the landlord of city-owned properties and developer of the publicly-owned riverfront that surrounds the mostly empty office building, with the balance committed to the non-profit trade group to reimburse them for past expenses..

On Thursday, June 19, 2008, Janet Howard, President of the Bureau of Governmental Research, urged the city to require the developer to pay the full 100 percent of the taxes that would otherwise be due.

Not the First Hotel Deal

Once called the International Trade Mart, the city constructed the skyscraper in 1963 as a vehicle to draw and develop international trade and high paying jobs.

By the mid-1990’s, though, the building sat half empty. The bustling office complex had dwindled into see-through floors with just a few international consulates and the city’s famous Plimsoll Club remaining.

The private board that operated the building hit upon the idea of opening a bidding process to develop a hotel in the lower 18 floors as a way of drawing needed rents and providing structural upgrades to the complex. Any additional funds from the venture would go to fulfilling the WTC’s original mandate of providing jobs though augmenting the port and international trade.

In a March 24, 1997 letter, the World Trade Center announced its intentions. After the release of a Request For Qualifications (RFQ), it received three reliable bids for the property. Politically connected local financier Larry Sisung bid in partnership with the Holiday Inn Crowne Plaza chain. He competed against the French Sofitel consortium and local group called MKL Consulting working on behalf of the Peabody chain. Stanley Muller, the architect and developer behind the MKL proposal offered $5 million a year rent to the WTC, nearly $3 million more than either Sofitel or Sisung.

Yet, Muller’s bid was denied—for two reasons. The local architect said the project was unviable unless the entire property was developed, excepting the upper two floors where the WTC offices lay. Moreover, he argued that the use of state industrial development board bonds were critical to construct the hotel, paid for out of a TIF, tax inducement funding that would have lowered the city’s tax returns from the project.

Critics at the time pointed said that tax benefits should not be a requirement to redevelop the property, and rejected Muller’s bid. Eventually project consultant John Keeling of PFK recommended Sisung partially on the basis that he wanted no direct state aid. (He had also pledged to spend several hundred thousand dollars doing needed repairs of the upper floors, an attractive proposal to the relatively impoverished WTC, which helped him prevail over his French competitors.)

At the time, Muller cried foul, questioning the Crowne Plaza proposal, and their ability to fulfill their promises. In some ways, his criticisms of inadequate funding vehicles proved prescient as Sisung sought legislative financing almost five years later, in April 2002, echoing many of Muller’s original comments.

Sisung justified his change of position by pointing out that September 11th changed many of the dynamics of hotel financing, drying up once readily available sources of revenue. He claimed that the tax money (and potentially state bonds) would help guarantee a five-star chain for the property, having lost Crowne Plaza as a backer. By June 30th of that year, Sisung’s period of development expired, and the WTC board began exploring new bids.

While the building took little damage during Hurricane Katrina, the economic impact of the storm delayed redevelopment until recently.

Interestingly, the WTC board which had rejected Muller’s bid on the basis of his demand that the upper floors of the building be included in the project and special tax status be afforded to his deal ultimately approved a variant of those same requirements for Full Spectrum.

(There are differences, of course. Many of the current Foreign Consulates will be able to retain their specific office suites, and there are far fewer tenants in the World Trade Center post-Katrina. Nevertheless, the firm denial of use of the upper ten floors of the property, originally areas that were to be reserved for port related activities, was dropped.)

Then, as now, business critics have questioned the rationale of using tax money for direct public financing of a project. Howard and the BGR Board joined the chorus in a letter to Councilwoman Jackie Clarkson on Thursday.

“The World Trade Center property enjoys one of the most attractive locations in New Orleans,” Howard explained. “It is hard to believe that it cannot be developed in a way that protects riverfront views without a tax break. If indeed it cannot, the city should consider holding the property until the market improves.”

The BGR said that the prime location of the property was payment enough. The city should demand 100% of the taxes it would otherwise be owed. It should further “clarify the terms for the upfront payment of the taxes”, as the dates are “ambiguous”.

The watchdog group further requested that the rent not be retained by the NOBC for riverfront redevelopment but directed into city’s needy general coffers. Finally, the BGR letter suggested that the Council requires a performance bond or other mechanisms to protect the city if the developer fails to deliver the world-class museum, hotel, condos and retail development promised.

Unlike Sisung’s deal, under the current contract, NOBC cannot reclaim the property if the tenant fails to develop it, Howard explained, because the base rent would have been already paid. More importantly, under the contract, the tenant would have the unprecedented right to demand that the NOBC sell the property through a public auction.

In the letter, Howard called the provision “On its face, this is an extraordinary provision to include in a commercial real estate transaction. It should be explained and evaluated in light of the explanation.”

City Council President Jackie Clarkson likewise requested additional protections and a performance bond several weeks ago. The council voted to defer the lease review and vote at the time due to the late addition of amendments. The review of those provisions had only been included in the Council’s agenda at the last minute following a deferral request by Clarkson on June 5, 2008.

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