At meeting this week, more details emerge on new convention center hotel deal
By Michael Isaac Stein
Source: The Lens
October 23, 2019
The New Orleans Ernest N. Morial Convention Center reached a deal last week with a consortium of private developers to build a new 1,200-room hotel on the center’s upriver side, with public subsidies amounting to an estimated $114 million, or 17 percent of the hotel’s total cost, according to the center.
The price tag on the hotel has long been reported at about $558 million. But that’s just the cost of building it. The overall price tag, according to a Monday night presentation before the convention center’s governing board, is $675 million. That’s up more than $30 million from a previous 2018 proposal, which was estimated to cost $646 million.
But convention center officials say the new plan represents an overall better deal for the public compared to the 2018 proposal, with millions more in payments coming back to public agencies from the developers. In an email, convention center President and General Michael J. Sawaya said those added costs account for some of the overall $29 million price increase.
“The number changed with the addition of [payments in lieu of property taxes], ground lease, and other miscellaneous costs that were determined since they submitted an estimate over a year ago,” he said in an email this week.
Officials tout new deal at Monday meeting
The convention center board heard public comment on the proposal at a meeting Monday night. The speakers were a mix of supporters, residents criticizing the use of public funds for a hotel, people hoping to be hired to work on the new development and hospitality worker advocates who didn’t stake a clear position on the deal.
Five of the outright supporters were employees of New Orleans and Co., the city’s tourism marketing agency, formerly known as The Convention and Visitors Bureau. That included its newly hired vice president for strategic affairs, New Orleans State Rep. Walter Leger III. Leger is term limited and could not run again this year.
Leger has sponsored a number of pieces of legislation benefiting the hospitality industry, including House Bill 617 in the 2019 regular session, which removed several key hurdles that stood in the way of the convention center developing the hotel.
“We, the legislature, in passing this legislation, the governor in signing it, as well as the mayor sitting at the table with me … felt compelled by the possibilities and the opportunities that are created by this significant development,” he said at Monday’s meeting.
That piece of legislation was part of the Mayor’s “fair share deal,” an attempt to divert more tourism dollars to infrastructure projects in New Orleans. The deal is supposed to deliver $50 million in one time funding, including $28 million from the convention center, and up to $20 million a year for infrastructure improvements for the city.
Sawaya started the meeting with a presentation on the deal, made with a consortium of developers including Mathews Southwest Hospitality, local developer Darryl Berger and Omni Hotels, saying that it is much better than what was offered in 2018 by a similar group of developers. Sawaya previously worked for Omni until 2003, when he took a job heading the Convention and Sports Facilities Department for the City of San Antonio.
The newly proposed incentives package — a combination of tax rebates and a direct cash payment from the convention center — is valued at an estimated $114 million, significantly less than the convention center’s official estimate for the previous plan.
Last year, a consulting group hired by the convention center board estimated that plan would cost the public $173 million, or 27 percent of the total cost of the hotel. An analysis by the Bureau of Government Research, however, said that the value of the public subsidies in the 2018 plan was closer to $330 million in 2018 dollars, or $739 million when accounting for inflation over the 40-year life of the deal.
Stephen Stuart from the watchdog group the Bureau of Governmental Research was at Monday’s meeting and said the group would be analyzing the new deal as well.
The development team is made up of Mathews Southwest Hospitality, Preston Hollow Capital and Provident Resources Group. The developers will get a fee equal to 3 to 5 percent of the project’s cost, which would come out to somewhere between $20 million and $34 million. It’s unclear how that money would be split between the developers.
Omni Hotels, meanwhile, will receive a management fee of 3 percent of the hotel’s gross annual revenue. Sawaya said both the hotel fee and the developers’ fee are standard, and that this portion of the deal is still up for negotiation.
The remaining profits from the hotel, according to Sawaya, would be put in a fund that could only be used for two purposes: paying back hundreds of millions of dollars in bonds used to finance construction and making improvements to the hotel.
The developers will issue bonds with interest rates ranging from 7 to 11 percent with an average of 8.2 percent, Sawaya said, which will be paid back over 40 years. Once the bonds are completely paid back, the convention center would take ownership over the hotel and claim the profits.
“They’re taking all the risk,” Sawaya said. “The bond holders have all the risk. And we take none.”
The convention center will also be contributing a direct cash payment to the construction costs. Under the 2018 deal, that was proposed at $41 million. Now, under the newly negotiated incentives package, it’s $7 million.
Last year’s proposal did not include any property tax payments at all. The hotel would initially be owned by a third-party nonprofit group, which, convention center officials claimed, would be exempt from taxation. (Orleans Parish Assessor Erroll Williams disputed that.)
But under terms that were spelled out in HB 617, the proposal calls for the hotel’s developers to pay $3 to $5 million per year to the city and other taxing authorities, under a payment-in-lieu-of-taxes, or PILOT, arrangement. They will also make ground lease payments for the property, starting at $250,000 per year.
But the bigger public contribution to the project will be the tax rebates. The hotel will be exempt from roughly half of local hotel occupancy taxes as well as 4.45 percent of the state sales tax. The exempted portion of the hotel taxes is dedicated to the convention center, the Louisiana Stadium and Entertainment District, tourism marketing and the state government.
Also new in the deal: the convention center has agreed to finance the construction of a 900-space parking garage for the hotel. That $27.5 million expense, however, is not included in the official tally of publicly financed incentives. If it were, it would grow from $114 million to $141.5 million.
But convention center officials told The Lens that expense wasn’t counted as part of the incentives package because the public agency will own the asset, and the hotel will lease 200 of the 900 spots for $300,000 a year, increasing by 2 percent per year.
‘Imagine this, when our city is starved of resources’
Sawaya said that New Orleans Mayor LaToya Cantrell had agreed to support the project earlier this year, as part of the negotiations that led to her “fair share” infrastructure deal with Gov. John Bel Edwards and the tourism industry. As part of the deal, the convention center — which had built up more than $200 million in reserves from its share of tourism taxes — agreed to hand over a one-time payment of $28 million for infrastructure projects, along with the annual PILOT.
“The mayor, when we agreed to the PILOT and agreed to give her $28 million, she agreed to support the hotel project,” he said. “She committed to it in front of the governor, in front of all of us.”
Cantrell’s office did not respond to a request for comment on this story.
Sawaya said that a hotel connected to the convention center is needed to attract conventioneers and compete with other cities.. He said the current headquarters hotel, the Hilton New Orleans Riverside, won’t cut it because visitors have to walk several blocks to get to their conventions.
“We can’t subject you to being in the elements, or outside, and make you walk four blocks from the headquarter,” Sawaya said. “Nobody wants to do that.”
Some people came to the meeting to object to the project entirely. Civic activist and local philanthropist Anne Milling used her time to remind the audience about the history of the convention center and the upriver land they’re trying to develop.
She noted that the 47 acres of land, which will house the new hotel as well as the convention center’s proposed entertainment district, was originally purchased for the center’s Phase IV expansion — a plan to increase the square footage of the convention center itself. The state passed a one percent hotel tax and a .25 percent food and beverage tax in Orleans Parish to fund the expansion in 2002.
But that plan was scrapped shortly after Hurricane Katrina.
“The dedicated tax dollars for Phase IV continued to flow quietly to convention center coffers,” Milling said. “Over the past 15 years it has been able to accumulate more than $235 million in unrestricted reserves.”
She charged that using these funds for this hotel and entertainment district development was outside the center’s original purpose.
“Only 600,000 of our 17 million tourists went to this facility last year,” she said. “Rather than acknowledge this changed paradigm, today the commission is subtly modifying its mission. No longer is it just about trade shows and conventions. Rather, it now wants to be an entrepreneur, a developer, a king maker. Today the commission wants to build a hotel, parking garage, entertainment centers, and even a golf driving range with taxpayer dollars and public subsidies.”
She urged the convention center to sell the upriver land and use the money to retire the remaining bonds for the Phase IV expansion. When those bonds retire, the one percent hotel tax and .25 percent sales tax could be terminated.
“Imagine this, when our city is starved of resources,” Milling said. “If this commission is indeed here for the good of the public, it should take the profits from the sale of the land and retire the bonds. Once accomplished, the law will allow the current hotel/motel tax to be redirected.”
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