Investment or giveaway? Despite rosy projections, some question New Orleans Convention Center’s hotel proposal

By Richard Thompson

September 2, 2018

It’s a $156 million difference of opinion.

That’s the gap between two estimates of the public subsidies involved in the Ernest N. Morial Convention Center’s proposed 1,200-room high-rise hotel project, a significant addition to the local hospitality industry that its leaders have long hoped to build.

The would-be hotel developers are seeking a $41 million upfront cash contribution from the New Orleans Exhibition Hall Authority, which runs the center, plus free use of the publicly owned land and up to 40 years of hotel tax and sales tax rebates and property tax exemptions.

The nonprofit Bureau of Governmental Research estimates the total cost to taxpayers at around $739 million over 40 years, or $330 million in present value. A consultant hired by the project’s backers pegs the present-value number at just over half that much.

The Chicago-based firm’s calculations depend on more optimistic assumptions about how much the project’s future subsidies would be worth in today’s dollars than BGR used.

The higher the so-called “discount rate,” the smaller the total subsidy would be in terms of 2018 dollars. The figure is essentially a rate of return used to calculate how much money one would need to invest today in order to meet the project’s total costs over the coming decades.

BGR said it discounted future public contributions to present value at an annual rate of 5 percent, which reflects a 2 percent inflation rate and a 3 percent return on investment.

The Convention Center’s consultants said a discount rate of 8.8 percent is more appropriate and realistic.

Heywood Sanders, a professor of public administration at the University of Texas at San Antonio, views the projections by HVS Convention, Sports and Entertainment Facilities Consulting as mathematical sleight of hand and questions some of the report’s other findings.

Sanders, a well-known skeptic of convention center expansions, said that when such a significant public investment is proposed, it’s especially important to know the numbers and the assumptions are sound.

“If New Orleans, as a community, and the state of Louisiana, is going to make a bet with a whole lot of public dollars, one of the key questions has to be, ‘How good is the guidance? How sure is the bet?’ ” Sanders said.

Amy Glovinsky, BGR’s president and CEO, said the group was still reviewing the consultant’s latest projections and plans to respond “within the next several days.”

BGR’s critique of the project goes beyond the size of the proposed subsidies. More broadly, the group questioned why any public money should be used to build a hotel and why the private market can’t support the project on its own.

The watchdog’s appraisal helped to kick off a spirited public dialogue about the project’s merits, with Mayor LaToya Cantrell joining in a chorus of criticism.

The hotel’s boosters, and the Convention Center’s consultant, counter that the focus on the project’s cost to taxpayers is misplaced.

HVS and project backers are trying to reframe the subsidy as an investment rather than a giveaway. They say the hotel at the upriver end of the Convention Center will help reclaim lost convention business and boost flat attendance, and thereby improve New Orleans’ economy generally.

”They failed to mention that (the money is) going to a nonprofit which exists for the benefit of the (exhibition hall) authority,” Thomas Hazinski, a managing director for HVS, said of BGR’s report. “It’s the authority investing in itself.”

“Not one penny of subsidy is going to a developer,” he added. “There is public investment in its own nonprofit.”

And the investment will pay off, HVS says, predicting the hotel would add 45 “event days” — days on which an event is being held in the building — each year for the Convention Center. That, in turn, would generate $41 million a year in new lodging revenue and $179 million in new direct spending that stays in New Orleans.

A fraction of that would come back to taxpayers. The total spending generated by the hotel would generate $9.2 million in annual sales taxes, HVS says.

In addition, the study found that the hotel would cause an extra $54 million annually in indirect spending.

It said the expected uptick in visitors would help generate 1,900 jobs, everything from hotel workers to cab drivers and line cooks in restaurants.

Convention Center officials have long contended that the addition of a high-rise anchor hotel at the upriver end of the giant assembly hall will drum up business for the typically harder-to-sell meeting rooms in the parts of the hall farthest away from the French Quarter and most of the city’s hotels.

HVS’ study noted that the Convention Center’s occupancy rates are more than 10 percentage points higher for the halls closest to Canal Street and the 1,600-room Hilton Riverside Hotel — the center’s de facto anchor hotel — than at the center’s upriver end.

While one might expect other hoteliers to balk at the subsidy for a competitor, project boosters argue that the new hotel will actually be a lift to the industry generally because it will help New Orleans land some big-ticket events that now bypass the city. And that will create demand for rooms all over town.

“When you take a look at the market, we need this hotel in New Orleans,” said Leonard Wormser, senior vice president at Hospitality Real Estate Counselors, a hotel brokerage firm. “We need to be able to have two 40,000-person conventions in the city at the same time. We don’t have the capacity now, and this hotel will help provide that capacity.”

The hall’s leaders see the huge initiative as essential for New Orleans to remain competitive with its nearly two dozen rivals around the country for major conventions and sporting events.

HVS’ study estimated that the hotel would enable the Convention Center to recapture perhaps 19 events out of about 275 that it says were “lost” over the past two years.

However, most of those events were lost because organizers did not want to return to New Orleans at all or objected to the quality of the meeting facilities, according to HVS’ data.

Sanders has long been critical of the tendency of convention centers nationwide to spend money on hotel projects based on the hope that such spending will translate into more guests — partly because so many other cities are pursuing a similar strategy.

Among the New Orleans center’s competitors that recently added new associated hotel capacity were Chicago, Dallas and Nashville, with Kansas City, Oklahoma City and Portland on the way.

Boosters say that’s exactly why New Orleans needs to build the hotel.

“The bigger picture is that we’ve got to find a way to get this done,” said Michael Sawaya, who took over this year as president and general manager of the Convention Center. “Other destinations are growing their convention center room night demand, and in New Orleans, it’s not growing. It’s flat.”

But Sanders is skeptical of that logic.

“The argument that building a hotel to enable a convention center to recover lost business has been made by HVS and other consultants for years, and we don’t see that happening in any consistent way across the country,” he said.

While Sanders is often viewed as a doomsayer by convention industry boosters, even some in the business agree that adding hotels and other features is not a sure bet.

“I think there are some instances where it can make sense, and other instances where, I think, folks get it in their heads that they just keep building for Easter Sunday (the highest-attendance day of the year at many churches) now,” said Kristie Dickinson, executive vice president of CHMWarnick, a Boston-based hotel asset management and advisory firm.

In other words, there’s no sense in building for the sake of building, even if the roughly 25,000 hotel rooms in the downtown area are occasionally filled to capacity during short peak periods, such as bowl games and the final weekend of Carnival.

But Melvin Rodrigue, president of the Convention Center board, said he remains confident in HVS and its methodology. In his eyes, the project is a good bet that will bring hundreds of millions of dollars of benefit to the city and lift the hospitality industry as a whole.

“It’s economic development. It doesn’t happen overnight,” he said. “That is a long-term play, but it’s an investment nonetheless, and if you want infrastructure to be better in the city of New Orleans, you’ve got to continue to make investments that have an economic impact.”

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