Nonprofit status for New Orleans convention center hotel? Looks like ducking taxes, assessor says

By Richard Thompson

November 22, 2018

As negotiations continue behind the scenes over the terms of the Ernest N. Morial Convention Center’s proposed 1,200-room high-rise Omni Hotel, the city’s property tax assessor says he is skeptical that the $557.5 million project would qualify for the tax-exempt status its proponents are counting on.

“What they want to do is build a hotel to compete with all the (other) hotels, and they don’t want to pay any taxes,” Orleans Parish Assessor Erroll Williams said in an interview. “That’s what it looks like.”

Williams’ initial view comes years before he may have to issue a formal determination, which even then may end up in court. But it throws into question a key aspect of the potentially hundreds of millions of dollars’ worth of public subsidies and tax breaks being sought by the project’s would-be developers.

The development group, including local businessmen Darryl Berger and Joe Jaeger, as well as Matthews Southwest Hospitality, a Texas-based real estate firm, is seeking a 40-year break on property taxes under a novel arrangement that would have the hotel owned by a nonprofit, called Provident Resources Group.

The nonpartisan Bureau of Governmental Research has estimated that the four-decade property tax exemption would be worth nearly $44 million. That would be in addition to a host of other subsidies, such as $41 million in up-front cash from the Convention Center and complete rebates of a 10 percent hotel-occupancy tax and a 4 percent sales tax on all hotel revenue from sources other than room rentals.

The developers have also requested a free 50-year land lease with four optional 10-year extensions.

All told, BGR estimates that the project’s subsidies and tax breaks would total nearly $330 million. HVS Convention Sports and Entertainment Facilities Consulting, a firm hired by the Convention Center to provide an analysis of the project, contends that they would be worth about half of that.

But it’s the proposed property tax exemption that upsets Williams.

He questioned why the project’s developers should be given a break — worth perhaps $2 million annually — when their hotel, in his view, would compete with and inevitably take business away from other, tax-paying hotels.

“Just creating a nonprofit organization does not necessarily make it tax-exempt,” he said. “It’s a commercial endeavor, and we would view it as taxable … because it’s nothing more than a hotel.”

Williams thus joins a chorus of other public officials, including Mayor LaToya Cantrell and state Senate President John Alario, who have expressed doubts about the large public subsidies being sought by the developers.

In response, Convention Center officials — who hope to have the framework of a deal in place by early next year — dispute that having the hotel owned by a nonprofit is simply a way to dodge property taxes and serve as another enticement for the developers.

“That actually isn’t the case at all. It’s set up as a nonprofit because it is a nonprofit,” said Melvin Rodrigue, president of the Convention Center board.

In an email, Rodrigue contended that because the hotel would benefit the Convention Center, which is a political subdivision of the state, and “doesn’t enrich anyone but the public,” the tax-exempt status is appropriate.

Michael Sawaya, president and general manager of the center, deferred questions about the project’s tax status to its developers.

Neither Jaeger nor Michael Garcia, president of Matthews Southwest Hospitality, returned messages.

For years, the giant assembly hall’s leaders have touted the hotel project as essential for New Orleans to remain competitive with its nearly two dozen rivals around the country for major conventions and sporting events.

The hotel would include at least 150,000 square feet of ballroom and meeting space as well as ground-level retail space on an 8.1-acre site at the Convention Center’s upriver end.

After the hotel project’s debt is paid off, decades from now, the board that governs the assembly hall could take control of the hotel, or it could lease or sell it and retain the full proceeds.

The nonprofit structure being proposed is a novel approach that Tom Hazinski, managing director of HVS, described as the “first one under this model.”

HVS contends that the proposed hotel would create demand for more than 172,000 new hotel room nights a year.

But Williams doesn’t see it. The 1,600-room Hilton Riverside Hotel, which is located near the opposite end of the center, is almost certain to take a hit as a result of the new competition, he said, and that hotel pays roughly $2.5 million a year in property taxes.

“As you add more hotel rooms to the market, the rates may drop, but the end result would be that we’re still going to wind up with a whole lot of vacant rooms,” Williams said.

He said a middle ground could be for the developers to apply for a “payment in lieu of taxes,” a program that allows major developments to negotiate in advance the amount they will pay instead of property taxes.

A similar battle may play out as the National World War II Museum’s long-planned $67 million Higgins Hotel and Conference Center nears completion next year.

“It’s created for educational purposes, but I can’t see the hotel being the educational purpose in this case,” Williams said of that project. “The Convention Center’s going to say this helps bring conventions here, but the conventions are already coming.”

Meanwhile, any determination by Williams’ office on whether the Convention Center project should be tax-exempt may not come for roughly two years after the developers file a building permit.

If his office determines that it isn’t eligible for tax-exempt status, he expects the developers would likely file suit and leave it up to the courts to decide.

But from his view, there’s little ambiguity because “there’s nothing in (the Internal Revenue Code) that says a commercial endeavor is a tax-exempt purpose.”

“It’s about being responsible,” he said. “That’s all. I think if you’re going to put up a development like that, while (a tax exemption) makes it attractive for the developer, it’s unattractive for the government, because the government needs the money to provide services.”

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