Take a close look at $330M sweetener for convention center hotel, watchdog says

By Richard Thompson

July 19, 2018

A local government watchdog group is urging officials to take a more critical look at a request for hundreds of millions of dollars worth of public subsidies for a proposed high-rise hotel adjacent to the Ernest N. Morial Convention Center.

The nonpartisan Bureau of Governmental Research does not take an official position on the hotel’s merits but questions why the private market can’t support the project on its own, and why it would require so much public money to get it built.

“The proposed deal would involve, by far, the largest contribution to a real estate project involving a private developer in recent memory in New Orleans,” BGR says in a 16-page report released Thursday. “Therefore, a careful analysis is essential to determine whether the public contributions are appropriate and to ensure the public receives sufficient benefits.”

The BGR report was released a day after WVUE-TV aired a segment questioning whether Convention Center officials inflated the facility’s out-of-town visitor numbers and therefore the size of its economic impact in 2017 — a contention that could cause some to second-guess the need to subsidize the building of a 1,200-room Omni Hotel.

The proposed $557.5 million project at the upriver end of the giant exhibition hall would include at least 150,000 square feet of ballroom and meeting space as well as ground-level retail space. It would be connected to the center by a bridge over Henderson Street.

The development team includes local businessmen Darryl Berger and Joe Jaeger, as well as Matthews Southwest Hospitality, a Texas-based real estate firm, and Preston Hollow Capital, a Texas-based finance company.

To help cover the project’s cost, the developers are seeking $41 million in up-front cash from the Convention Center, which is funded by a variety of taxes. They also want a complete rebate to the hotel of a 10 percent hotel occupancy tax and a 4 percent sales tax on all hotel revenue from sources other than room rentals, which would last for roughly 40 years.

The developers further have requested a free 50-year land lease from the Convention Center with four optional 10-year extensions, which BGR values at $28.9 million, and a 40-year break on property taxes, which the group pegs at $43.7 million.

Altogether, BGR estimates that the requested tax breaks and incentives are worth roughly $329.5 million in today’s dollars.

The report describes the project’s negotiations as “on the fast track,” with a likelihood of being approved at the New Orleans Exhibition Hall Authority’s Aug. 22 meeting, although nothing is set in stone. The authority is the governing board for the Convention Center.

Construction could begin in late 2019, with the hotel opening by April 2023.

Michael Sawaya, who took over this year as president and general manager of the Convention Center, said in an interview after the BGR report was released that he appreciates the “enormity and the magnitude” of the project, and stressed that the Exhibition Hall Authority was already doing its due diligence.

As part of that, he said, the board hired HVS Convention, Sports and Entertainment Facilities Consulting, a Chicago-based firm, to study the hotel’s potential effect and economic impact and the rationale behind building it, an effort that should be completed by August.

Sawaya said the BGR report “pointed out some things that we already anticipated that we, in our due diligence, would address.”

“It says you’ve got to be diligent and meet these criteria for making investments, and we already know that,” he added. “While I appreciate that they have a mission to do what they’re doing, we’re already on that path and have been throughout the course of this project and previous projects.”

Since the proposal was unveiled, the developers have sought to allay concerns about the proposed incentives, arguing that without the new development, the 8.1-acre site will sit vacant for many years, producing no tax revenue and no economic benefit to the city.

However, BGR’s report contends that convention visitors would stay elsewhere and pay taxes at other hotels, providing a stream of money that would not be lost even if the new hotel is not built.

BGR warns that the hotel, which would be among the city’s largest, could simply cannibalize business from other properties.

Based on the 70 percent occupancy rate projected by the developers, the project would generate 307,000 occupied room nights a year.

In recent years, the project has drawn support from many of the city’s business and hospitality leaders, who are eager to add another high-rise hotel to the city’s skyline, especially one that’s big enough and with the facilities necessary to serve as the headquarters for major conventions.

Perhaps most important, officials say, is that it would provide a huge bloc of rooms upriver from the Convention Center, making it a key piece of a broader vision to bring more visitor foot traffic to the upriver end of the giant exhibition hall, rather than having it all concentrated around Poydras and Canal streets.

However, BGR says the public subsidies under consideration warrant more scrutiny, especially when the city has other pressing needs, like investments in basic infrastructure such as drainage and road work.

The Convention Center has amassed a surplus of more than $210 million. It brings in nearly $60 million a year from state-approved hotel taxes, a sales tax on food and drinks sold throughout the city and other sources.

BGR’s report calls for an independent analysis to see how that money should be invested.

“An appraisal of the hotel site characterizes it as a prime development location, especially for a hotel,” the report says. “The Convention Center should clearly explain why the private market cannot build the hotel without the public’s assistance.”

The hotel tax and sales tax rebates would likely be provided by four recipients of the tax proceeds: the Convention Center; the Louisiana Stadium and Exposition District, which oversees the Mercedes-Benz Superdome and other sports and meeting facilities; New Orleans & Co., the city’s recently renamed convention and visitors bureau; and the Regional Transit Authority.

But the money lost because of the proposed property tax exemption would mean forgoing tens of millions of dollars that — if the hotel is built — otherwise would go into the city’s coffers, as well as to the Orleans Parish School Board, the Sewerage & Water Board, the Orleans and Algiers levee districts and the New Orleans Public Library, the BGR report says.

The Convention Center purchased the vacant 47-acre tract across Henderson Street from the center for $45 million in 2000. It was once slated to become home to another 500,000 square feet of exhibit space for the already 1.1-million-square-foot exhibition hall. Those plans were scrapped after Hurricane Katrina in 2005.

Under the developers’ proposal, after the project’s debt is paid off, decades from now, the Exhibition Hall Authority could take control of the hotel, or it could lease or sell it and retain the full proceeds.

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