Watchdog group questions consultant’s analysis of Convention Center hotel project

By Richard Thompson

September 13, 2018

A local government watchdog offered a detailed rebuttal to arguments that it’s necessary for developers of a $558 million hotel project to receive public subsidies that will total hundreds of millions of dollars.

The nonpartisan Bureau of Governmental Research said in an open letter Thursday that a recent analysis of the project written by a consultant hired by the Ernest N. Morial Convention Center, “appears to substantially underestimate the value” of the public subsidies that Convention Center leaders plan to propose to developers.

In addition, the watchdog group said the consultant’s comparisons to other hotels “have limited value,” partly because the analysis left out some comparable projects in other cities where little to no public subsidies were provided to developers.

“Neither the consultant’s presentation nor the development team’s proposal shows how the requested tax rebates fit into the financial plan for the hotel,” BGR said.

The letter from BGR represents the latest salvo from one of the closest observers of the Convention Center’s attempts to bring a hotel to an unused swath of land at the upriver end of the facility.

Local business leaders as well as some politicians and New Orleans civic groups have been supportive of the subsidies and the Convention Center’s plans. The subsidies, they say, would help add hotel rooms, retail space and other amenities that are needed to maintain the city’s convention business and allow it to compete with other cities for major events.

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

“We sincerely believe that this proposed hotel development deal advances the long-term interests of the Convention Center to the benefit of the state and the city, and meets the criteria for best practices for economic development,” said Michael Sawaya, general manager of the Convention Center.

Sawaya said BGR’s letter lacks “a full understanding of the HVS hotel market and economic-impact analyses.”

Some of the biggest questions raised by BGR relate to the size of public subsidies being requested by the project’s developers.

HVS Convention Sports and Entertainment Facilities Consulting, the firm hired by the Convention Center to provide an analysis of the project, has argued that the subsidies are worth about half as much as the $330 million price tag that BGR’s analysis shows.

The two views are far apart largely because of how HVS and BGR crunched the numbers. HVS has used more optimistic assumptions than BGR about how much the project’s future subsidies would be worth in today’s dollars.

HVS’ math involved a higher so-called “discount rate,” or rate of return used to calculate how much money one would need to invest today to meet the project’s costs over the life of the project. Using a higher discount rate generates a smaller total subsidy in terms of present-day, 2018 dollars.

BGR said it discounted future subsidies at an annual rate of 5 percent; HVS contends that a discount rate of 8.8 percent is more appropriate.

New Orleans officials used a 5 percent discount rate — the same used by BGR — to evaluate proposals to redevelop the former World Trade Center at the foot of Canal Street, BGR said. That property is being converted into a half billion-dollar Four Seasons Hotel and condos.

Moreover, BGR questioned the selection of comparable hotels that was put together by HVS to support the case for moving ahead with the project. Most were smaller in size than the proposed 1,200-room Omni Hotel project, BGR said, and the projects used different discount rates to calculate their costs.

BGR’s letter also said that HVS left off examples of similarly-sized projects that received limited public contributions.

BGR highlighted the $550 million, 1,054-room Boston Omni, which is expected to be completed in 2021. The project does not include a public subsidy to build or operate.

The proposed $557.5 million, 1,200-room Omni 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 upriver end of the giant exhibition hall.

The hotel project’s developers would include 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. They are also requesting a free 50-year land lease with four optional 10-year extensions, and a 40-year break on property taxes.

They also want a complete rebate of a 10 percent hotel-occupancy tax and a 4 percent sales tax on all hotel revenue from sources other than room rentals.

Officials initially expected negotiations for the hotel to wrap up by July. Now, officials are targeting having an agreement in place by March 2019. Construction could potentially begin in late 2019 and the hotel opening by April 2023.

With the delay, more officials and residents have weighed in, most notably Mayor LaToya Cantrell, who expressed “grave concerns” about the large public subsidies being sought by the developers.

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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