Why watchdog is urging Convention Center in New Orleans to rethink hotel project

By Anthony McAuley

Source: The Times-Picayune | The New Orleans Advocate

April 9, 2020

The Bureau of Governmental Research, a public policy watchdog, has called on leaders of the Ernest N. Morial Convention Center to rethink plans to build a large hotel, saying it is an especially bad use of taxpayers’ money at a time when the coronavirus pandemic is expected to blow a hole in the city’s finances.

BGR has long opposed proposals for a 1,200-room hotel by the state-owned Convention Center, which derives most of its annual revenue from a share of hotel and other taxes collected by the city and state. The financing of the project, which envisions an Omni-branded hotel at the upriver end of the vast complex, relies too much on city and state tax subsidies, the watchdog has argued.

The project was originally expected to cost just under $560 million, though BGR said the latest estimate it received from the Convention Center puts the cost at around $706 million.

Now, BGR said in a new report Thursday, the case against the hotel project is even stronger given the uncertain future for the city’s hotel sector.

The report noted that Mayor LaToya Cantrell’s administration last month said that the virus outbreak and the efforts to slow its spread will cost the city an estimated $100 million in revenue and may require municipal job cuts. On Thursday, Cantrell updated those figures, announcing that the cost is likely to reach $150 million and warning that the Sewerage & Water Board could face bankruptcy.

“The Convention Center and its board should stop and take time to reassess the project’s feasibility, as well as its place as a strategic priority among the community’s many pressing needs,” said Amy Glovinsky, BGR’s CEO, in a news release accompanying the new report.

Walt Leger III, a former state legislator who was appointed chairman of the Convention Center’s oversight board last week, said he is currently preoccupied dealing with the immediate crisis and would comment on BGR’s report when he has had time to consider it.

Convention Center President and General Manager Michael Sawaya declined to comment and directed questions to Leger. During a meeting of the Convention Center’s board last month, Sawaya said he was pressing ahead with negotiations on the hotel deal.

Convention Center leaders are forecasting a $38 million decline in revenue from their current budget due to canceled and postponed conventions and from lower taxes, which will mean spending down as much as $19 million in cash reserves to cover expenses this year.

The Convention Center is currently being turned into a 1,000-bed facility to deal with the overflow of patients from hospitals. Gov. John Bel Edwards has mandated an additional 1,000 beds be built if necessary, and there is no estimate yet for how long the space might be needed. Patients began arriving this week.

The state is not paying the state-controlled Convention Center for use of its space, according to contract and payment order documents from the Governor’s Office of Homeland Security and Emergency Preparedness.

In the past, the Convention Center’s leadership has argued that the hotel will allow New Orleans to better compete against other cities for convention business. The hotel is needed to balance the 1,600-room Hilton Riverside hotel at the downriver end of the massive building, so as to fill up the usually sparsely-populated upriver halls, they have said.

The Convention Center’s leadership also has plans to develop an entertainment district on 20 or so barren acres adjacent to the hotel. A decision on a “master developer” for that effort has been postponed from this month at least until May. The broad concept has been to have a mix of residential, retail and entertainment venues there as an added attraction for those staying in the hotel, and more generally to develop a part of the city that has long been neglected.

BGR previously has not objected to the broad vision of a hotel and entertainment district as such, but rather the plans for how they are financed.

Specifically, BGR argued that the proposed terms of the hotel deal, with private developers Matthews Southwest of Texas and local hotelier Darryl Berger, means spending significantly more in financing costs and tax breaks than alternative methods of funding the deal.

In its latest report, BGR said that the proposed issue of tax-free bonds to finance the project would result in an interest rate of 10.5%. BGR also says the financing method prolongs the tax rebate by a decade.

The watchdog has argued that Convention Center leaders have not been transparent enough as the plans have developed, especially as it envisions one of the largest public-private partnerships in the city’s history.

Now, looking to the uncertainties of a post-pandemic world, BGR’s report questions whether the hotel is at all feasible.

“A potential reduction in demand for hotel rooms after the pandemic could intensify the convention hotel’s impact on occupancy levels at existing hotels,” the report warns, before later concluding, “Given all the uncertainty, it is imprudent to make a large financial commitment spanning four decades without knowledge of how the global crisis has altered the economic landscape.”

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