“What’s the status of the hotel development, given the state of things, is that on pause?” Ryan Berni said during a virtual meeting of the Ernest N. Morial New Orleans Convention Center board last week — its first meeting since the coronavirus crisis triggered sweeping restrictions on everyday life.
“When do we pause?” he asked.
Berni — a board member who was once a top aide to former Mayor Mitch Landrieu — was asking for a status update on a trio of publicly funded, interconnected developments that have been the Convention Center’s central ambition for years: a $558 million capital improvement plan, a $675 million hotel and a new “entertainment district” to surround the hotel that will feature new bars, restaurants and venues.
“My bigger point is, I want to make sure we’re thinking about this before we go put up $80 million, $90 million or whatever it is in site costs and other things,” Berni said. “The demand side is going to be different. It’s like post-9/11 or post-Katrina, we’re just living in a different world.”
But Convention Center President and General Manager Michael Sawaya told Berni and the rest of the board that the projects weren’t on pause, at least behind the scenes. Although the virus and related government restrictions have pushed back certain public-facing benchmarks and votes, negotiations with private developers have forged ahead.
In a meeting this week, Sawaya again reported that negotiations on the hotel deal, which were expected to be done in January, were ongoing and that the center’s attorneys were working on a counter-offer that they hoped to send to the developers this week.
“Obviously, things that are going on today may complicate that some, but we’re hopeful that we can get beyond some of those things and be able to move this thing forward,” he said.
Some board members at last week’s meeting were concerned about the optics of moving forward with the publicly funded projects in the midst of the crisis. Not only is New Orleans seeing among the highest rates of coronavirus infections and deaths in the country, but its tourism-based economy has crumbled in a matter of weeks.
Existing restaurants and hotels face closure, unemployed workers scramble to meet basic costs and the city government is considering layoffs due to a projected $100 million budget shortfall from decreased sales and hotel taxes.
“You can imagine what kind of image that gives to us if we start moving forward with something like this,” board member Eddie Jacobs said.
“In terms of any type of public statements or anything moving forward, we can negotiate behind the scenes but my opinion is, until we get into some sort of recovery, we shouldn’t be out there completing deals,” one board member said. It was unclear who because the member did not announce his name before he spoke.
Even before the coronavirus appeared in New Orleans, Berni and two other board members, New Orleans City Council members, financial experts and citizen advocates told The Lens in interviews that they had serious misgivings about the viability and prudence of the projects.
Now those concerns — such as whether the new hotel, restaurants and bars will siphon money away from existing businesses — appear to be amplified by the crisis.
“This whole thing reeks,” Councilwoman Kristin Palmer said in a Thursday phone interview.
“Why do we want to create something that’s going to take away from existing businesses? Because it very well could. I don’t understand what they’re trying to do. Are they trying to create this district that’s like Disney World with the Convention Center so people never have to leave?”
That, she said, would defeat the whole purpose of the Convention Center: to attract visitors (and their highly coveted out-of-town cash) and fill up existing hotels and businesses.
“These tourist leaders, these hospitality leaders are saying, ‘We need a whole other thing to attract people to this city,’ ” she said. “I call bull on that. We have so many things that we aren’t marketing that we already have. … We need to flip the script. We need to define tourism on our own level.”
Councilman Jay Banks, who previously served on the Convention Center’s governing board, told The Lens that there is no end to the uncertainties that face the city’s tourism industry. There are even questions about whether there will be enough workers to fill all the existing hotels and restaurants once the economy begins to rebound.
“When we’re having trouble making sure people can stay in their houses and feed their family, is this really the time we need to be focused on trying to build a new hotel?” Banks said.
The Convention Center did not respond to requests for comment on this story.
Who profits from the hotel?
Perhaps the chief concern for the board members and council members that spoke to The Lens was whose pockets would be filled with the hotel’s profits.
Publicly, Sawaya has said that the profits will ultimately flow back to the Convention Center. That may be technically true. But the financing model proposed by the developers is unconventional, and the developers don’t expect there to be any true “profits” for at least 35 years.
The hotel would be financed through bonds purchased by San Antonio-based Preston Hollow Capital — a member of the development team and the project’s financier. At the beginning, the hotel would be owned by a nonprofit that would funnel hotel revenues to make debt payments. Once the debt is paid off, which is scheduled to happen in 2065, the hotel’s ownership would revert to the Convention Center.
While there won’t be any profits in the traditional sense, the hotel will produce “excess revenues” that will be used to pay off debt on its construction. Interest rates on the debt will range from 7 to 11 percent.
According to a debt payment schedule produced by Preston Hollow, every cent of the hotel’s excess revenues will go to debt service payments for 35 years from 2025 to 2060. Those annual payments will range from $43 million to $125 million. If all payments are made on time, they will add up to $3.15 billion.
Preston Hollow, at least initially, will own 100 percent of that debt, according to the developers’ proposal, meaning it will have 100 percent of the rights to those annual “excess revenues.”
“It’s public money,” Jay Banks said in an interview last month. “All the profits should not be shipped out to another community. The taxpayers of this city and state are the ones that are going to foot the bill anyway.”
The Convention Center board is a public body, appointed by the Governor of Louisiana and Mayor of New Orleans. It receives annual tax revenues of around $65 million a year and has used those large payments to amass $215 million in unrestricted reserves. It’s those reserves that allow the center to chase such large, ambitious projects.
Berni said in a March interview that he had some concerns not only about the financing, but about the fact that the Convention Center didn’t have any other options. The proposal currently on the table was the only response the center received when it put out a request for proposals in 2018.
Although it was the only proposal, the Convention Center’s review committee — which included Sawaya — still graded it. The proposal received extremely high marks in every evaluation category except the financial category, which got a 78 percent.
“There have definitely been a lot of issues with the way the financing proposal was put together at its inception,” Berni said. “I have long been concerned about the process of how we got to this one proposal. But now that we’re at this one proposal, the mission of the center and authority has been, how can it be most advantageous to the public if we go forward at all.”
There are also questions about whether the hotel will be able to produce enough revenue to cover the payments. The hotel revenues projected by the developer are higher than what was projected in a 2018 feasibility study commissioned by the center. In the first ten years of the hotel’s operation, Preston Hollow is expecting $45 million more than what the feasibility study projects. That’s important, because if the hotel makes a dollar less than what Preston Hollow is projecting, that dollar is added to the premium at the highest 11 percent rate.
“Jesus Christ, this is so crazy,” Keith Butler told The Lens earlier this month as he reviewed the developers’ proposed debt payment schedule. Butler, a New Orleans native and graduate of Harvard Business School who started a brokerage firm in New York, has been urging the Convention Center to consider alternative financing for the hotel since 2018.
“I don’t think these guys understand what they’re leaving on the table and still doing this,” Butler said. “If this is the only way they can do this, you need to question the wisdom of the project. … I have been financing public facilities since 1982, and I’ve never seen anything this outrageously different and expensive.”
He said that with extremely low interest rates around the country and the Convention Center’s solid credit rating, they could achieve an interest rate as little as half of what the developers are proposing.
In March, Sawaya told The Lens that due to recent tweaks in the proposal, the developers would be issuing a new feasibility study for the hotel. However, he would not say whether that study would be completed before an initial contract is signed or even before the board has to take a final vote on the project. He only said that he expects it to be done before bonds are issued, which he said is expected to happen by the end of the year.
‘Poverty is expensive and charity doesn’t work’
Together, the three development projects have been pitched by Convention Center leadership as vital for turning around years of slumping attendance and occupancy rates at the center, as well as reinvigorating a vacant section of riverfront land owned by the center.
The Convention Center originally purchased the land on its upriver border in 2000 to build a “Phase IV” expansion of the center. Many of the taxes currently dedicated to the center, which have allowed it to build such massive reserves, were originally levied to fund the expansion.
That plan was scrapped in 2007, partly because the center was having trouble filling the space it already had. Eventually, the focus turned to filling the vacant land with a new marquee hotel and an entirely new entertainment business corridor.
The plan is now seen as important enough to justify staking hundreds of millions in reserve cash, as well as its future tax revenue, on making it happen. The center claims the public subsidy for the hotel is worth $114 million. But that doesn’t include $28 million to build a parking garage for the hotel, $20 million to build a new road to the hotel or roughly $9 million to build a bridge that would connect the hotel to the Convention Center.
While most of the hotel funding would come from private sources, the entire five-year, $558 million capital plan would be funded by the Convention Center. For the entertainment district, the Convention Center will be pitching in at least $25 million for street, utility and ground preparation to make the vacant land suitable for new businesses. But it’s still unclear whether the center will offer further subsidies and tax incentives for business development there.
Palmer said that if these large investments are necessary to keep the Convention Center afloat, it might be time to consider spending those hundreds of millions of dollars on something else.
“The trends around the country show that convention centers don’t work,” Palmer said. “So why are we going to keep throwing money at something that doesn’t work? Let’s be clear, they are heavily subsidized. … If this model doesn’t work they need to do something else.”
Local community group Women of the Storm recently launched an opposition campaign against the hotel. Group founder Anne Milling said she agrees with Palmer that the Convention Center is receiving a disproportionate amount of money.
“Only four percent of the 17 million tourists who come to the city, only four percent enter the Convention Center,” she said. “And they get these dollars. It’s out of whack. It just doesn’t justify what they’re receiving from people. People come to New Orleans because they love the city, not because of conventions. Conventions are declining, everyone will tell you that.”
Milling wants to see the money redirected to the Sewerage and Water Board to fund much needed infrastructure upgrades. A coalition of 21 unions and other groups, meanwhile, is calling for the center to release $100 million of its cash reserves to set up a hospitality worker support fund.
Palmer said that another option is simply using the money to bolster city services. She said that a vital way the city needs to support hospitality workers isn’t just through grants and emergency financing, but by creating a more livable city for working class people by funding things like affordable housing and public transportation.
But Palmer went further. She said that aside from restructuring revenue allocation, the city also has to change the current power structure of the hospitality industry. She said that the nature of the developments, and the fact the Convention Center is moving forward during this current crisis, is emblematic of the top-down inequities of the hospitality industry. She pointed out that the Superdome is also moving forward with a $450 million renovation.
“Their value systems are wrong,” she said. “My shtick now is: Poverty is expensive and charity doesn’t work. That’s the reality. It’s a power structure. The power structure is ‘look how great it is we’re giving to these people.’ That’s a power structure that needs to be changed.”
She said the coronavirus is revealing to the whole city just how fragile the tourism economy is and just how vulnerable its workers are — problems that existed long before the virus touched down in the U.S.
Palmer has been advocating in recent years for the city to adopt a completely new mindset around managing tourism that focuses on sustainability for its workers and the city’s residents at large. She believes the hospitality industry is too focused on the number of visitors the city can attract.
“New Orleans is using the wrong numbers to gauge the success of tourism,” she said. “We need to use numbers of people in the hospitality industry who can afford to buy houses, the number of musicians who can afford to live in the same neighborhood they were raised in … It’s very clear that those numbers aren’t working for our city.”
She’s pointing to a problem that many in the hospitality industry are well aware of: While reported profits and tourist spending in the city continue to go up, wages for workers haven’t climbed at the same pace.
“This industry brings in $9 billion a year. Where is it? Why are housekeepers not making $15 an hour? If it’s really $9 billion what is going on?”
Former State Rep. Walt Leger takes the reins
The three developments aren’t a done deal yet. The board still has to take a vote on the final hotel deal. For the entertainment district and five-year capital plan, the board still needs to select a master developer. That was expected to happen in March and April, but those dates have since been pushed back.
The ultimate decision on whether these developments go forward is up to the publicly appointed board. But former and current board members have told The Lens that even with that power, it can still be difficult for part-time, unpaid board members to stop something with years of momentum behind it and hundreds of millions of dollars on the line.
Banks said that while he was on the board, it felt like the hotel was getting finalized before he had the chance to fully understand the specifics.
“All of this stuff happened, and when we found out it was all pretty much done,” he said. “None of us had any knowledge of this too far in advance. And pretty much that when we got knowledge of it, it was already down the road.”
Banks and other board members pushed for the consideration of an alternative funding plan being offered by Butler. And at a 2019 meeting, board member Ronald Guidry offered a motion to direct the center’s financial advisors to meet with Butler and discuss alternatives. The board voted the measure down in a 5-5 vote.
“We were shot down,” Guidry told The Lens last month. “I think Melvin led the fight not to even consider this guy.”
Melvin Rodrigue, President of Galatoire’s Restaurants, was the chairman of the Convention Center board until he stepped down from the post on Wednesday of this week. Rodrigue and Sawaya have led the charge on making these developments happen. Banks said it was difficult, while he was on the board, to override the pair once they’d come to a decision.
Rodrigue will remain on the board. But he will be replaced as chairman by former State Rep. Walt Leger III. Leger’s term ended at the end of 2019 and he immediately took a job as Senior Vice President of Strategic Affairs at New Orleans and Co., a publicly-funded private marketing agency for the city’s tourism industry.
Leger will now play a large role in what happens to these developments next. Leger, while in the State Legislature, sponsored several bills favored by the hospitality industry. Last spring was his final session as a legislator. And one of his major pieces of legislation in the session was a bill that gave the Convention Center the authority to go forward with the hotel development.