'Demand isn't there right now' to carry out $450 million project

Wednesday, September 27, 2006

By Rebecca Mowbray

New Orleans convention officials have put the Phase IV expansion of the Ernest N. Morial Convention Center on indefinite hold in hopes of redirecting the money to other efforts to create demand for the beleaguered tourism industry.

"We're going to hold off on Phase IV," said Warren Reuther Jr., chairman of the Ernest N. Morial New Orleans Exhibition Hall Authority, the state board that manages the Convention Center. "The demand isn't there right now."

The official halting of the project, which would have added 524,000 square feet of meeting space to the 1.1 million-square-foot riverfront complex, is subject to the approval of the Convention Center board. But convention officials already are working to undo the financing mechanisms behind the $450 million project.

While news that Phase IV is being canceled had not yet spread around the tourism industry, the outcome was largely anticipated.

"I'm not surprised at the thought of deferring Phase IV until we re-establish our footing in the marketplace. A temporary deferral is probably appropriate," said Bill Langkopp, executive vice president of the Greater New Orleans Hotel and Lodging Association.

Even though the state would have helped finance the expansion, Reuther said the Convention Center board can't afford to move forward with the project. Convention Center revenue has been insufficient to support operations since 2001, and the center has had to dip into its reserves to cover the shortfall. Adding nearly 50 percent more space would only increase the cost of maintaining the complex and the burden of selling the space, he said.

While convention officials hold out hope for improvement in both bookings and the center's finances, they also acknowledge that New Orleans is a tough sell for groups shopping around for places to hold gatherings. Only 61 percent of the city's pre-Hurricane Katrina airline seats are back in service, and meeting planners frequently raise concerns about crime. Making matters worse, convention groups increasingly are demanding that the Convention Center pick up the tab for event-cancellation insurance, which along with all other types of insurance has skyrocketed in cost.

"We have some challenges that we've never faced before," Reuther said.

Unwinding the project will be a monumental task. The Convention Center must undo a $300 million bond sale that took place in August 2003 and give the proceeds back to investors. It also must withdraw its request for $100 million in state money that had been allocated for the project over five years.

Tourism leaders hope to hang on to a second source of state financing for the expansion: a 1 percent hotel tax from rooms rented in Orleans Parish and 1/4 percent restaurant tax, both levied to support the project. They plan to lobby the Legislature next spring to allow them to redirect those taxes to other tourism projects. The redirected tax money could be used to address long-standing sanitation, public bathroom, sidewalk, lighting, signage and public safety needs in the French Quarter. Tourism leaders say the planning process could result in something of a master plan for the city's major industry.

"None of us are depressed about this. We think it's the right strategy," said Stephen Perry, president of the New Orleans Metropolitan Convention and Visitors Bureau.

Practical decision

The news is yet another twist in the plan for Phase IV, which before the storm was considered the second-largest state-financed project in Louisiana history, after the Superdome. The expansion, which would have restored New Orleans ' status as having one of the largest convention centers in the country, originally was scheduled to open in December. But the project was snarled in the courts for nearly two years when Broadmoor LLC challenged the initial award of the construction contract.

The project also nearly fell victim to rising construction material prices and an effort in the summer of 2004 to combine the Convention Center expansion with a riverfront stadium for the Saints. But those hurdles were overcome, and one week before Katrina, Broadmoor construction crews began clearing a site upriver of the center to make way for the expansion.

Officials say Phase IV is not dead; it's just on hold until business conditions warrant more space. But when that will be -- if at all -- is anyone's guess.

And what Phase IV would look like also is up in the air. The design might change if demand calls for something different, and the scope of the project might change depending on how much construction costs escalate.

Tourism leaders say their decision is a pragmatic one.

When the feasibility study for the project came out in 2000, the convention business was coming off of its peak year in 1999, when a record 885,997 people participated in meetings at the center. But as more cities around the country got into the convention business and the supply of convention centers grew faster than the growth of meetings, attendance at the New Orleans Convention Center fell. By 2004, the last full year of business before the storm, Convention Center attendance had fallen to 523,761, a drop of 41 percent.

Back in the go-go period of 1999 to 2001, New Orleans was in the enviable position of having its Convention Center in use 69 percent to 75 percent of the time. Because downtime at such centers is required for maintenance and holidays ,and to accommodate conventions moving in and out, a 70 percent occupancy is considered full. In 2004, the Convention Center was in use only 46 percent of the time. Officials were banking on a rebound in 2005 and 2006.

For the next four years, occupancy is expected to hover in the 30-something percent range, about half the business that was there in 1999, when officials decided they needed to expand the building.

"The demand isn't here," Reuther said. "You cannot build a Phase IV without demand."

Second thoughts

Moreover, building the extra space would only increase the center's financial difficulties. Unlike many other convention centers, which are financed by the state and city entities that run them, the Ernest N. Morial Convention Center must live off the revenue it generates by renting convention floor space. Tourism taxes that support the center are dedicated to paying the building's bonds, General Manager Jimmie Fore said.

Even before the storm, New Orleans convention officials found it difficult to compete against the many subsidized convention centers around the country that offer their space for free. Officials say the decision to hold off on Phase IV recognizes that it makes no sense to expand the building until there is a sensible means of paying for the center's operations.

"It was really a practical consideration. Wouldn't it make sense to wait a few years?" Perry said. "We look at it actually as a pause to refine some strategies."

At the same time, Broadmoor, the contractor that would oversee the expansion, also is having second thoughts.

In order to claim the project, Broadmoor had to post a $300 million bond proving that the local company could complete the Phase IV project. If the project isn't moving forward, Broadmoor would like to officially close out the project so that it can use that $300 million bonding capacity for other jobs.

"It's just a fact of life that their demand is what it is. If they don't need the building right now, there's no reason to build the building right now," said John Stewart, president of Broadmoor. "We're disappointed, like we're disappointed in many, many things in the aftermath of Katrina. This is just another victim of the storm."

Stewart and Reuther are working out the details on a contract suspension that would give Broadmoor the first option on the construction if the Convention Center decides to move forward with the project, and they say they'll have something worked out shortly.

"We're very close," Stewart said. "We both largely agree on what ought to happen. Now we've just got to get it documented."

As for the state's contribution to the project, Reuther said the Convention Center will let the state know it doesn't plan to use what was earmarked for the project: $20 million a year for the next five years.

Another issue is what happens to the $300 million in bonds sold in August 2003 in anticipation of the project's start.

Meredith Hawthorn, an attorney with the law firm of Foley & Judell LLP, which specializes in public finance and works with the Convention Center, said she has not been asked to undo the bond sale, but if she is, she doesn't think it would be difficult. "I'm working on evaluating what our obligations are under the bond documents, and under tax and state law issues," Hawthorn said.

Hawthorn has not looked into what flexibility the state has with the taxes if the bonds can't be called in until 2013.

Redirecting taxes

With the word that the Convention Center does not plan to move forward with Phase IV in the foreseeable future, Reuther, Perry and Fore hope to convene a discussion with tourism stake-holders in the coming weeks about how to redirect the taxes that were levied to pay for the expansion.

They hope to build a consensus within the tourism industry on what do to with the tax money in time for the spring session of the Legislature, which would need to approve any change in the revenue dedication.

A starting point for discussion, the trio said, is to consider temporarily redirecting the tax proceeds to the upkeep of the French Quarter. The 1 percent hotel tax generated about $7.4 million in 2004, but it's producing only about half that now, Perry said.

Perry said the money could be used to set up a sanitation and waste management program that would better coordinate trash pickup and strictly enforce rules on when residents and businesses put out garbage. It also could pay for enforcement of obscenity laws, noise ordinances, public bathrooms, new sidewalks and curbs, better lighting, historic signs, public safety and walking patrols. To accomplish this, tourism leaders would seek matching funds from the Louisiana Recovery Authority as an economic development project and from FEMA, because the Quarter was damaged when repair trucks were working there.

The idea is that improving the French Quarter would stimulate demand for New Orleans as a tourism destination, which would help bring back convention business.

"We're trying to take that money and create demand," Reuther said. "If we're going to be a smaller city, we need to try to be the best that there is. It's time for us to start managing our industry."

Focusing on the Quarter, Perry said, would buy the city time to resell itself as a destination. In concert with efforts to develop the waterfront and revitalize the airport, it will help pump up demand for Phase IV. "Now's the time for us to do that," Perry said.

Debate about what to do

It's too early to tell how difficult a sell this will be, or what competing ideas might emerge.

Jim Funk, executive vice president of the Louisiana Restaurant Association, says there's little debate in the tourism industry that Phase IV doesn't make sense right now. But what to do with the tax is another story.

"If they're not going to use it for the fourth phase, the tax shouldn't be collected. You just don't need to be collecting the tax if there isn't a plan," Funk said.

While many restaurateurs might go for using the proceeds on the French Quarter, restaurants in other parts of the city also might have needs. "There needs to be a lot of discussion on it," Funk said.

Ralph Brennan, who worked on Phase IV for six years under his tenure as chairman of the exhibition hall authority board before he stepped down last fall, said he hadn't heard enough about the plan for dismantling the Convention Center expansion to comment.

But Brennan questioned whether it was the proper role of the tourism industry to assume responsibility for the French Quarter. "My opinion has been for 25 years that it's the responsibility of the city of New Orleans to provide enhanced services in the French Quarter because of the importance of the tourism destination. We generate an incredible about of revenue for the city, and the city over the years has neglected the Quarter," Brennan said.

The Convention Center expansion was not without its critics before Hurricane Katrina, and they applauded the tourism industry's fresh thinking on Phase IV after the storm.

One of the most local critics, Heywood Sanders, a public finance professor at the University of Texas-San Antonio who studies public expenditures in the convention business, said it takes guts not to move forward with a big project. Many cities that have moved forward with convention center expansions and publicly financed convention hotels have found that it's much more expensive to go ahead with a project that's not needed than to incur the costs to cancel it.

"It makes sense to get New Orleans on a much sounder economic footing," Sanders said. "The rebuilding should be viewed as an opportunity to say, 'Let's not do what everyone else is doing; let's do something that supports and develops and enhances the uniqueness of the community.' "

. . . . . . .

Rebecca Mowbray can be reached at rmowbray@timespicayune.com or (504) 826-3417.