The Omni Convention Center Hotel - The Good, the Bad and the Ugly

On Thursday the Convention Center Authority approved the Development and Funding Agreement with OMNI Hotels for the construction of a 800 room convention center "headquarters" hotel. The deal actually involves 5 agreements and I presume all were approved at the same time. The most important of those agreements are the Development and Funding Agreement and the Room Block Agreement. The hotel will consist of a minimum of 800 rooms, about 60,000 square feet of meeting space including a ballroom and junior ballroom, business center, spa and pool. Here is a not so quick run-down on the financial and operational aspects of the deal:

The Good: Our brand spanking new convention center will have a "headquarters" hotel. No one believed the malarkey from our somewhat controversial feasibility consultant, Tom Hazinski of HVS in Chicago and endorsed by the Dean administration, that the convention center would prosper without a hotel. Most of us have favored the conventional wisdom (pardon the pun) which said that since even unsuccessful convention centers in America have hotels attached to them it might be difficult to compete if ours did not not. Proving the point to some degree is the fact that bookings have been ominously below even Mr. Hazinski's "no-hotel" scenario projections.

The hotel will be privately financed (albeit with healthy public subsidies), owned and operated. OMNI will bear the operating and construction risk. Before we pat ourselves on the back remember that it is unlikely we could have publicly financed any hotel since virtually all tourist related taxes and revenues have previously been pledged to the convention center itself. The only other option was a general government or "moral obligation" pledge. After all the controversy that surrounded the approval of the convention center itself, putting Nashville in the hotel business was an idea about as politically viable as asking the Mayor of Grand Isle, LA if Tony Hayworth can lead the Mardi Gras parade this year.

The Bad: In exchange for building a hotel for our convention center, OMNI gets an annual payment from Nashville. These payments will total $245.5 million over 20 years. Using an interest rate of 8.75%, these payments represent $103 million in today's money. Nashville will also provide a 62.5% decrease in property tax payment which would work out to about $3 million a year and total $60 million over 20 years.

Nashville will also commit to a room block agreement with OMNI. That agreement says that OMNI will make 80% of its hotel rooms available for "City-wide Events" that are booked at least 36 months ahead of time. A "City-wide Event" is one that uses the OMNI plus one other hotel and requires a minimum of 1,000 hotel rooms. For events scheduled 24 to 35 months ahead of time, the OMNI will make 50% of its rooms available for "City-Wide Events."

The hotel room rate will be established at the sole discretion of OMNI. This provision may be in conflict with the events tentatively booked for the new convention center. A number of the of those events were sold with the stipulation that the headquarters hotel would be no more than 10% above the next four star property. If the Renaissance is booking rooms at about $189 per night then the OMNI can charge no more than $207. Also, many of these pre-booked events do not have food and beverage minimums. The OMNI contract allows the hotel to charge food and beverage minimums commensurate with the event. These sorts of conflicts for events booked before OMNI was on the scene will need to be worked out.

The Ugly: We have been told since this project was first discussed that a convention center needs a 1,000 room hotel so that 800 hotel rooms can be available for booking conventions. The OMNI will only have 640 rooms available for conventions that book 3 years in advance, 400 for those that book 2 years in advance. With meeting attendance getting smaller, I am not sure I agree with this claim but I mention it only to say that we need to be certain that this hotel is adequate to make our convention center successful.

For what it is worth, our not very credible hotel feasibility consultant, HVS, seems to be saying that the hotel won't matter much to our tourism industry. I reviewed Mr. Hazinski's original report, made a few adjustments for his math errors, and compared it to his most recent study dated September 1, 2010. Mr. Hazinski concludes that the difference in hotel and sales tax collections with a hotel and without a hotel is almost precisely what we will pay OMNI in annual subsidies. In other words, the much ballyhooed "surplus" in tax revenues created by the construction of the hotel will be OMNI's surplus, not Metro's. One year, 2013 looks like it will go into the red about $3 million.

Also, much of the additional tax revenue derived from the hotel will not be hotel occupancy taxes but rather sales taxes. Of the $9.9 million extra we are supposed to collect in 2015 as a result of building this hotel only about $750,000 will be a result of more heads in hotel beds. The rest, according to Mr. Hazinski, will come from sales taxes at the OMNI hotel and the convention center or in the downtown Tourist Development Zone. In fact, Mr. Hazinski thinks that the convention center and the hotel will generate about $80 million in taxable sales in 2015. The convention center, also according to Mr. Hazinski, should generate about $25 million in that year. That leaves the hotel to do about $55 million in business. Since he isn't predicting a whole lot more overnight guests, we have to conclude that the OMNI will instead do a booming business in weddings, proms, bar mitzvah and pay parties for people who already live here. And that, of course, is bad news for every other hotel in town that does not have the luxury of fat government subsidies...unless of course Mr, Hazinski is wrong.