City Government will have “Skin in the Game” and an ROI on the Convention Hotel: by Joe Wallace

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Joe Wallace, Managing Director, Coachella Valley Innovation Hub
Joe Wallace, Managing Director, Coachella Valley Innovation Hub

City Government will have “Skin in the Game” and an ROI on the Convention Hotel

Joe Wallace

The game of deal or no deal that is playing out in downtown Evansville with respect to the proposed convention hotel has a full gamut of opinions ranging from unconditional support at any price to not a dime of public money without equity. From a private investment perspective the return on investment of such a deal easily defined by traditional business metrics based on probability and outcomes.

When calculating the ROI of public dollars the return portion becomes much more derivative in its beneficial components. Placing a value on something like how many more lunches will be sold at any particular Main Street restaurant and how that accrues to the City is real but the range of possibilities is too wide to hang your hat on. The basic direct ROI on the other hand can be grasped fairly easily if the direct tax revenues are the return and the subsidy is the investment.

In the case of the deal put on the table at Monday night’s city council meeting where it was stated that the direct hotel subsidy would be $7.5 Million, the direct return would be the incremental property taxes paid by the hotel plus the county option income tax of 1% collected on the wages paid by the hotel alone.

The property taxes on the hotel by Indiana law will be capped at 3% of the assessed value. The assessed value according to Indiana law is the fair market value of the property as opposed to what the construction cost may end up being. For analysis purposes let’s assume that the fair market value of a 253 room 3-Star hotel will be $100,000 per room or $25.3 Million. The maximum property tax on the property will therefore be $759,000. The reality is that the actual tax will be less so let’s assume the tax is $650,000.

For the COIT using a $100/day room rate, 60% occupancy, and a payroll that is 35% of the net revenue which is typical of lodging businesses, the payroll can be expected to be about $2 Million. That would work out to a COIT collection of 1% or that amount or $20,000 per year making the incremental direct return on the $7.5 Million subsidy bring in $670,000 per year in a highly probable scenario.

The return to the City on this $7.5 Million works out to 8.9% of the subsidy per year which exceeds the interest rate anticipated that the bonds will pay by a significant amount. The most recent payment estimate on the bonds is just over $500,000 so in this likely scenario the cash generated would not only pay the bonds off but would have some margin to cover indebtedness for associated infrastructure. Similar analysis can be done for the apartments and the parking tower and should be done as this week comes to a close and Monday’s vote approaches.

This same analysis applied to a $20 Million direct subsidy as was pushed for last week results in a payment of $1.4 Million per year against revenue of the same $670,000 making that proposal result in a negative return on investment as well as coming up short on the payments. In short last weeks deal would have been a financially poor decision and this weeks has a good return.

The recent reduction in the City subsidy has no only made this hotel contribute to the City’s bottom line it has eliminated the need to tap the Innkeeper’s tax and maybe even riverboat funds to pay for the subsidy.

Of course the businessmen with the $11.5 Million needs to be verified as does the down payment and financing of HCW before the City should pony up with a $7.5 Million direct subsidy. The tortured process if it really works out seems to have resulted in a deal that is good for the people of Evansville, HCW, and the unknown local investors.

21 COMMENTS

  1. This is an excellent analysis and underscores why this deal is getting very close to something all sides can be proud of.

    With the elimination of the Innkeeper’s Tax, I could personally go on our Facebook page and declare this a deal that will truly be a reasonable compromise.

    • I just saw that, according to the C&P, the County Council just approved the CVB appropriation for $2 million from the Innkeeper’s tax, to go to the Hotel financing. Have I misunderstood something here?

      • My understanding is that the $2.0 M from the CVB and the $1.5 M from the county will be used for improvements to the Centre and for infrastructure. My assertion with the $7.5M of direct hotel subsidy is that Innkeeper’s taxes will not be needed which will free those dollars up for projects that can benefit all of the hoteliers. I will be tackling the parking garage/apartments and the infrastructure with other articles later this week. The bottom line is that for the right price the taxes collected and revenues generated will cover the bonds and operating expenses making Innkeepers taxes unnecessary.

    • Wrong.

      (The following was copied from another post, because this argument is getting redundant.)

      Lon and Wayne are both wrong and are proving once again why we need a conservative overhaul of the Republican Party. Wayne Parke’s threat that citizens’ taxes would rise as a result of eliminating the innkeepers tax shows again why he has no business running the local Republican Party and why he doesn’t understand the basics of conservative economic theory. Rather than making an effort to slow government spending, he has taken to scaring taxpayers on the government’s behalf.

      Every good or service has an optimal price the market will support. The hotelier in a given market will find that price with the innkeepers tax included. This tax is built into the price of a room and reduces the potential profits of the hotelier.

      The benefits of the tax are then not spent equally as government will create spending projects in one are or another that will not help all hotels equally. This is the problem from a conservative perspective, you are removing potential profits from a hotelier to a government fund, which will then claim a cut to pay bureaucrats to come up with spending proposals which may or may not generate tourism, then you tell hoteliers they better have influence with these powerful bureaucrats who decide the locations of these things or they won’t see any spending in their area.

      It is a system ripe for corruption and has no place in a fiscal conservative model of how things should be done. The bureaucracies should be eliminated and the hoteliers should be encouraged to do these things voluntarily through cooperative associations.

      • Brad: Your comments are nothing but total confusion and grossly misleading. You sound like a liberal Democrat that is currently President.

        Hotels collect a sales tax of 7%.
        Hotels collect an Innkeepers tax of 8%.

        Hotels collect the money from the customer for the government. Neither tax is ever the hotels money. Never!

        Innkeepers tax is used to pay off bonds. If innkeepers tax was stop/eliminated, taxes would have to be raised to pay off already sold bonds. Ordinary local citizens taxes would have to go up. Why would anybody in there right mind even consider that. That would stupid.

        • You still don’t get it, so let’s try a mental exercise here…

          Let’s say the cost of a hotel room on a weekday is $89/night. That price is determined by the market to be the price consumers will pay on a weeknight. The total cost to the customer will be $89 + $6.23 (sales tax) + $7.12 (innkeeper’s tax) for a total of $102.35.

          Now let’s say for argument’s sake that the Innkeeper’s Tax was raised to 25% instead of the current 8%.

          The hotelier will not be able to keep his price for the room at $89. He will have to lower his portion of the cost down to around $77 to keep the total around that same $102.35 range.

          In order to do this, he will need to either cut back on staffing, increase mechanization, find efficiency cuts elsewhere, or lower the quality of the service.

          As a self-professed “conservative” you should have read Milton Friedman, Henry Hazlitt, Friedrich Hayek, Murray Rothbard and other great 20th century economists and known all of this. Obviously, there is an educational deficiency here.

          I recommend you begin your education with Hayek’s “The Road to Serfdom” and continue with Friedman’s “Free to Choose” series. We might turn you into a conservative yet.

          • The rate is 8% for innkeepers tax.
            All hotels have the same 8% rate.
            No one is suggesting raising the tax rate.

            Your example is not applicable to the real situation at hand and therefore means absolutely nothing–totally worthless.

          • You’re right Brad. People don’t stop at hotels and check for available rooms, they make reservations via the computer. The wide range of prices is an indication of the competitiveness of the lodging business. When you personally pay for your lodging you look at it differently than when the government or company pays the bill.

  2. Editor,

    Your analysis is not relevant. To get the ‘R’ (Return) of $ 670,000 you outlined (Property Taxes + COIT), the Public must outlay $ 20 Million, not the $ 7.5 Million ‘I’ (Investment).

    Put another way, if the only Investment by the Public is $ 7.5 Million, there is a 0 % return (as the project will not happen). Even though the direct subsidy to the Hotel may be “just” $ 7.5 Million, that won’t cause a project to occur , there has to be a $ 20 Million outlay by the Public, and that is the proper denominator for your ROI calculation.

    • More to come in bite size portions that can be digested. The hotel will also pay property tax and the parking garage will have some revenue. I hope to tie it all up and do a comprehensive by Monday.

  3. Now all Bob Jones has to do is get $11.5M in d̶o̶n̶a̶t̶i̶o̶n̶s̶ investments by Monday morning.

    Supporters there is still time for you to rescue downtown and maybe even the city!!! ONB has set up an account just for your d̶o̶n̶a̶t̶i̶o̶n̶s̶ investments.

    Maybe Bob can get a complete replica of Rock Ridge built by then too! The fool, I mean the sheriff’s going to do it!

    Winneke: My mind is a raging torrent, flooded with rivulets of thought cascading into a waterfall of creative alternatives.

    Get Lily Von Sthtupp on the phone! Hello Lily!
    I want you to seduce Sheriff Friend by Monday Morning.
    Can you do it!

    No one can resist Lily Von Sthupp!!

        • The 1st deal was a good one. This deal is better.
          I am glad HCW stated in the game. There are other Cities who want their money.

          • Do you mean other cities willing to give them a hotel? I have some land I am going to give you. I will build the houses that will be rented on this land partially at your expense. I will collect the rent. You will maintain them. Sound like a good deal?

          • The first deal was NOT a good one. That should be obvious. The public subsidy went from $37.5 million to $20 million. That tells me the negotiators from the city were deficient in seeking the best deal for the public’s money.

            $17.5 million is a lot of money. We would be throwing that at this hotel if six council members had not balked at the initial bad deal. And those that advocated for that initial deal, including the mayor and three council members have egg on their face.

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