August 21, 2013

Mayor Lloyd Winnecke:

After reviewing the available information, I have remaining questions regarding the downtown hotel project. My questions are listed below. I would like to meet with someone from the Administration to discuss my concerns as soon as possible.

(a) Size of the Project and Full Service Aspect

I need to understand the logic of 253 rooms. I have read that 300 rooms or more are required for larger conventions. It is my understanding that the downtown hotel’s market will primarily be smaller conventions using 200 rooms or less. I also understand that Aztar and Le Merigot have between 35 and 100 committable rooms per night that could be used for a convention.

I also struggle with the hotel being full service. The construction cost difference between a full service hotel compared to a limited service plus hotel, such as what was built in Ft. Wayne and Owensboro, is significant. It requires a larger subsidy, more capital to run, and it will generate a lower return on our investment.

(b) Source of the Base Business

Rob Hunden wrote that the hotel would cater to two markets, with business and leisure travelers making up 70% of the hotel’s occupancy and conventions only 30%. It is estimated that the 70% equates to about $5 million a year that would be shifted from the existing hotels to the new downtown hotel. I would like to understand if this prediction is true. I do not find it likely that the new hotel can win a rate war with the existing hotels, as their ability to lower the room rate will be far greater than the new hotel’s. Additionally, why would we subsidize one hotelier to try and take business from other local hoteliers? Shifting $5 million a year across town will not create jobs. The existing hotels will downsize their staff if they lose business. How many of the projected jobs will be the result of the shift in business?

(c) Hotel Meeting Space

The meeting space in the downtown hotel will presumably compete with the Centre. I would like to understand its need other than that the new hotel, which will be owned by HCW, would like some of the Centre’s business.

(d) The Retail Space

I don’t understand the requirement for the expensive retail space. We need storage for the arena and a base on which to build a Sky Bridge. Why are we paying $5.7 million to meet this need? Is it a necessity for the hotel deal with HCW? Why can’t we just build attractive storage space at less than half the cost?

(e) Long-term Cash Flow

Will a 253 room full service hotel generate enough revenue to maintain its quality? Hunden reported that 240-270 rooms were optimal, but he also said that our market does not generate enough demand to support a hotel that size. He called it a “feasibility gap.” He wrote, “even with up front financial assistance, too large of a hotel in Evansville will eventually need reinvestment, that if not supported by the market, will be too expensive to justify. This would lead to a repeat of the Executive Inn downward cycle.” (p.13). Hunden stated that the size of hotel that could sustain itself in our market was 120 to 150 rooms. It would be able set aside the appropriate amount of gross revenue annually for a capital improvement fund. What is the operating budget for the new hotel and conference center? Does it include funds for capital improvements?

I believe HCW proposed a 180 room hotel as one of their possible developments. I would like to see that proposal. A hotel of this size may address all concerns. It would be of a size that still carried significant risk, but could make it with a good start such as what HCW is capable of doing, and good management going forward. It would also be of a size that would force the hotel to focus on conventions and would be less of a threat to the existing hotel market. Hunden told us that the highest average occupancy rate that a 240 room hotel could achieve is 60%. The extra 60 rooms would rarely be used and, I believe, would not be worth the cost of maintaining them.

(f) CVB’s Ability to Deliver Conventions

What is the 5-year sales plan and forecast from the CVB regarding the new conventions/meetings market? I can find no corroborative studies that suggest that 253 rooms is a requirement for group business. Of the event planners surveyed, only 40% said it was likely that they would consider Evansville. Don’t we already have an idea of what groups would come here?

(g) HCW’s Plan to Market

What is HCW’s marketing plan? What prices are contemplated that will secure the business/leisure traveler business?

(h) Parking Garage Cash Flow

When you say the revenue from the parking garage will pay for running the parking garage, does that include a percentage set aside of gross revenue for capital improvements of that structure? We do not set aside revenue for capital projects with our other parking garages. We have over $3 million in needed capital improvements with our current garages.

(i) Hotel’s Final Assessed Worth

I would specifically like to know what we expect the hotel to be worth when it’s completed and projected out five years. Hunden says far less than what we put into it. Is that accurate? What is your estimate of $500,000 per year in property taxes based on?

(j) The Total Impact on the General Fund

I would like to understand the cost of maintaining (capital improvement fund) the Ford Center and these new ancillary projects- parking garage, retail/storage space, sky bridges, and streetscape. When Venue Works’ Scott Schoenike appeared at City Council, we were advised that the Ford Center should begin setting money aside for capital improvements. I would like to understand how much that should be on an annual basis. Even as a small percentage of gross revenue (4%), it’s a pretty high number. Right now, the Evansville Redevelopment Commission pays approximately $1 million a year to cover the arena’s operating deficiency and the cost of the Building Authority. The payment on the bonds is over $8 million. The real cost of the arena currently is about $10 million a year once we add funds for capital improvements.

The payment on the bonds for the hotel project is going to be $2.6 million. Once we take into consideration the capital improvement funds that will be necessary on an annual basis for the ancillary projects, it’s at least $3 million.

When we talk about the cost for having an arena and downtown hotel, we are really incurring a cost of $13 million dollars a year. $7.2 million of the money pledged is property taxes. The downtown tax increment finance zone (TIF) captures growth in property taxes after 1983. This is money that but for the existence of the TIF would flow into the general fund. The arena has encumbered about $3.8 million of these property taxes. The remaining $3.4 million annually could be set free from the TIF to rejoin the general fund and be used for any purpose. If we build the hotel, we tie it up for the next 25 years.

$13 million dollars a year to maintain the arena and hotel projects may not increase property taxes right now, but it’s unrealistic to think that this kind of set aside long term will have no impact on the general fund’s ability to meet the basic needs of the population. To put it in perspective, $13 million is the equivalent of two zoos in terms of the annual budget of the City. It’s more than the Police and Fire Departments combined. Just the $3.4 million a year in property taxes that we are about to pledge on this hotel project is almost twice what we will spend in 2014 to maintain our parks. I would like to understand the planning that goes with this kind of long-term pledge. Have we looked at the fact that funds from the state, federal government and gaming industry are going down?

(k) Size of the Subsidy

Why is the subsidy so large? It is well beyond what Rob Hunden estimated as necessary to build a 240 room full service hotel. His report estimates $26 million as the public contribution with regard to the hotel and ancillary projects.

Thank you for your time, and I look forward to discussing these issues further.

Sincerely,

Stephanie Brinkerhoff Riley, J.D.
City Council Ward 3