Project calls for more tax concessions

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Scenarios assume Denton ISD, county will commit to center

A second briefing on talks with a hotel developer brought new information on tax concessions for Denton’s proposed convention center, but it also elicited another round of questions from the City Council.

Assistant City Manager Jon Fortune presented a pair of pro forma documents during a council workshop session last week showing how tax revenue could be cobbled together to pay for a $25 million, 100,000-square-foot facility to be built on University of North Texas land.

During the presentation, city staff projected publicly for the first time how much property tax the Denton school district and Denton County might contribute each year, although neither has formally committed to the project.

Council members questioned some of the other financial assumptions in the pro forma scenarios and asked for more information, including a discussion of the worst-case scenario and how it could affect not just the hotel tax fund but the city budget as a whole, as well as a list of conditions that could kill the deal.

About five years ago, city leaders were in talks with a respected hospitality developer for a new hotel and convention center, which eventually died after the economic downturn. Recently, O’Reilly Hospitality Management made an unsolicited proposal to Denton to revive the project, which would bring a full-service, 300-room hotel and restaurant next to UNT’s Apogee Stadium.

O’Reilly and its financial partners would pay for the hotel construction and its lease with UNT for the land. The city would issue about $25 million in certificates of obligation to pay for the convention center. The city would then use the hotel, property and sales tax receipts from the convention center and hotel to pay back the bonds over 20 years.

While the convention center is being built, the city can capitalize the first two years of payments, Fortune said. But after the convention center opens, the city must begin paying back the bonds, which is expected to cost from $2 million to $2.5 million per year.

The projected scenarios showed the city would be short of what it needs to make those payments from the beginning. Although the main selling point of talks with the new developer was that O’Reilly’s financial partners agreed to help fund the gap, O’Reilly has also asked that those payments not begin until the third year of operations, Fortune said.

O’Reilly has asked for tax concessions from other entities to help put the deal together, including the school district, county and the Denton Central Appraisal District. As much as 15 percent or more of the convention center hotel could be tax-exempt because it would be dedicated for use by UNT hospitality students.

The school district’s concessions, if the school board agrees to them, would likely be limited because of restrictions in state law. The new scenarios showed the school district contributing about $16,000 toward the city’s bond payments in the first year, which would grow to about $76,000 in year five, and $100,000 by the time the concessions would end about 15 years later.

The county’s concessions, if commissioners agree, would contribute far less because it collects less to begin with, starting at about $9,600 the first year and growing to about $61,000 at the end.

As a result, the scenarios showed the city pledging not only the tax revenue from the convention center and hotel, but another $100,000 from hotel tax revenue collected elsewhere in the city in order to fund the gap.

The original plan showed that pledge in the beginning, when O’Reilly wasn’t planning to make payments to fund the gap. But the projections also showed that $100,000 of extra hotel tax money would be committed throughout the financing term, which troubled council member Dalton Gregory.

“That wasn’t supposed to go all 20 years,” Gregory said.

He asked that it be taken out and future pro forma scenarios show calculations for replacing things such as carpet, roof and system equipment in the convention center.

Some of both pro forma documents also depended on hotel room revenue that was projected by O’Reilly, Fortune said.

Those projections have been questioned repeatedly by hoteliers and others in the community and have been lowered somewhat from original projections, according to the documents Fortune presented last week.

Currently, O’Reilly projects room rates beginning at $138 and rising to $155 per room by the fourth year of operations.

The Texas Hotel Performance Factbook shows the average daily room rate in Denton is about $60. Denton’s hotels operate at less than 60 percent occupancy.

The city has 2,091 hotel rooms, about 500 more than the city of Frisco, which has a comparable hotel and convention center development. Frisco’s average room rate is about $131.

According to Charles Helms, owner of the Best Western Premier in Denton and other Best Western hotels, the market remains soft in Denton. UNT recently negotiated two-year contracts with two area hotels for room rates of $77, less than the state rate of $85 per night, because the Denton market is so soft, he said.

Council member Kevin Roden told the city staff he wanted to see a fuller discussion of what might happen if either the financial partners or management group got into trouble and left the city holding the bag.

In particular, he asked that the annual $2 million to $2.5 million bond payment be shown in the context of the city’s annual budget.

Council members also asked to see a list of conditions that could kill the deal.

Staff briefings have focused on a project development timeline that sees both the city and O’Reilly investing more in the project before making a final decision. Over the next six months, which the developer and city are calling a “feasibility period,” the city is expected to spend about $200,000 of hotel occupancy tax money to design the convention center to a point of 35 percent completion.

The city would also begin setting up the tax-increment finance district that would allow the school district and county to contribute to the city’s bond repayment for the convention center, should they agree to participate in the deal.

Fortune said he believed O’Reilly would spend a comparable amount on the hotel design during the feasibility period.

He also said the city staff believes that O’Reilly is putting its own money into the hotel deal, not launching the project with 100 percent financing, which gives the city more confidence in the arrangement. However, when questioned by council member Joey Hawkins, Fortune said the details of O’Reilly’s financing would never become public.

The designs would allow the city to bid the project and sign a contingency contract with a construction company for a guaranteed maximum price. Once at that point, then the city and O’Reilly would decide if they should go forward.

Fortune told the council he considered the agreement, which guarantees O’Reilly makes up the difference any year tax revenue falls short, the city’s main protection in the arrangement.

“We think it’s manageable,” Fortune said.

PEGGY HEINKEL-WOLFE can be reached at 940-566-6881 and via Twitter at @phwolfeDRC.


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