Many cities are currently in the process of selecting a hotel development team to deliver their essential meeting facilities and hotels and are analyzing the appropriate methodology for development financing. Therefore, it is essential to understand all available federal, state and local financial programs and economic incentives available to provide the turn-key delivery program that is expected by public-sector clients.
First and foremost, municipalities should be aware of Build America Bonds (BABs), which have been available since February 2009. This program was created by the American Recovery and Reinvestment Act of 2009, commonly known as the Stimulus Act.
The Stimulus Act provides an alternative method for municipalities to finance capital costs for essential new facilities. Besides BABs, the Stimulus Act creates Recovery Zone Economic Development Bonds, Recovery Zone Facility Bonds and other initiatives, but only BABs are not subject to volume caps and allocations.
One of the best local stimulus approaches is to attract more tourism. The associated local spending and tax revenues generated by annual convention visitors can number from tens of thousands to millions depending on a city’s size. In recent years, cities with convention facilities not supported by modern, connected headquarters hotels have sought to renovate and enlarge or build new convention and meeting facilities, essential to drawing group business to their communities, and many have and are developing the essential, adjacent hotels to ensure success in recruiting groups and events.
BABs currently provide for a federal rebate equal to 35 percent of taxable bond interest payments to a municipal issuer, providing significantly less expensive borrowing than traditional tax-exempt municipal debt, resulting in a more financeable project. Two municipalities have issued BABs for hotel development financing of their convention center headquarters hotel developments within the past year – Dallas, TX and Franklin County (Columbus), OH.
In order to make Dallas’s new 1,000–room Omni Hotel at the Dallas Convention Center more affordable, it was a goal of the City to achieve a financing rate below 5.5 percent. Of their $479 million bond offering lead-managed by Citigroup, $388 million was BABs issued at a taxable interest rate of just over 7 percent. However, with the federal 35 percent interest rebate, the net effective interest cost to the City is approximately 4.5 percent. The use of BABs saved the City of Dallas 150 basis points (1.5 percent) on its then current tax-exempt borrowing rate for comparable maturities, enabling the new headquarters hotel to provide much less taxpayer risk in future operations and debt service costs.
BABs can be utilized not only for public hotels, but for any public facility capital costs which could ordinarily be financed by tax-exempt municipal bonds. The Stimulus Act now provides a vital and meaningful tool allowing municipal governments to access a larger and more efficient bond market to make their own local economic stimulus projects a reality.
Ray Garfield is Principal of Garfield Traub, the nation’s leading development services firm focused exclusively on essential public facilities. Garfield Traub acts as the lead coordinator for all public and public/private project development needs, including financing, design, construction and asset management. For more than 35 years, Garfield Traub and its principals have financed more than $11 billion in debt and equity and developed more than 30 million square feet of all property types, nationally and abroad.
***IMPORTANT UPDATE: Although the American Recovery and Reinvestment Act expired at the end of 2010, Garfield Traub is second to none in providing turnkey financial and development solutions for public/private partnerships (PPP or P3) and public developments using a variety of advantageous funding and financing programs. For more information on how Garfield Traub can create a hotel development team that will help you quickly deliver your essential development within schedule and budget, call us at 972-991-5200 or e-mail us.