The Real Reason Nobody Wanted To Build A Hotel On The New $800 Million New Orleans Airport North Terminal

The city’s criteria for building a hotel on the New Orleans airport north terminal property will shock you. The hotel is part of the $800 million new terminal on the massive stretch of land on the north end near Veterans Boulevard. That will be good news for the tourism industry which is a powerful economic driver to the area, witnessed by last year’s 10.6 million passengers,  up 9.1% from the previous year. The new development will demolish concourses A, B and C and use concourse D as charter and administration, even though charter accounts for 3,189 passengers, down 40% from last year and only 0.1% of the total.

new airport north terminal

New $800 Million Airport North Terminal

The city hoped to lease part of the land to a developer who would build a 140 room, 8 story hotel on 22,000 square feet of land leased by the city to the hotel developer, but no developers were interested. The reason for the lack of demand can be found in the restrictive criteria in the 140 page Request For Proposals, which we found to have 5 areas where criteria were so restrictive that it made any hotel unfeasible.

Criteria For Awarding The Hotel Contract

criteria pieThe city is using consultant Leo Daly LLC as its advisor since they are experts in airport development, and the city is awarding the hotel land lease based on the weighting of these 5 criteria:

  1. Payment to the city, 30%.
  2. Design, 30%.
  3. Team members, 20%
  4. Airport Concession Disadvantaged Business Enterprise, 10%
  5. State of Louisiana Disadvantaged Business Enterprise, 10%.

City Criteria For 30% Of Hotel Employees Can Be A Prior Arrest

During the construction phase, 30% of the work performed by Louisiana workers must be Targeted Workers, which are defined as residents of Orleans, Jefferson and St. Charles Parishes, and 10% of the project hours must be performed by Disadvantaged Targeted Workers, which are:

  1. In Orleans Parish, having a household income of less than 50% of Adjusted Median Income.
  2. Homeless.
  3. Custodial single parent.
  4. Eligible to receive public assistance.
  5. Having a prior arrest or conviction.
  6. Suffering from Chronic Unemployment.
  7. Emancipated from the foster care system.
  8. A veteran of the U.S. military.

During the operations phase of the hotel, the city requires 50% to be Targeted Workers and 30% to be Disadvantaged Targeted Workers. In addition, all new hires for the hotel must use the city’s agency, Office of Workforce Development.

Hotel Developer Must Pay City $550,000 Annually

The 22,000 square feet will be leased by the city to the hotel developer for $103,000 annually, which is actually a fair price, plus a minimum of $450,000. This payment to the city could amount to as much as 36% of the net operating income for the hotel, making the entire hotel project unfeasible. Here is how the net income is calculated:

  1. Number of rooms: 140
  2. Times Daily Market Room Rate: $125
  3. Times 365 Days/Year:365
  4. Total Potential Revenue: $6,387,500
  5. Times Average Occupancy:60%
  6. Expected Revenue Per Year: $3,832,500
  7. Less Operating Expenses Averaging 60%: -$2,299,500
  8. Net Operating Income: $1,533,000

The Net Operating Income does not include the payments of $553,000 to the city, which amounts to 36%, so the net income to the investor/developer is actually $980,000, less income taxes of 35% results in an after tax income of $637,000. Since the development is expected to cost $17,000,000, the annual rate of return would be 3.74%.

The numbers just don’t add up to a viable project, which is why the city did not receive any interest in building a hotel on the airport property. There are several strategies the city can use to make the project work: one, lease more land for a larger hotel so that hotel revenues can be higher which reduces the impact of the city’s fee on the bottom line, or two, reduce the fee, or three, finance the developer by using low interest rate tax free bonds which the city can issue.

 

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