Stimulus Dollar Understanding, Essential for Hotel Developments

Since February 2009, one program available to municipalities is Build America Bonds 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 and the associated local spending and tax revenues generated by annual convention visitors that 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 finance and build these hotels essential to drawing group business to their communities and to enlarge and modernize or build new convention and meeting facilities.

BABs provide for a federal rebate equal to 35% 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 to finance their convention center headquarters hotel developments within the past year: Dallas and Franklin County, OH.

In Dallas, in order to make their new 1,000–room Omni Hotel at the Dallas Convention Center more affordable, it was necessary for the City to achieve a financing rate below 5.5%. Of their $479 million bond offering lead-managed by Citigroup, $388 million was BABs issued at a taxable interest rate of just over 7%. However, with the federal 35% interest rebate, the net effective interest cost to the City is approximately 4.5%. The use of BABs saved the City of Dallas 150 basis points (1.5%) 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.

The views expressed in this column are those of the author and not necessarily GlobeSt.com.

Ray Garfield is principal of Garfield Traub, a development services firm focused exclusively on essential public facilities.