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City identifies a potential hotel developer, exploring hotel chains

Article Date: 
4 January, 2013 (All day)

Morgan City’s consultant is progressing on bringing a hotel to Morgan and is now concentrating on financing arrangements and which hotel chain best suits the area.
The city and their consultant Matthew Godfrey are in talks with Scott Somerville, president of Renascent Hospitality headquartered in Westerville, Ohio.  
Somerville has served in various senior level leadership and ownership roles with individual hotels, regional hotel groups and hotel management firms including Marriott, Hilton, Intercontinental and Starwood.
Morgan Mayor Jim Egbert said city leaders are trying to decide which hotel “flag” would best suit the area, and are particularly cognizant of rates that are affordable for families.  Godfrey, city leaders, and potential developers are working together to explore which hotel chain would be willing to do business in Morgan.
Godfrey, of Better City, said he has been in conversations with several people interested in developing a hotel in Morgan City.  Renascent Hospitality, he said, was “better suited to properties and communities of this size.”
He said this particular operator has “flexibility” with flags, meaning there are as many as three options of which hotel chain could be developed in Morgan.
“So, you will have a selection of what particular flag you want here,” Godfrey told city leaders recently.
Egbert said the developer has completed many hotel projects both nationally and internationally in the past.
According to studies, Morgan City is best suited for a 60-room hotel with average daily rates of $80.  The price to develop such a project would break down into $55,000 per room.  Total, the hotel would be a $4 million project.
Godfrey admitted that the studies are “not robust, not something a hotel developer is going to get excited to jump into.”
So, to entice developers to the Morgan area, there must be incentives offered.  Keeping investment money low while the project begins to produce cash flow is a good incentive, he said.
“Most communities of Morgan’s size struggle to get developers to come in and invest in their community,” Godfrey said.  “The federal government would take on some of the risk to help make that happen.”
The USDA could offer a loan guarantee of up to 90 percent of the project could “make it so banks are more willing to lend at low rates because they are only at risk for that 10 percent.”  
A Rural Economic Development Loan and Grant (REDLEG) offered by the USDA provides an equity investment backed by the developer, Godfrey said.
“Combining the two programs together, it would be very low money out of pocket,” Godfrey said, as little as $160,000 to get the hotel started.  No payments are required to the REDLEG loan for the first two years.  In year three, a $600,000 payment would start and remain until the 10th year.
“It gives him a running start, and incentive to do well in the first few years so he can make the hotel profitable,” Godfrey said.
However, the developer may have to secure a letter of credit to flow through Morgan City or its electrical utility, Godfrey said.  The letter of credit is an instrument that tells the bank if the developer defaults, the city is willing to step up and pay the money back.  The developer would have to pay $130,000 for that letter of credit.
“It is a highly leveraged real estate transaction,” Godfrey said.  “The security on that is the letter of credit.  We are trying to find a way to eliminate risk to the city and still make the project happen.”
“It is kind of like a guarantee,” said Morgan City Attorney Gary Crane.  “It makes the developer more comfortable and says to the bank we will stand behind it.”
In worst case scenarios the city would have to pay the loan back, Godfrey said the city could use redevelopment agency tax increments and transit room tax to cover the payment.
“You will get the money back at some juncture,” he said.  “It is a matter of timing with the tax flow.”
“We want to look at avenues to help a developer come in without putting the city out on a limb,” Egbert said.
The benefits of an area hotel to city tax payers are great, Godfrey said.
“This is a beautiful revenue stream,” he said.  “Residents don’t pay into it at all.” 
Egbert said the land for the hotel would be “centrally located in the commercial area of the city,” that is currently producing about $8,000 in property taxes for the city.  A hotel developed on the property would increase the property tax value by as much as 800 percent.
Although Godfrey still wants to help coordinate development at Como Springs, he said separating the hotel from the Como Springs project is in the city’s best interest.
“I want to come back at a later date on Como,” Godfrey said.  “There are challenges in the timing of it.”