Saturday, September 27, 2008

LETTER: Hotel room tax likely to be increased

"The currently anticipated 'hotel tax' revenue which is dedicated to the Lancaster County Convention Center Authority would barely be enough to cover the current cost of the construction bonds, plus the ANTICIPATED operational losses of the convention center. Everyone who has taken a close look at the projected figures agrees that the
current 'hotel tax' will most likely not be enough to cover the ACTUAL operational losses.

"The current 'hotel tax' is 3.9%, plus 1.1% dedicated to the Pennsylvania Dutch Convention and Visitors Bureau, for a total of 5%. The LCCCA gets to keep 80% of the 3.9%, the rest also goes to the PDCVB. Total 'hotel tax' collections in 2007 were about $6.1 million, of which the LCCCA is supposed to have retained about $3.76 million (all of which went directly to Wachovia for processing), and the PDCVB got $2.34 million (note that a significant portion of the PDCVB's budget goes toward promoting the convention center).

"Increasing the 'hotel tax' to the maximum allowable 5% for the convention center (plus another 2% for the PDCVB) would provide the convention center (via Wachovia) with the full $6.1 million, or $2.34 million more than current (these figures are expected to climb every year, depending on the economy of course). This should be enough to cover any actual future operational losses, with some cushion.

But given a combination of negative events (increasing interest rates, the potential need for additional borrowing to complete project construction), additional funding could very well be required well into the future.

"The LCCCA is a joint authority of Lancaster City and Lancaster County, with no taxing powers of its own. But since Lancaster City is also responsible for guaranteeing the hotel, it is most likely that Lancaster County will be held fully responsible for the convention center.

"The Redevelopment Authority of the City of Lancaster (RACL) is building the hotel, and will own it for at least 20 years; this is so the Penn Square Partners can get out of paying their real estate obligations, primarily to the School District of Lancaster. Over half of the expected $75 million cost of building the hotel is from State grants, assuming all of the money actually comes through. Part of this is the $14,513,726 construction mortgage held by Fulton Bank, which is to be repaid by $1million a year in State 'Act 23' grants over 20 years.

These grants are supposed to be dependent upon future State sales and income tax revenues from the project;
if this falls below the anticipated $1 million a year, Lancaster City will be forced to pay the difference. Lancaster City taxpayers will also be forced to pay the School District of Lancaster its full amount of real estate taxes on the hotel IF the building is ruled to be taxable once it opens.

"There is also the $24 million which the Penn Square Partners are committed to pay toward the construction of the hotel. Currently, PSP has taken out a $5 million construction loan, for which they are held liable; if the PSP defaults, the lender (I think it's Wachovia, but I'm not sure) will be able to take possession of the hotel.

The big question is if the PSP will be able to convert this contruction loan into a mortgage. If the PSP is successful, there is supposedly no risk to Lancaster City; the agreement between RACL and PSP specificies that the lender will indemnify taxpayers. However, if the PSP is unable to take out a long-term mortgage for the
balance of the $24 million, RACL will continue to hold title to the building (as it does now), and could be held responsible. Since RACL has no taxing authority of its own, Lancaster City taxpayers will be on the hook.

"There is one more VERY big 'if':

"No one has mentioned what would happen if the hotel consistently loses