July 15 drop-dead date: Letter of Intent indicates Omni Hotel deal has a long way to go to reality

Contact Info: Blake Marvin | bmarvin@hksinc.com

The shape of things to come? The new Omni in Nashville.

Hard to believe the proposed Omni Hotel and retail complex was the biggest news only two weeks ago.

Since announced, all reporting has ceased. Except, oddly, at the Wall Street Journal, where the Omni/Cordish project is featured on today’s “Deal of the Week” blog, which you can read here.

So, we thought this was a good time to look more closely at the $261 million proposal that could put a 600-room hotel on the abandoned Water Company Block of Third Street.

After the announcement, Monday Business Briefing promised greater granularity on the deal. Now, we have the Letter of Intent, the preliminary document that is the basic framework of the deal. And when we say basic, we mean basic.

The Letter of Agreement makes clear the Omni complex is a long way from a done deal. The deal won’t be official until there is an “amended development agreement.”

In fact, deep into the document, it states four things must happen before the deal can go forward:

• The Louisville Metro Council must approve a $118 million city bond issue, as well as declaring the former Louisville Water Co. buildings – owned by the city – surplus property.

• The Kentucky Economic Development Cabinet must approve tax incentives.

• The bond market must remain stable.

• LeCentre LLC must agree to participate in the tax increment financing district created for the project. LeCentre appears to be the operating entity for hotelier Mary Moseley’s $80 million reconfiguration of the Stewart’s Dry Goods building at Fourth Street and Muhammad Ali Boulevard into an Embassy Suites Hotel. Executive’s at Moseley’s Al J. Schneider Co. did not return calls and emails for comment.

Chris Poynter, spokesman for Mayor Greg Fischer, told IL he’s trying to confirm LeCentre is the Embassy Suites project. We will update this post with more information when available.

This may be the most crucial detail from the Letter of Intent: If the city can’t get its ducks in a row by July 15, the deal is dead.

In this initial stage, Dallas-based Omni Hotels & Resorts and developer The Cordish Cos., based in Baltimore, are only obligated to spend $500,000 or less on initial design and development, and the city will reimburse them up to $250,000 in out-of-pocket cost if we can’t hold up our end of the deal.

To his credit, it looks like Fischer drove a fairly hard bargain, getting a guarantee of 10 percent of Omni’s (or whoever owns the hotel in the future) adjusted net operating income in excess of $14 million.

“In each fiscal year thereafter, the ANOI (adjusted net operating income) shall be increased by 3 percent,” states the Letter of Intent.

The city also gets a commitment Omni will maintain a minimum employee payroll of $10.3 million beginning the fourth full year the hotel is in operation. If the hotel chain doesn’t, “Omni shall make a payment to the Louisville Metro to cover the shortfall of occupational and state incomes taxes related to such a payroll amount,” according to the document.

While the TIF district is in place, which is likely to be 30 years, Omni must maintain that minimum $10.3 million payroll.

City officials get final approval of the way the complex looks inside and out, and it must be built to LEED Silver certified status under U.S. Green Building Council standards.

Let’s go first with the most important details … the money:

• The estimated cost of building the hotel is $180 million. Omni would put up $105 million and the city $75 million “which will be utilized solely for construction of the hotel.”

• The estimated cost of building the residential/retail piece, which Cordish will own, is $45.5 million, with Cordish putting up $30 million and the city $15.5 million.

• The first money spent will be a “Hotel Grant,” which appears to be the initial pot of construction money. The city will “capitalize the interest” – that is, carry the initial, pre-revenue interest into the final debt – until the projects begin to cash flow, Steve Rowland said at the March 6 announcement.

The city will give Omni free of charge the land under the “Water Company Block,” which runs from Liberty Street on the north to Muhammad Ali Boulevard on the south.

The hotel/retail/apartment complex:

Omni has three years to complete its hotel, which under the agreement will have a minimum of 600 rooms. The agreement states the Omni must be built to American Auto Association’s Four-Diamond standards or higher, referencing Omni’s new hotels in Nashville and Fort Worth.

In Louisville, 21c Museum Hotel, Louisville Marriott Downtown, The Brown Hotel  and The Seelbach Hilton Louisville all are Four Diamond rated hotels, recognized by AAA as having an extensive array of amenities combined with a high degree of hospitality, service, and attention to detail.

• The hotel must have a minimum of 70,000 square feet of meeting space.

• The complex must have 44,000 square feet of retail to include a “high-quality, full service, urban grocery store …”

• The deal includes 200 market-rate apartments “appropriate for an urban location …”

• The hotel must have two full-service restaurants, a lobby lounge and a rooftop poolside cafe.

Metro government has the right to link the hotel to the Kentucky International Convention Center at city expense.

The parking garage, which will be paid for by PARC, the city’s parking entity, will have 850 spaces. In the parking garage, residents shall be guaranteed 300 of the 850 spots, with the grocery getting 25 dedicated spots shoppers can use free of charge.

At the end of the 10-page Letter of Intent, it states all this and more must happen quickly, including figuring out what infrastructure upgrades must be made to the block. The bond closure date is Sept. 1, with construction of what could be a 20-story-plus main building possibly beginning next year.

IL will have regular updates as this crucial downtown development project moves forward.