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City of Omaha Facing Restructuring of $103 million in Bonds Used to Build
 the 450 room Hilton Omaha;  Hotel Revenues Have Not Met Projections
By C. David Kotok, Omaha World-Herald, Neb.McClatchy-Tribune Business News

Apr. 21, 2007 - The immediate pressure may ease for Omaha taxpayers to pick up the bill for new plush pillows, firm mattresses, silky sheets and new televisions for the city-owned Hilton Omaha.

The Fahey administration could avoid tapping tax dollars to help pay for upkeep at the same time the city makes interest and principal payments on the original hotel construction debt.

The good news for taxpayers would be achieved through a technique familiar to many homeowners over the last decade -- refinancing the mortgage.

The new financing plan, which will go before the Omaha City Council for approval next month, is expected to save the city $8 million by the time the bonds are paid off in 2034.

"This really straightens out the cash-flow issues for the city," Mayor Mike Fahey said.

The city issued nearly $103 million in bonds to build the hotel, which opened in April 2004. But hotel revenues never met projections, so the city wants to restructure the debt.

The costs associated with the hotel began to escalate this year as debt payments were scheduled to rise and maintenance costs kick in.

The new financing plan wouldn't provide enough flexibility to increase the size of the hotel from 450 to 600 rooms as some convention promoters have urged, said City Finance Director Carol Ebdon.

"Adding rooms isn't in the cards at this time," said Ebdon, who is also president of the hotel corporation.

Advocates of adding rooms argue that convention planners would find Omaha a more desirable destination with a larger convention hotel. A skywalk over 10th Street connects the Hilton to the Qwest Center Omaha.

With the new financing plan, the annual payments would be low enough that city officials are confident hotel revenues would be sufficient to make the debt payments.

For example, under the current plan the city would pay up to $6 million this year. With the new plan, the debt payment drops to $3.8 million.

Another bill facing the city is the $8.7 million that must be spent over the next six years to replace hotel furnishings. The Hilton Omaha is the state's only AAA four-diamond hotel -- the association's second-highest ranking.

Even if the hotel generated enough revenue to cover the debt payments, Ebdon said she doubts there would be enough left over to pay renovation costs with the current financing plan. Gross revenues for 2006 were $22.9 million, far short of the pre-construction projection of $28.4 million.

"Now we think we will have the hotel revenues to pay for it," Ebdon said of the new financing plan.

If tax dollars had been needed for new down comforters, sparkling wine glasses, thick cotton towels and fresh coats of paint, Ebdon said, it would have had to come from other city needs, including park improvements and street resurfacing.

The complicated refinancing plan includes several changes to deal with the financial strain on the city:

--The term of the loan is extended three years from 2031 through 2034.

--Debt owed to the Hilton and the hotel's developer is reduced.

The Hilton agreed to forgive $3.7 million in exchange for having its management contract for the hotel extended by three years to 2021. The Hilton is paid an annual fee to manage the hotel.

The developer, Landmark Inc., would be paid $3 million instead of the $5.3 million currently owed. The advantage for Landmark is that it gets money immediately instead of potentially waiting 25 years to be paid.

--The city's bond insurance payments are reduced.

--The start of principal payments are delayed from 2007 to 2009.

The impact of all of the changes reduces annual debt payments by $1.1 million, to $2.3 million a year through 2031. Of course, the payments for the final three years go from zero to more than $9 million a year.

"The hotel is doing better every year," Ebdon said. "Rates are increasing. But it's been a challenge."

Filling rooms hasn't been the problem. Occupancy rates in 2005 and 2006 exceeded expectations. But competition and convention incentives depressed rates well below the anticipated average rate of $147 a night last year.

Omaha is going through what a lot of cities have faced after jumping into the convention hotel business, said Heywood Sanders, a University of Texas at San Antonio professor who monitors the convention industry.

Omaha and other cities are acting no differently than individuals who face mounting debt and not enough income to make the payments, Sanders said. They are going back to the bank, he said.

This is more than a short-term solution, Fahey said, because it addresses debt owed to the developer, Landmark, and the Hilton.

The city was allowed to annually roll over debt owed to both entities. Each time it wasn't paid, interest was added. With each passing year, the debt grew.

The original $2.5 million loan from Hilton already has grown to $3.7 million and the original $3 million from Landmark now totals $5.3 million.

The final payment might have ballooned into a huge number, Fahey said. "We are really fortunate to eliminate that debt," he said.

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Copyright (c) 2007, Omaha World-Herald, Neb.

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