Apr. 30, 2003 - PROVIDENCE, R.I.-- For two years, the Rhode Island Convention Center Authority has been campaigning for money to build a companion hotel to the state-owned Westin Providence. 

Another hotel is needed to directly cater to conventioneers and to attract more of them in order to build business at the taxpayer-subsidized Convention Center downtown, according to the authority. 

In a dramatic change of direction, however, the authority has now dropped the much-discussed idea of lending money to build a second hotel. 

Instead, the authority wants to be the majority owner of another hotel, becoming full partners with developer Vincent J. Mesolella Jr., a former Democratic state representative from North Providence who was in the House leadership. 

State representatives were informed of the new plan at a public hearing yesterday at the State House. 

"It shows a commitment and a belief in the project," authority Chairman Dominic L. Ragosta recently said of the authority taking majority ownership of the $65-million hotel. "We think the taxpayers down the line will be very happy with this decision." 

"This is a very lucrative project," Ragosta said, which promises to not only pay for itself but to help the Convention Center generate more revenue and to directly reduce the state's annual subsidy. The current subsidy is about $16.4 million. 

After the public hearing, the House Finance Committee took no action on the authority's request for permission to issue $27 million in 35-year revenue bonds in order to do the deal with Mesolella. Rep. Paul Sherlock, D-Warwick, the committee chairman, said the committee would send the proponents written questions. 

Mesolella would raze the John E. Fogarty Memorial Building, an office building on Fountain Street that is being used temporarily for public school classrooms, and put up a 392-room hotel that would be connected to the Convention Center by a pedestrian bridge. Gilbane Building Co. would be the general contractor. 

The hotel would probably be a Sheraton, which is a brand name owned by Starwood Worldwide Resorts and Hotels, the same company that owns the Westin brand and manages the Westin Providence, Mesolella said yesterday. Starwood could jointly manage both properties, saving money for itself and the owners in the process, according to Mesolella and authority members. 

The project's stated rationale is this: the Convention Center needs more hotel rooms nearby in order to bid for larger and more profitable conventions and trade shows. 

The authority, according to the rationale, must invest in order to get hotel construction going because private financing for hotels is scarce and expensive -- especially for hotels tied to convention centers -- and because developers tend to want to build different kinds of hotels than convention centers need. 

Including the 364-room Westin Providence, there are about 1,600 hotel rooms available downtown. The authority would like to see an additional 800 to 1,000 rooms built to reach its target market. 

The authority wants to be an owner, not just a lender, because it would be making a much greater investment than first envisioned and because it wants to benefit from the profits, according to Ragosta. 

In the new deal, however, the authority and taxpayers would be shouldering more financial risk. As an owner rather than a lender, the authority takes on more risk per se, Ragosta acknowledged. 

An explicit taxpayer guarantee of the deal would be sought, he acknowledged, in order to win lower interest rates on the private and public borrowings for the project. If the project fails, the state would have to repay the authority bonds with taxpayer money rather than the project proceeds. 

In the original deal, Mesolella would have been responsible for paying for private "credit enhancement" -- possibly bond insurance -- to reduce the interest rates. When the original deal was still in the offing, authority members insisted there would be no taxpayer risk. 

The proposed authority investment in the project was increased, Ragosta has said, for at least two reasons: because the authority insisted that Mesolella develop a more expensive 392-room hotel with finer amenities compared with the 300-room hotel Mesolella first proposed, and because it makes it easier and less expensive for Mesolella to line up a private lender to help finance construction. 

"Yes, it's a better deal for him [Mesolella], but obviously it's a prudent deal for us as well," Ragosta said of the changes made in a drastically revised agreement between the authority and the developer. 

The authority is emboldened by the success of the Westin Providence, which could not cover its debt service for several years after it opened in 1994 but now spins off millions of dollars in profit annually. Members contend that they can replicate that success. 

And it is driven by what members say is a growing threat from competing convention centers, such as facilities being developed with attached hotels in Boston and Hartford. There would be a cost to doing the project, but there will be a cost to inaction, too, James P. McCarvill, authority executive director, warned legislators. 

The General Assembly last year, over Governor Lincoln Almond's veto, granted the authority an additional $30 million in borrowing power to assist the construction of one or two hotels. Almond said, in part, that the state should know the details of the project it was financing before it plunged ahead. 

But the approval was only step one in a two-step process in which semiautonomous state agencies such as the authority undergo extra scrutiny before they get to take on additional debt that would overhang state government. 

Both houses of the Assembly and the executive branch must check off on the project this year before it may proceed. 

Governor Carcieri, who did not include the hotel bonds in the capital budget he submitted to the legislature, could not be reached for comment in recent days. 

According to the new development agreement, the authority and Mesolella would make a 60/40 split: the authority would own 60 percent of the hotel and take 60 percent of the annual profits, and Mesolella, 40 percent. 

The authority would be responsible for providing $27 million of the $65 million project cost. Of the $27 million, $17 million would be considered a loan and $10 million ownership interest, or equity. 

Mesolella would be responsible for providing $38 million: a $35-million loan from a bank or other lender and $3 million in equity. A lender would require him to furnish his equity in cash rather than a mere pledge of assets, Mesolella said. 

For hotel use, the authority would dedicate 240 parking spaces in its two Convention Center garages, which McCarvill said have a total of 2,450 spaces. 

The deal that is on the table now differs significantly from a deal that the authority and Mesolella negotiated without competitive bidding in 2001. Almond balked at that arrangement, but it was the starting point in last year's public debate of the controversial project that led to its preliminary approval by the Assembly. 

Among the differences between the new deal and the original: The price tag is $65 million, compared with the original $57 million. 

The state's proposed investment has grown from a $10.2-million loan to a $38-million combination of loan and ownership stake. 

The state's loan in the new deal would be subordinate to that of the private lender, meaning that if the project failed, the private lender would be protected first. 

In the original setup, Mesolella was expected to pay off the authority loan as soon as possible by privately refinancing the project. When he refinanced, Mesolella would have had to pay the authority up to $1 million. 

Those two provisions have been dropped. 

Mesolella would be paid a developer's fee of up to 3.5 percent of the project cost, or a maximum $2,275,000. The fee provision is explicit in the new agreement, but it was not mentioned in the original agreement. 

Mesolella said it was embedded in the project budget in the original agreement and that he is entitled to compensation for his expenses. 

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(c) 2003, Providence Journal, R.I. Distributed by Knight Ridder/Tribune Business News. HOT,