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DeVos Place Bondholders Protected
GRAND RAPIDS — The convention centers in New Orleans and Grand Rapids have one thing in common: The buildings are largely being paid for with revenue from visitors.
But damage from Hurricane Katrina wiped out that revenue source for New Orleans, as officials there reportedly cancelled 200 conventions and closed the convention center. And despite Mardi Gras being held, hordes of tourists haven’t flocked to the French Quarter since last August.
Still, the bondholders for that city’s convention center have to be paid, as would those who hold the notes on the $92 million worth of securities that played an essential role in building DeVos Place should a similar disaster stop groups from meeting here and travelers from visiting here.
An ugly scenario like that would be an economic catastrophe for the county’s lodging excise tax, the 5-percent levy guests pay on their hotel and motel tabs that is used to make the bond payments on the $212 million convention center. And it’s a tax that is on the rise.
Revenue to the account grew by 7.2 percent to nearly $4.5 million from February 2005 to January 2006, the first real jump the levy has taken since 2000. In previous years, the intake was stagnant at $4.1 million.
“Business is very strong at the convention center,” said County Fiscal Services Director Robert White, who serves in a similar post for the Convention and Arena Authority, as one reason why revenue to the lodging-excise tax has risen.
So what steps have public officials taken in the event that a natural disaster strikes DeVos Place, closing the building for a lengthy period of time?
First, they bought property-damage insurance for the building. Then, they added the Triple-A financial backing of Kent County to the bonds.
“In the event that the revenue from the hotel-motel room tax is insufficient to make those service payments, the county said that they would step in, and out of their general tax dollars pay the shortfall,” said White.
Unlike the bonds that helped pay for Van Andel Arena, the convention center securities weren’t insured. When the Downtown Development Authority issued the arena bonds in 1994, the board bought a policy that guaranteed payment, and that move gave the bonds a Triple-A rating. Similar action wasn’t taken for the DeVos Place bonds because the county already held that high-investment rating.
“The bondholder has the reliance of the county’s general tax collection standing behind the bonds, in addition to the lodging-excise tax — which stands in the first position,” said White.
While the county protects bondholders from potential harm, damage to the convention center itself is covered by the city. The city is a partner with the county in the CAA, and it was less expensive for the city to add DeVos Place to its existing policy than for the county or the CAA to buy insurance solely for the convention center.
Under the policy, it would cost $273 million to replace all of the properties operated by the CAA — a figure that is about 20 percent of the $1.25 billion it would cost to rebuild all the buildings covered in the city’s policy.
Of that $273 million, the portion of the convention center that was the Grand Center and still is DeVos Performance Hall would take $51.8 million to replace. Replacing the new part of DeVos Place would cost $163 million. Rebuilding the arena would run $57.5 million, and redoing the skywalk that connects the convention center to the arena would cost $750,000.
“You’re only insuring the buildings, not the land or the other costs,” said White.
Each year MBIA Insurance Corp. and the city meet to review the properties covered and determine the appropriate replacement cost for each. It’s the total replacement value that determines the annual premium the city pays, but that value doesn’t limit the payout.
“This policy states that no matter what it costs, the insurance will pay for replacement,” said White. “You can be sure that the insurance company wants to be sure that the value is reasonably representative of replacement, because they want to get their premium right.”
The last premium was $140,472, which gave the city $500 million worth of property coverage. The policy doesn’t cover the entire replacement cost for all city-owned buildings because the structures are spread out over a large area. So the thinking is, all those buildings won’t be damaged or destroyed at the same time.
“The policy also includes a $250,000 deductible,” said White.
Damage coming from every imaginable incident, including floods and earthquakes, is covered under the policy. It offers $25 million for damage coming from a flood and $100 million from a quake. Business interruption coverage is also part of the policy.
But heavy flood damage is something that DeVos Place might avoid even though it hugs the east bank of the Grand River. According to history and the city’s topography, river flooding from a century ago did the vast majority of its damage to the west side of the city.
“If the river ever comes above the floodwall, it will spill onto the west side of Grand Rapids. And it would flood all the way to the hills on the west side before it would start coming over the east side,” said White.