City wants to increase hotel tax for Rupp project; UK confirms support

bmusgrave@herald-leader.comMarch 5, 2014 

This rendering shows proposed Rupp Arena renovations. Legislators said releasing the financial plan could open the door to $65 million in state funding.

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The city of Lexington wants the state legislature to give it authority to raise taxes on hotel and motel rooms by 2.5 percentage points to help pay for a proposed $310 million renovation of Rupp Arena and the convention center.

Rep. Jesse Crenshaw, D-Lexington, filed House Bill 544 on Tuesday.

In addition to raising the transient room tax from 6 percent to 8.5 percent, House Bill 544 would set aside money toward retiring debt for the redesigned Rupp Arena and convention center. The remaining money would promote tourism and economic development projects.

Even if the bill is passed this legislative session, the Urban County Council would have to sign off on any tax increase.

Mayor Jim Gray unveiled plans for the new Rupp Arena and convention center in early February but said that a financing plan would not be released for several months. But one key part of the financing plan — a long-term lease with marquee tenant University of Kentucky — is in the works, university officials said Tuesday.

The current tax on hotel and motel rooms in Fayette County is 4 percent, but merged city-county governments are allowed to charge an additional 2 percent. The bill filed Tuesday would increase the additional amount Fayette County can charge on hotels and motels from 2 percent to 4.5 percent, bringing the total to 8.5 percent. On top of that is a statewide 1 percent state tourism tax, which would bring the total to 9.5 percent.

No money from the city's general fund goes to the Lexington Center, which oversees the convention center, convention center shops and Rupp Arena. But 2 percent of the city's 6 percent room tax goes to Lexington Center. That 2 percent goes to pay off a $22.5 million bond that was used to pay for a 2004 renovation of the center. The bond is set to be retired in 2021.

If the convention center is demolished as part of renovation plans for Rupp, that debt must be retired. The outstanding debt is $18 million. That money would have to be rolled into the $310 million price tag for the Rupp redesign, bringing the total cost to $328 million.

Brent Rice, chairman of the Lexington Center board, said the additional 2.5 percent tax would generate $3.5 million a year. Rice did not say how much the city proposes to borrow for the Rupp redesign.

Susan Straub, a spokeswoman for Mayor Jim Gray, said that Gray would include the amount in his April budget address.

Even at 9.5 percent, the hotel room tax would be lower than Cincinnati, Columbus, Indianapolis, Chattanooga, Knoxville, Memphis and Nashville, Rice said.

The additional 2.5 percent tax would work out to an average increase of $2.28 a night for a hotel room.

Members of the Bluegrass Hospitality Association, a group of hotel, restaurant and other tourism professionals in Central Kentucky, said Wednesday that they oppose the increase.

"We oppose any change to the existing hotel room tax without being included in the discussion," said Ron van Haaren, general manager at Embassy Suites and president of the Bluegrass Hospitality Association.

The group is not opposed to all hotel tax increases, Haaren said. In 2004, the last time the room tax was increased, the group was included in the discussions before the tax was levied. "We supported it," van Haaren said.

But Rice said that a new convention center would generate added revenue for the entire city.

"The Rupp and Convention Center expansion will generate $35 million per year in business that is not occurring today," Rice said. "We cannot afford to miss this opportunity, and this hotel tax is one necessary piece of getting us there."

Straub said that the city has talked to several members of the Bluegrass Hospitality Association who support the increase. "And we will be back to talk to them again when we have authority to consider the additional tax," Straub said. "This process has encouraged community involvement from the beginning."

The plans call for moving the current convention center to the west of Rupp Arena and expanding its meeting and exhibition space. Rupp Arena's interior bowl will remain largely the same but will have better amenities, including seat-backed chairs on the upper level. It will also include a new row of premium seating.

Gov. Steve Beshear put $65 million in his two-year budget for the project, but the General Assembly has not yet approved it. It has until mid-April to approve the $65 million and HB544.

Key to the financing plan will be the University of Kentucky, Rupp's most well-known tenant. The current 20-year lease expires at the end of 2017.

Jay Blanton, a spokesman for the University of Kentucky, said Wednesday that UK is behind the Rupp redesign.

UK officials have previously expressed reservations about the project, fearing it could jeopardize funding for other capital projects. But on Wednesday, Blanton confirmed that the university will sign a long-term lease, the first time the university has publicly said it will sign a long-term commitment to stay at Rupp.

"As the primary tenant, the University of Kentucky and its athletic department are supportive of this project," Blanton said. "We continue to work on our financing plan to help support this initiative. The UK plan includes a long-term lease and new project revenues generated solely from premium seating and other revenue opportunities created by the new Rupp Arena."

UK does not use university funds for Rupp. It will not use university money for the $328 million project, he said. A final agreement between UK and the city has not been finalized.

"No university funds support Rupp today, and none will be used to support this new project," Blanton said.

Gray has said that the financing plan will include tax increment financing or TIF, which uses taxes generated from a project to pay off loans, fan contributions and naming rights. Rupp will always be part of the name, Gray has stressed.

Beth Musgrave: (859) 231-3205. Twitter: @HLCityhall.

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