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PHX Might Unload Sheraton – At a Steep Loss

Credit: Sheraton Phoenix Downtown

By Roland Murphy for Arizona Builder’s Exchange

One thing every well-run city does is to make themselves hospitable places for their residents and visitors. Infrastructure, transit and entertainment options, reasonable but controlled zoning and development processes and a host of other municipal functions all go into making a city someplace people want to live or visit.

While certainly a well-run and hospitable city in terms of the services it provides, Phoenix city government has spent nearly a decade demonstrating an inability to succeed in the business of providing hospitality with the spectacular money pit known as the city-owned Sheraton Grand Phoenix downtown hotel.

The 1,000-room hotel, Arizona’s largest, was built by the city after it identified a need for a third hotel to accommodate the $600M expansion of the Phoenix Convention Center. Phoenix wasn’t able to line up a private developer to undertake the $355M hotel project and decided to go it alone.

The city still owes $306M on the project, and between 2008 and today the hotel has dropped $47M between $10M startup costs and $37M in operating losses.

Prudently, if late, city officials decided in late 2014-early 2015 perhaps the hotel ownership game wasn’t part of its core competency and started shopping for a buyer, in part to use tourism tax monies to address budget issues and/or fund new development projects.

The New Deal

In a July 12 article, The Arizona Republic announced it had been informed the previous evening about the basic terms of a Letter Of Intent between the city and TLG Phoenix LLC, an investment group connected to hospitality company Thayer Lodging Group. Thayer Lodging Group was acquired by Toronto-based Brookfield Asset Managed in 2014.

While finally emerging from the dark cloud of this particular project is a welcome thought to all involved, the deal itself leaves much to be desired if one listens to the immediate outcry the proposal generated.

TLG Phoenix has proposed a purchase price of just $255M.

To add fuel to the fire or salt to the wound – choose your own metaphor – the Republic article notes comments from Jeremy Legg, a special projects manager for the convention center and the person who gave the notification about the LOI to the paper, explaining TLG Phoenix will spend as much as $30-$40M to renovate the hotel, but that the city will incentivize the purchase with a property tax break of not yet disclosed value, and the relinquishment of a $13M reserve fund intended for improvements to the facility.

It’s not the first time Phoenix and this prospective buyer have discussed a sale. In February, 2016, Phoenix City Council voted 8-0 to accept a $300M offer for the property. After apparently sitting dormant for more than a year, that deal was officially declared dead a few months ago after TLG Phoenix backed out.

Opposition Comes Fast, Furious

When it comes to potentially losing in the neighborhood of $100M in taxpayer money – even if it does, ultimately, help staunch the current bleeding – significant opposition is not just expected, it’s practically mandatory.

In her July 12 column headlined, “Phoenix will lose HOW MUCH on its money sucking hotel?” The Republic’s Laurie Roberts castigated Mayor Greg Stanton and city officials, writing, “The city may be pleased, and I imagine Phoenix Mayor Greg Stanton is relieved, given his 2018 political aspirations. But I can’t imagine that taxpayers are excited about this boondoggle.

“About the fact that the city has sunk $47M into this money sucker since it opened in 2008.

“Or about the fact that the city still owes $306M on a building it now is hoping to sell for $255M.

Or about the fact that city leaders will have to throw in tens of millions more in order to unload the state’s largest hotel.”

Her statements were taken further by District 6 City Councilmember Sal DiCiccio, a long-standing opponent of the hotel project in all its forms. In a post on his Facebook page, DiCiccio quoted the statement issued to the Republic, “The City of Phoenix continues to actively work to sell the Sheraton Grand Phoenix downtown hotel. Most recently, the city signed a Letter of Intent on July 10, 2017 to accept an offer from TLG Phoenix to purchase the Sheraton Grand Phoenix for $255M. There are numerous, complex steps that are part of this transaction and the Phoenix City Council still must approve the agreement.”

He countered, however, by saying, “This statement is NOT true. It does not include the give away of the reserve account nor does it include the GPLET (PROPERTY TAX GIVE AWAY) value the city is throwing in the deal. The REAL number is less than (sic) $190M.”

DiCiccio then broke down how, in his view, taxpayers are being “snookered” in the deal by providing an outline of the numbers:

Original taxpayer paid funding: $355M

  • TLG Offer (excluding give aways): $255M

TLG value of their wants:

  • Reserve Account: -$13M
  • GPLET (Property tax give away) value. -$50M
  • True value of sales price: $192M

Operating Losses:

  • Start up cost: -$10M 
  • Operating Losses: -$37M
  • Total Operational Losses: -$47M

What to Do?

Whether or not the city should have gotten into the hotel game in the first place is a point long past arguing about. Whether or not the Sheraton could have made a go of things had it not opened near the start of the country’s most severe economic downturn in most living people’s memory is something economists and historians can – and likely will – argue for a long time to come.

What supporters are asking, in short, is, “Isn’t ending the losses and trying to move forward the best and most important thing now, no matter how it has to be done?”

What opponents are asking, in short, is, “Isn’t there some better way, any better way, out of this mess than eating a nearly $100M loss in taxpayer money when we’re finally doing so well in so many ways?”

For the moment, the answer to both questions may well be, “Not really.”

A vote by the city council is expected before the end of the year.

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