City takes $32M offer for its hotel, conference venue
The city of Chattanooga will get out of the hotel business — debt free — city officials say.
The Chattanooga Downtown Redevelopment Corp. voted Monday to accept a cash offer of $32 million from Schulte Hospitality Group of Lexington, Ky., for The Chattanoogan, the city-owned luxury hotel and conference center located at 12th and Broad streets.
“The price that has been proposed will be sufficient to retire all the debt that is related to the construction of the hotel,” said City Finance Officer Daisy Madison, CDRC chairwoman.
The Chattanoogan has been a drain on city coffers since it opened in 2002.
Benchmark Resorts and Hotels, which manages the hotel for the city, has made lease payments of about $1.1 million, or about one-third of the roughly $3.4 million of The Chattanoogan’s share of the debt for the bonds that built the hotel.
“The city did subsidize the [hotel] to the tune of approximately $2 million a year,” Madison said.
The sale of The Chattanoogan will put the hotel on the tax rolls. That should generate about $650,000 annually in tax revenue, said Tom Morsch, managing director, PFM Financial Advisors LLC. He’s the Chicagobased consultant who handled the sale for the city.
Once The Chattanoogan is sold, the city will save the roughly $2 million annual subsidy, Madison said. And the city also will get tax revenue from the hotel, plus revenue for leasing the hotel about 120 parking spaces at the city-owned garage nearby.
Combined, that should earn the city about $30 million over the next 13 years, she said.
Offers for The Chattanoogan started in August in the high $20 million range, Morsch said, but three rounds of bidding pumped up the sales price.
“In three rounds of bidding, we think we’ve pushed the market to what the market will bear,” Morsch said.
In the past, the city received bids for the hotel, Madison said, but they weren’t high enough to retire the debt.
Earlier this year, Madison said the city had about $37 million in debt on The Chattanoogan, or $5 million more than the $32 million sales price.
“That was an estimate at the time,” she said Monday. “In the meantime, we have paid off some of that debt and we have refined the numbers.”
Schulte Hospitality Group operates 102 hotels in 26 states.
“They also own other convention center hotels, so they know the market well,” Morsch said. “They’re excited about this.”
The $32 million sale price works out to about $160,000 per room, Morsch said, which is less expensive than building a new hotel.
“We looked at some hotels that are being constructed here in town, and they’re over $200,000, typically,” he said after the CDRC meeting.
Schulte has 30 days to change its mind, and another 15 days after that to pay.
Schulte Hospitality Group’s bid includes paying all the closing costs.
Another bid was made for $32 million, but it didn’t cover all closing costs and the bidder wanted 60 days’ due diligence and another 60 days for closing. The third top bidder offered $31.5 million.
Morsch declined to say who the other bidders were, since the sale hasn’t closed.
PFM Financial Advisors kept the sales process out of the public eye.
It set up a “data room” that only qualified bidders who signed a confidentiality agreement had access to. The data room contained sensitive information, such as the hotel’s operating history and detailed budgets, Morsch said.
“We began the [bidding] process about six months ago,” he said. “We also did an extensive amount of outreach with potential buyers. We did seven or 10 tours of the property.”
Mayor Andy Berke said last week that The Chattanoogan contributed to the comeback of the Southside neighborhood, and that it’s time for the hotel to go into private hands.
“It’s accomplished it’s purpose,” Berke said. “The market is strong now, and it’s a good time for us to recoup, substantially, what was paid for it and put it back on the tax rolls. We feel like this is a good deal for the city.”
Morsch said the sales price reflects well on Chattanooga.
“The great news is, Chattanooga’s a great story right now,” Morsch said. “The economy here is strong, it’s stable. [Chattanooga’s] becoming increasingly a destination on the weekends.”