Sheraton sale perk: $97M tax incentive
Proposal for buyer of city hotel sparks controversy
As Phoenix negotiates the sale of the city-owned Sheraton Phoenix Downtown Hotel, a new aspect of the deal — a proposed $97 million tax break for the buyer — is sparking controversy.
The city already expects to take a hefty loss on the Sheraton. In July, Phoenix entered into exclusive talks to sell to TLG Phoenix LLC, an investment company based in Florida, for $255 million.
Phoenix still owes $306 million on the hotel — the largest in the state, with 1,000 rooms — and the city has already sunk about $47 million of taxpayers’ money into it.
But the deal raised even more eyebrows last week, when the city released a report showing the deal’s potential economic impact and the value of the proposed property-tax break.
Critics said the tax break would add to the city’s staggering losses from its foray into the hotel business and shows the hotel is worth far less than its sale price.
“The incentive deal they are offering the buyer adds insult to this injurious affair,” Sean McCarthy, senior research analyst at the Arizona Tax Re-
search Association, a government watchdog group, wrote about the sale.
“The hotel probably would not fetch $255 million if the owner had to pay full property taxes in downtown Phoenix, which sports some of the highest rates in the state,” he added.
Meanwhile, representatives for at least two other prospective buyers said the city should have negotiated more competitively before jumping on the offer from TLG Phoenix.
City officials praised the deal, saying it would put the hotel in the hands of an experienced owner that plans to spend tens of millions to give the Sheraton a much-needed face-lift.
The city estimates that if the hotel sale closes, the entire nine-year venture will have cost taxpayers about $87 million in losses. That includes $47 million to cover past debt payments, buy the land and create a hotel operating reserve account.
The other $40 million is what the city still must pay to its lender for debt on the building. The hotel is expected to sell for $51 million less than what Phoenix owes, but the city expects to have $11 million in leftover hotel profits and reserves to pay off the balance of the loan.
But city officials contend the hotel’s impact can’t be measured by its balance sheet alone.
The city opened the Sheraton in 2008 to provide hotel rooms to support a $600 million expansion of the nearby Phoenix Convention Center, but the hotel quickly began losing money due, in part, to the recession.
Today, the hotel is no longer losing money and the convention center brings more than 200,000 event attendees downtown annually.
Mayor Greg Stanton, who voted to build the hotel as a City Council member in 2004, said he supports the sale because the city shouldn’t be in the hotel business long-term.
Still, Stanton said he considers the hotel a wise investment because it — coupled with large investments in the convention center, light rail and Arizona State University’s downtown campus — has propelled a development and techjob explosion.
“As a result of those necessary investments, our city core ... is booming in a way that it has never before,” Stanton said. “We’re in an unprecedented time of growth.”
Last week, City Manager Ed Zuercher released an economic-impact report that revealed more details of the deal. Along with that, he also released a memo that contends the tax break wouldn’t add to the city’s losses.
According to Applied Economics, an outside consultant hired to do the report, the tax incentive would spare the buyer from paying an estimated $97 million in property taxes to the city, county, school districts and other taxing jurisdictions over 20 years.
Despite that, city officials said the hotel will generate more property-related taxes than it does today, because the city has never had to pay property tax on the building.
Under the terms of the sale, the hotel’s buyer would technically lease the building from the city for 20 years — a maneuver to keep it off the property-tax rolls — but the buyer would still pay a smaller lease excise tax of about $1.8 million per year to start. That would increase over time.
The hotel also would pay personal property taxes for the value of equipment, furniture and fixtures. That’s expected to generate about $638,000 in new revenue for taxing jurisdictions in the first year.
“There is no loss of taxpayer revenue in this case, because it’s always been zero (property-tax revenue),” said Jeremy Legg, a special-projects manager for the city who is overseeing the sale.
Legg said TLG Phoenix needs the tax break to make the sale and renovation pencil out. He added that the sale price “could be substantially less” or the deal might not go through without it.
That type of property-tax break has long been controversial and is the subject of a lawsuit in Maricopa County Superior Court. It’s not clear how the outcome of that case could affect the Sheraton deal.
In addition to the property-tax break, the city would give the buyer a roughly $13 million reserve fund earmarked for hotel improvements.
The City Council has final approval over the sale and is expected to vote later this year.
The report also states the sale would have long-term benefits, netting the city and other taxing jurisdictions a combined $391 million in estimated direct public benefits over the next 20 years.
But the bulk of the projected public windfall is from the hotel’s $255 million sale price. In other words, the report considers it a “direct public benefit” that the city is selling the hotel — which originally cost $350 million to build — for $255 million.
Beyond that, the report projects the hotel will see an uptick in business under new ownership and generate about $136 million in additional bed taxes and other net new revenue for the city and other levels of government.
The report assumes the hotel will perform better after TLG Phoenix makes $30 million to $40 million in renovations. It’s planning to redo guest rooms, add a new restaurant and give the lobby a facelift.
However, critics of the deal say the city’s numbers paint an overly rosy scenario.
McCarthy, of the Arizona Tax Research Association, said the city drastically inflated the deal’s potential benefits by counting the sale price of the hotel even though the city would take a major loss on the building.
He said the report also includes lofty assumptions about how the hotel’s performance could improve after a renovation.
Ultimately, McCarthy said, the report was meant to justify a property-tax break that should be considered an additional loss to taxpayers.
“Everyone knows that these economic studies can be goosed to say what you want them to say,” he said.
As the city faces criticism about the deal on the table, representatives of other prospective buyers are criticizing the city’s process for selecting TLG Phoenix.
Bruce Hanley, a commercial real-estate broker, sent city officials several emails in July, complaining that he had a client preparing a potential offer when the city entered exclusive negotiations without notifying him.
Hanley also criticized the city for accepting an offer from TLG Phoenix, given that the company backed out of a previous deal to buy the hotel for $300 million last year.
“It makes absolutely no sense that my client was denied an opportunity to meet with the city’s executives, tour the property and potentially write an offer,” he wrote in one email. “Bottom line, the city has no idea how to sell a property like this.”
City officials responded to Hanley’s emails by sending a cease-and-desist letter to the brokerage firm where he works. The letter accused Hanley of inappropriately interfering with the deal after the city told him it had entered “exclusive negotiations.”
The city’s letter also stated that the sale process “has been competitive” and noted that the best offer Hanley submitted for the hotel in the past was for $178 million.
But Hanely wasn’t the only party surprised by the city’s approach.
Jeffrey Eells, a developer and consultant, emailed the city after it entered into the deal with TLG Phoenix, stating he had an interested client.
Eells said the city should have sought counteroffers before settling on one buyer.
“I think probably it could have gotten a better price,” he told The Arizona Republic. “My client would have enjoyed looking at the project more in-depth.”