January 3, 2009 - The city is building a new $4.3 million entrance to the Tucson Convention Center -- intended to be the gateway to a planned convention hotel that many local leaders believe is the key to reviving downtown.

But it's uncertain whether that hotel will be built anytime soon.

The city has refinanced millions in TCC rental payments made to Rio Nuevo -- in effect, tapping one of its remaining credit lines -- in order to pay $11 million to developer Garfield Traub for the final hotel design. And the city's ability to finance bonds to complete the hotel could be threatened by an unprecedented financial crisis that could force layoffs, new taxes and cuts in police and fire personnel.

Now some experts are questioning the city's ability to finance the $180 million hotel at all. An April report said the hotel's projected cash flow would not cover the debt to build it and advised the city to apply several site-specific taxes to make the finances pencil out.

In addition, the city likely would have to kick in $1.1 million a year from the general fund -- which could otherwise be used to pay police officers, firefighters and keep recreation centers open.

A footnote in the hotel's financial report said the expected occupancy rates are valid only if the city does a massive $34 million renovation of the TCC and substantially upgrades or replaces the arena. The city theoretically has money to renovate the TCC -- by tapping the same credit line as TCC rental payments -- but it likely will not have the money to build an arena for 10 years, if ever.

"The likelihood of something like this succeeding is basically close to zero," said Edward A. Mermelstein, a real estate attorney and co-founder of international real estate law firm Edward A. Mermelstein & Associates. "It's one of the worst times to do any type of real estate development, especially anything to do with hotels."

Distressed market

Hotels are dependent on the economy, and the market will likely stay depressed for three to five years, Mermelstein said. Those who are financing hotel deals now are buying distressed hotels at low prices and expect to start making money in five to seven years, he said.

"Construction of new facilities ... is nonexistent," he said.

Worse, he said, is that Tucson's hotel would be union-built, which typically adds 20 percent to 30 percent to the cost.

Carl Winston, director of San Diego State University's hospitality and tourism-management program, said many convention center hotels fail. A convention hotel in St. Louis, for example, went into foreclosure in early 2009.

"If the project is so good, why isn't the private sector building it?" Winston asked. "It's a mighty big bet, and it fails more often than it succeeds."

A convention hotel is a great idea, but the city can't afford it right now, said Alan F. Willenbrock, a Tucson portfolio manager and chartered financial analyst. Willenbrock represents Pima County on the Greater Arizona Development Authority.

He said the city will have to put up additional taxes and money to make the hotel's finances work, adding that he felt Tucson couldn't sell bonds for the hotel because of its financial condition. He noted that commercial, mortgage-backed securities tied to hotels have the highest default rates of any commercial properties, making it hard for Tucson to find investors for its hotel bonds.

Deficit is focus now

The city's focus on the new hotel has been pushed somewhat to the back burner after city officials discovered a $32 million budget deficit for the current fiscal year.

Sean McBride, the city's new assistant city manager, said talk of the hotel finances are "conjecture and speculation" until a new report on the hotel's projected occupancy comes out in January.

McBride, who is now heading the city's hotel effort, said he has not read the April report on the hotel's projected occupancy rates and cash flow.

The city is not blindly committed to building the hotel if the numbers don't make sense, McBride said. He acknowledged that not building it means the city will have paid $4.3 million for a new entrance to the TCC for a nonexistent hotel.

In this scenario, the city would also have paid $11 million for the final design of the hotel as well. Officials likely would try to use the hotel designs when it makes sense financially, he said.

Tax receipts way down

The Rio Nuevo district has little excess cash flow, McBride said, because its sales-tax receipts are way down and because of the debt service being paid on Rio Nuevo's $80 million bond issuance in December 2008 -- money which has now been exhausted.

The bonds would need to be backed by the city's general fund, McBride said, because Rio Nuevo alone doesn't have the ability to do it.

A swath of the city's bonds was downgraded in May because of the city's deteriorating financial condition.

Winston, of San Diego State, said he couldn't predict whether the city could issue bonds for the hotel, but he said this is the worst economic environment for hotels he has seen.

In addition, he said, "by far the weakest part of travel is groups and conventions," adding that demand for convention hotels is dropping faster than the economy as a whole.

Bill Mosher, chief executive officer of the Denver Convention Hotel Authority, said even successful convention center hotels such as in Denver would have a hard time getting financing right now. Mosher was the head of Tucson's Downtown Development Corporation for about 10 years until 1990.

"I'm not sure we could do ours" today, Mosher said. "And it's one of the most successful of the publicly funded hotels."

Contact reporter Rob O'Dell at 573-4346 or [email protected]

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