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Tucson Convention Hotel Venture: Question the Assumptions, Examine
 the Forecasts, Guard Against Over-optimism and Prepare
 for Worst-case Scenario

The Arizona Daily Star, TucsonMcClatchy-Tribune Regional News

March 31, 2010 --The Rio Nuevo redevelopment district's governing board and the city of Tucson should take some lessons from Pima County's unhappy experience with spring training.

The county has been jilted by the Arizona Diamondbacks and Chicago White Sox, who signed a 15-year contract to play here after the county agreed to spend $38 million to build the Kino Sports Complex and Tucson Electric Park.

With the teams' early departures, taxpayers will be stuck with $22.7 million in remaining construction debt. The county's general fund will be drained by about $1.5 million a year because the teams have skipped out on the deal. The debt will be paid in 2019.

County Administrator Chuck Huckelberry told the board of supervisors in a March 29 memo that the county and its taxpayers will suffer because the teams broke their contracts.

"We never envisioned Major League Baseball and their ownership breaking or disavowing binding legal agreements with local governments, which has now occurred," he wrote.

We get that. But taking a closer look, we also can see with 20/20 hindsight that the county's pact with Major League Baseball was never a great deal. We say hindsight because in June 1996, the Star editorialized enthusiastically about the spring-training deal. We were wrong.

Our take-away is a few lessons that must be applied by the Rio Nuevo board and by Tucson City Council as they consider whether to build a proposed $180 million downtown convention hotel.

First some background:

The county's deal with the teams was predicated on two teams playing spring training. When the White Sox left last year for a gaudy new stadium in Glendale (after paying the county $5 million), the D'backs cited the deal in choosing to simply walk out, opting for fancy new Scottsdale digs.

"The agreement is for two-team spring training, so it's out of our control," Huckelberry said.

Lesson One: Details are critical when contracts are negotiated. We don't know how the two-team provision wound up in the baseball contracts, but it's obvious that detail favored the teams. Did the county fully understand the risk it was taking on behalf of taxpayers?

The Rio Nuevo board and the city need to clearly describe the risks in the hotel deal.

More about the fix the county is in: With the Sox and D'backs' departures, the county is losing an estimated $1.2 million from its share of ticket sales and parking, Huckelberry told us. That money was put toward paying off the construction debt.

The rest of the annual debt payment comes from an increase in the hotel-bed tax, the car-rental tax and an RV space-rental tax that was imposed in 1997.

For the first three years, the taxes didn't deliver, so the county had to spend $3 million from its general fund to cover some of the debt, Huckelberry said.

"After that we started to break even and bumped along that way" until the economy tanked two years ago, he said. "In the current recession revenues are down 30 percent, if not more."

Further, back when the dew was still on the deal, stadium officials projected that both the D'backs and Sox would have average attendance of 7,500 per game.

That has turned out to be pretty accurate for the D'backs, although it's all thanks to three strong years around the time the team won the World Series. The White Sox consistently pulled in about 5,600 per game.

Of course, D'backs fans were more likely to come from inside Arizona, which means they didn't import much in the way of tourism dollars to the state.

"The stadium seats about 12,000 and we probably sell out two games a year out of 30 with two teams training," Huckelberry said. "It was an economic benefit to the community at large, but not to the county."

Lesson Two: Projections are just that. Tax revenue falls short. Attendance doesn't measure up. The economy goes up -- and it tanks, as we've found out the last two years.

Tucsonans would do well to ask many questions about the hotel.

So far, we have only one financial viability study of the project. The HVS Convention, Sports, and Entertainment report, delivered in February, forecasts that a 525-room hotel at the Tucson Convention Center would be profitable by 2015 with a 69 percent occupancy rate.

If opened in 2012, it would run in the red for three years, the report said.

But maybe for more years than that: The profitability projection is predicated on rising occupancy and room rates every year.

But who knows if that will turn out to be the real-world experience?

The Rio Nuevo board and the City Council need to be tough in looking at the hotel forecasts. Another report is due in April, and they must study it closely.

Question the assumptions, examine the forecasts, guard against over-optimism. They must not bring taxpayers into a deal with too many ifs -- and they must be prepared for a worst-case scenario.

Arizona Daily Star


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