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New Report Suggests Proposed $192 million Sheraton Convention Center Hotel
in Downtown Tucson Will Need $4.5 million in Taxpayer Subsidies to Pay for Itself
and Pledge the City General Fund Would Pay Off Construction in Case of Default

By Rob O'Dell, The Arizona Daily Star, TucsonMcClatchy-Tribune Regional News

May 11, 2010--The proposed $192 million new Sheraton convention center hotel downtown won't make enough money to pay for itself and needs taxpayer subsidies to be built, said a report issued by a Rio Nuevo consultant late Monday.

The Rio Nuevo district was supposed to pay for the bulk of the hotel. But an ill-timed 2008 bond sale will eat up most of Rio Nuevo's revenues for at least the next eight years, to the point a Rio Nuevo board member questioned whether the district will even pay the $1.7 million a year now included in the hotel funding plan.

City taxpayers would need to put up $4.5 million for a reserve account, as well as pledge the city general fund would pay off the construction in case of default.

City Finance Director Kelly Gottschalk said the $4.5 million would come from fees generated from hotel construction, not from current or future general-fund money.

In addition, $2.7 million a year of taxes paid at hotel facilities would need to be rebated to the hotel instead of going to the city to help pay off debt.

The report by PiperJaffray said one of the challenges of financing the hotel was that the hotel does not project to have enough each year to cover the debt repayment, so other money has to be pledged in order to get anyone to buy the bonds used to finance the work.

"The hotel is expected to produce revenue but not enough to pay debt service," said Rio Nuevo board member Alan Willenbrock. "The only reason you get an investment-grade rating is because of the city's credit rating. Without the city's credit support, the credit rating would be much lower."

The report suggests Rio Nuevo and the city could get an interest rate of 5.51 percent and credit ratings of A2 and A-.

Financing plans call for the city and Rio Nuevo to sell $192 million in bonds for the hotel, which was previously estimated to cost $180 million. The sale will include construction costs of about $152 million. The remaining $40 million would go toward paying off the interest in the first three years of operating, as well as $14 million for a reserve fund.

Plans call for the hotel operator to put up a $3 million letter of credit plus another another $1.75 million for additional reserve funds. Gottschalk said the city and Rio Nuevo would also pledge to take all the revenue from the hotel and put it into reserve funds over the first several years of the project to make the finances stronger.

Gottschalk said the hotel would have to meet occupancy and revenue projections in order to build up those reserve funds, and said if those projections are not met, there would not be money to go into those reserve funds. The projections for the occupancy and revenue projections were done by HVS Convention, Sports, and Entertainment, whose analysis said all the city's planned Rio Nuevo projects would need to meet the projections in its report.

Neither the city nor Rio Nuevo has money to build those projects.

Willenbrock questioned how the Rio Nuevo district would pay $1.7 million beginning in 2016 -- which is considered the first year of stabilized occupancy -- when he estimates the Rio Nuevo district would have little more than $100,000 left over in its account.

Gottschalk said she believes the new hotel will generate so much new business that its customers will spend enough money to boost Rio Nuevo tax revenues to $1.7 million mark.

She said she hasn't decided whether she will recommend to City Manager Mike Letcher that the hotel be built, adding that the city wants to do more modeling to ensure there was absolutely no risk to city's general fund. There also are issues that have to be worked out regarding a new parking garage, she said.

Stephen Moffett, hotel developer Garfield Traub's president of hospitality, said several months ago that the hotel needed to have 1.5 times its debt service to be successful getting money from bondholders. The PiperJaffray report said the hotel will come up short at 1.4 times debt service.

Moffett did not return calls for comment, but Gottschalk said the standard of 1.5 times debt service is not an issue as long as the city backs the hotel.

"It would be a problem if the city didn't guarantee," Gottschalk said.

Contact reporter Rob O'Dell at 573-4346 or


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