Downtown Reservations
The city will soon decide whether a proposed convention-center hotel is worth the substantial risk
By Dave Devine
- The proposed Sheraton hotel.
Two recent headlines in other cities are not welcome news for supporters of a publicly owned, 525-room, $170 million Sheraton hotel proposed for downtown Tucson.
In September, The Oregonian declared, "Portland Convention Center Hotel Is Dead." In March, Standard and Poor's bond-rating service announced, "Downtown Phoenix Hotel's Outlook Is Revised to Negative."
In response to disappointing results during its first year of business—such as operating revenues 19 percent below forecasts—Standard and Poor's changed the outlook for the Phoenix Sheraton hotel's senior, non-publicly backed bonds from stable to negative.
In Portland, a 20-year effort to build a convention center hotel ended last year, because, as the Oregonian summarized: "The sticking point has always been the risk to taxpayers."
In both cases, public revenues were to be the ultimate guarantor of some of the bonds used to finance hotel construction. In Phoenix, city officials took that risk with subordinate bonds; in Portland, city officials declined.
The Tucson City Council and the Rio Nuevo Multipurpose Facilities District Board will soon be facing the same dilemma. They'll be provided a draft capital plan for the proposed convention-center facility, and they will have to decide: Should Tucson proceed with construction of the hotel, even though it may place City Hall's own revenues in jeopardy?
Stephen Moffett, of Garfield Traub, the Dallas-based firm that would build the facility, thinks the city should proceed. He calls the risks "negligible."
Moffett believes revenue streams produced by the hotel—such as room rentals and internal taxes—should be sufficient to cover the construction debt. He also points to the positive results in a recently released market study done on the proposed hotel by HVS. He even calls the study's conclusions "somewhat conservative."
Moffett emphasizes what he sees as both long-term and short-term benefits of building the hotel.
"The biggest reward," he says, "is getting Tucson back into the convention business. The overall economic impact of that is overwhelming. The No. 1 reason national meeting-planners select a city is because of a headquarters hotel and availability of room blocks."
Tucson doesn't provide those now, but Moffett says that if the hotel and a 33,000-square-foot expansion of the convention center are built, "It will open up Tucson to a whole new level of conventions."
As far as the hotel's short-term benefits, Moffett emphasizes the construction jobs that would be created. He estimates that approximately 70 percent of the hundreds of workers required would be from Tucson.
Moffett also highlights an October headline from The Dallas Morning News. It read: "Convention Center Hotel Is Helping Dallas Book More Business."
After an expensive campaign, Dallas voters last May narrowly approved city ownership of a convention-center hotel. Based on that, advance bookings for convention business there began to rise.
Moffett indicates that construction drawings for the Tucson hotel are 90 percent complete, and if the Rio Nuevo board and City Council give the go-ahead shortly, the hotel could be open by the summer of 2012.
However, Heywood Sanders, of the University of Texas at San Antonio—a frequent critic of the convention industry—warns of the financial risks of hotel public ownership.
"Folks get into this without any clear understanding of it," he says about the financing implications. "I anticipate Tucson will have to make a pretty serious financial commitment behind the bonds, and some officials will pooh-pooh that, because they always do."
Sanders cautions that backing such hotels can have consequences. "A convention-center hotel is a financially risky proposal," he observes, "but if you've bought it, you've got to pay for it. It's easy to say, '(A lack of business) won't happen,' but it has, a lot."
Reciting a long list of communities that have learned that lesson the hard way, Sanders comments: "It's all dependent upon the hotel's performance, and we've seen a lot of cases where consultants said it would do fine, and the hotels simply haven't done that."
Sanders also addresses the idea that Tucson should enter the "arms race" for convention business.
"Tucson (is being asked) to do what everybody else will or has done, bigger and better," he says about enlarging convention-center facilities and building adjacent hotels.
Sanders points out that convention business has fallen dramatically during the recent recession—and whether or not it will come back is open to serious question. Plus, he says of other market studies done by HVS that he's reviewed: "In a great many cases, things haven't turned out how they predicted."
Sanders says that publicly backed convention facilities that wind up falling short of expectations don't go bankrupt. "Instead, they just sit there and bleed money, and the city has to pay the bondholders. If Tucson officials aren't prepared to do that, they should rethink this proposal."
While it's easy to compare the city's risk of building a convention-center hotel to that assumed by Pima County when it approved construction of Tucson Electric Park—which is now devoid of both minor-league baseball and spring training—perhaps another analogy is more appropriate.
A story from October 1974 in the Arizona Daily Star summarized the financial situation of the Tucson Community Center (TCC) that had opened a few years earlier.
"'Self-Supporting' TCC," said the article's headline, referring to financial promises previously made about the facility, "Costs Residents Millions."
More by Dave Devine
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State of the New State
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