Expenses Up; Revenue Down

As the economy slows, cost projections for downtown projects continue to skyrocket

The proposed new downtown arena is now estimated to cost $166 million to build--a figure that's doubled since 2005. The City Council is scheduled to discuss this dramatic increase on Tuesday, May 6.

Councilwoman Regina Romero expresses reservations about the entire arena proposal.

"It's hard to make that investment and then probably not have it work out. ... In terms of bringing more people downtown, will the arena do that, and will they stay after a show, or just leave?" she asks.

Those types of tough questions weren't asked much three years ago, when a local group researching a new arena toured a number of other facilities around the country. The five buildings they visited had opened between 1999 and 2004 and ranged in construction price from $37 to $57 million.

According to a 2005 Arizona Daily Star story summarizing that trip, a new arena for Tucson was estimated to run about $80 million. By last year, after some preliminary sketches of the proposed building had been completed, the price tag had reached $130 million.

Rich Singer, director of the Tucson Convention Center (TCC), says the Los Angeles office of HNTB Architects has finished conceptual designs for the arena. The current construction estimate, he indicates, is $166 million.

"It's all about price escalations," Singer explains. "Construction prices are going up drastically."

On a more positive note, a consultant study last year projected the new building could increase attendance at arena events dramatically. The total number of attendees, it is estimated, could approach 700,000 people annually.

If the City Council decides to move forward with the project, Singer thinks construction drawings can be completed within one year. After that, he says, it would take about two years to complete the building.

City Councilmember Nina Trasoff has questions about the cost of the arena.

"I'm still hoping we can come in at or below the original ($130 million) cost," Trasoff states. Plus, she adds, "We need to look more specifically at the design."

Singer responds: "I think it can be done for $130 million, but it clearly would be a smaller building (than presently conceived)."

No matter how much the arena ends up costing, the method used to pay for the building will also be a major topic of discussion at next week's City Council meeting.

Last year, to finance overall downtown improvements, the council looked at the projected state sales-tax receipts from the Rio Nuevo redevelopment district. From this $581 million total, they earmarked $102 million for the arena and expansion of the convention center.

While the council didn't split that amount any further, rough construction estimates for the TCC expansion are $90 million. This project, which would require multiple funding sources, could be done in three phases.

As for arena financing, while naming rights and other revenue generators might close some of the anticipated budget shortfall, projected revenue from a new, publicly owned convention-center hotel was expected to bring in a significant amount of revenue.

A study prepared last June estimated the hotel might produce in excess of $10 million a year in profits. This figure was based on the hotel having approximately a 70 percent annual occupancy rate, as well as an average room rate of about $150 within a year after it opens.

That number compares optimistically to the average room rate for the first three months of 2007 for most Tucson hotels. During that period--the peak tourist season--the average room rate was $126.

Despite the study's rosy economic forecast, the experiences of several other cities with publicly owned convention-center hotels have not been fiscally positive. Some have lost money, while others have only broken even. (See "The Risks of 'Revitalization,'" Jan. 10.)

Mayor Bob Walkup thinks the hotel will be profitable. Through his aide, Andrew Greenhill, Walkup says: "I believe the hotel will cover not only its own debt service, but also part of the arena's debt service."

On the other hand, Romero isn't so optimistic. "I'm not completely convinced either way," she says. "I want to get more information, both positive and negative."

If profits from the hotel aren't available to help pay for the arena, another possible source of money could be additional Rio Nuevo funds. But after showing rapid increases in its first few years, that pot isn't expanding anymore.

Projected to bring in $581 million over a 22-year period which began in July 2003, annual state sales-tax collections from the district quickly rose from an initial $6 million to $16 million last fiscal year. Now, those numbers have leveled off as economic growth has slowed.

"Over the 22-year period," predicts Greg Shelko, downtown development director for the city, "we'll have economic swings in both directions. Receipts have flattened out now, but will also experience real growth periods. It's not a doom-and-gloom scenario."

Shelko believes the City Council on May 6 will primarily discuss how to pay for the new arena, not whether to build it at all.

"Financing will be a big part of the discussion," he predicts. "The mayor and council have bought into building these buildings (the arena, hotel and TCC expansion). The issue now is not revisiting the projects, but how to finance them."