Phoenix city-owned hotel has lost $28M since 2008

November 28, 2014
The Arizona Republic
Dustin Gardiner

The city-owned Sheraton Phoenix Downtown Hotel has lost so much money — more than $28.2 million total — that some city leaders say the hotel must be put in the hands of the private sector.

They also worry that the hotel, Arizona's largest with 1,000 rooms, could harm other projects in the downtown core.

When Phoenix leaders opened the Sheraton in 2008, they proclaimed it would be a cornerstone of downtown's comeback. They had one goal in mind: lure big conventions and tourism dollars. Officials argued the city needed the extra hotel beds to support its massive taxpayer-funded convention center a block away.

But the hotel opened in the middle of the Great Recession, and Phoenix's decision has proven costly. Some fear it could prevent the city from investing in other downtown projects for many years.

Losses from the hotel are siphoning money from a fund created to pay for construction of US Airways Center arena — home to the Phoenix Suns. Without that cash, the city could be hard-pressed to find the financial means to help the Suns renovate or replace the arena, among the oldest in the NBA.

Still, Mayor Greg Stanton and some City Council members contend the hotel is a worthwhile investment that's boosted sales-tax revenue to the city.

They say the Sheraton's bottom line is improving as convention bookings rebound, and the project has encouraged a burst of development in the city's once-sleepy downtown core. The area will host Super Bowl Central, the official hub of game-related events and entertainment, early next year.

But a concerned group of city leaders say it's time to stop the financial bleeding. The sports-facilities fund the city has used to cover the hotel's red ink has shrunk, and the Suns' future in downtown could be at risk.

"If the money is depleted and the decision is taken out of our hands, that would be a shame," Vice Mayor Jim Waring said of keeping the Suns downtown. "The Sheraton has been a tough one from day one. It limits our options."

Arena plans affected?

Phoenix's clock to work with the Suns to develop a plan to renovate US Airways Center or find a new home for the basketball team is ticking.

The team has a 40-year lease to operate the arena, but its agreement includes a provision for the Suns to opt out at the 30-year mark, if the building is considered obsolete. That could allow the Suns to leave downtown Phoenix by around 2022.

But decisions about the team's future might need to be made much earlier. In 2019, the Suns can initiate the process to determine if the building is obsolete.

That's a narrow time line in the world of major urban-development projects, and it means Phoenix and the Suns could be forced to develop a plan to replace or renovate the arena in the next several years.

The fear is that the city's losses with the Sheraton could continue to suck up money available to improve the arena. City leaders emphatically support keeping the team in downtown, though the City Council hasn't cast a formal vote on the issue.

In 1989, Phoenix created an extra tax on hotel-motel stays and car rentals to fund construction of the venue. The arena will be paid off by 2022, and many have suggested that sports-facilities tax revenue should then be used to fund the city's portion of the cost of building a new arena.

The city has used that tax stream to backstop other projects, including as security for roughly half of $350 million in bonds sold to build the hotel. Because the Sheraton hasn't turned a profit, the city has used the arena fund to keep the hotel afloat.

Maria Baier, senior vice president of communications for the Suns and a former city councilwoman, directed questions about the use of sports-facilities money to city officials.

But Suns Managing Partner Robert Sarver has signaled he's looking to move the team out of the arena it has called home since 1992 and build a new facility downtown — a move that would require a vote of city residents to garner public assistance.

"We're definitely going to have to get a new arena built," Sarver told The Arizona Republic earlier this year. "Our lease runs for another eight years maybe. Between us and the city, we've done a good job maintaining it despite its age but it's starting to run out of gas. It's like a house. It gets to be 30 years old, and then you've got a lot of work to do. You can remodel or build a new house."

There are concerns US Airways Center is lacking in several areas: it doesn't have the advanced electrical system required to put on some large concerts; newer arenas offer more types of seating to maximize ticket revenue; and the concourses could eventually use a face-lift.

Councilman Michael Nowakowski, who represents part of the downtown area, said he would like the city to explore if a new arena could be built on the site of the city's old convention center at Third and Jefferson streets.

So, what can Phoenix do to stem its losses from the Sheraton hotel and be prepared to negotiate with the Suns? Can the city sell the hotel to mitigate its financial risk in the future?

Those are questions city leaders said need to be vetted going forward, especially as the downtown real-estate market improves. But there's doubt about whether the city could sell the hotel without taking a loss, at least for several years.

Phoenix owns the hotel and has an agreement with Sheraton's parent company, Starwood Hotels and Resorts Worldwide Inc., to operate the facility. The city pays Starwood an annual management fee, and the city bears any losses or profits from the hotel.

Deputy City Manger Paul Blue, who oversees the city's downtown-redevelopment efforts, said the city's bond agreements prevent it from selling the hotel before 2016, and it could take years longer for the city to be above water.

Blue declined to comment on how the city might approach talks about the future of US Airways Center, saying City Council members have yet to give direction on the issue. But selling the hotel could free up money for new projects downtown, he said. Whether that could be done before the Suns' lease expires is unclear.

"It gives the council options for use of the money in the arena fund," Blue said of selling the Sheraton. "I don't disagree with the sentiment that sooner rather than later is a good timing."

A broad spectrum of Phoenix leaders on both sides of the political aisle have expressed support for selling the hotel, including Waring, Stanton and council members Nowakowski and Bill Gates.

But leaders are less united in their feelings about the city's initial decision to buy the hotel and its potential financial consequences.

Convention anchor

City officials say one of the biggest factors contributing to the hotel's losses has been the struggling Phoenix Convention Center. The hotel was built to provide the city with extra hotel beds to help lure major conventions, but the recession hit at the worst time.

At the same time, the city entered the hotel business, it opened a $600 million glass-and-stone convention center. Empty convention meeting rooms inevitably led to empty hotel rooms.

Phoenix's convention bookings plummeted soon after the facility opened, hitting bottom in 2013. That year, there were roughly half as many meeting delegates as in 2009. The Sheraton's occupancy rate has similarly slumped, dipping to 51 percent last year — in other words roughly half of its rooms were empty on average.

But officials say both facilities are starting to notice an uptick. Convention and hotel booking numbers are up this year, and convention business is slated to keep increasing.

Mayor Stanton said he believes opening the hotel was a wise decision despite its $28 million loss to date, echoing tourism officials who've said the convention center couldn't have succeeded without a major hotel. He said he's "cautiously optimistic" its performance will improve.

"I think that will turn out to be a very good investment," Stanton said. "The trend lines are heading in the right direction. The best thing we can do is sell Phoenix."

Phoenix's struggles owning the Sheraton have rarely been publicly aired as the hotel is owned by a non-profit corporation in the city's control and its losses haven't directly impacted the city's day-to-day budget. The subject is also seldom discussed at council meetings.

One of the few times the city's role in the hotel has been in the public eye came recently after a fire forced the evacuation of hundreds of guests and its closure for nearly a week. Insurance ultimately covered the city's losses in that instance, Blue said.

But other city leaders said the hotel's overall financial drain illustrates why such an enterprise doesn't belong in the hands of government.

"I'm not a big fan of the city being in the hotel business," said Gates, who chairs the council's finance subcommittee. "In my opinion, it's not a function of a city to own and operate a hotel. The market will certainly fill this void moving forward."

Blue stressed that revenue from the Sheraton has covered its operating expenses, such as payroll and upkeep. Money from the city's sports-facilities fund covers only bond payments that the hotel's revenue cannot cover. But those payments have been increasing to include principal — the city lost about $12.7 million last fiscal year alone.

And the Sheraton has not done as well as many of its less-flashy competitors in the city's core. Hotels in central Phoenix reported an average occupancy rate of about 60 percent last year, according to Smith Travel Research Inc., which tracks hotel stays.

Bill Murney, senior vice president of the consulting firm HREC Investment Advisors, said there's now an abundance of hotel rooms in downtown Phoenix. Still, he doesn't disagree with the notion that the hotel boosted the city's convention prospects initially.

But he said large downtown hotels could be losing business as a result. Meanwhile, smaller hotels with more limited services, typically excluding amenities like room service or a concierge, are faring better. Two more select-service, high-rise hotels — a Hilton Garden Inn and a dual-brand Marriott Courtyard and Residence Inn — are under construction.

"The city only did it because nobody else was going to do it," Murney said of the Sheraton. "I think it's going to be a slow process to absorb these rooms."

Hotel occupancy rates rebounding in central Phoenix

2008: 58.9 percent percent full on average

($148.11 average daily rate)

2009: 53.9 percent

($130.23 average daily rate)

2010: 57.9 percent

($124.51 average daily rate)

2011: 57.9 percent

($127.54 average daily rate)

2012: 58.6 percent

($131 average daily rate)

2013: 59.7 percent

($132.69 average daily rate)

2014: 64.8 percent*

($138.25 average occupancy rate)

*Reflects average occupancy rate through September. Hotel bookings typically slow down in the final three months of the year.

Source: Smith Travel Research Inc.

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