December 16, 2015
If you've got around $300 million that you don't know what to do with, the city-owned Sheraton Phoenix Downtown Hotel could be yours.
Phoenix is officially seeking offers from buyers interested in purchasing the 1,000-room Sheraton, which, the city reports, has lost at least $29 million since its doors opened during the height of the recession in 2008. A sale could mean more losses.
City officials have prepared to sell the Sheraton for at least a year, saying a convention hotel ultimately belongs in the hands of the private sector. Selling the hotel also could free up money to help build a new downtown arena for the Phoenix Suns and Arizona Coyotes, a prospect city leaders are negotiating.
The city owns the hotel and has an agreement with Sheraton's parent company, Starwood Hotels and Resorts Worldwide Inc., to operate the facility. Phoenix pays Starwood an annual management fee, and the city bears any losses or profits from the hotel.
Deputy City Manager Paul Blue said the city doesn't have a specific asking price right now, but a news release states the city is considering offers from buyers who can "demonstrate immediate evidence of approximately $300 million in available funds" and have experience owning a full-service hotel. The Sheraton is the largest hotel in Arizona.
City could lose millions more
But selling the hotel now could force the city to absorb many millions of dollars more in losses, a sensitive political topic for City Council members given controversy over its red ink to date.
The city owes about $306 million on the building. City estimates previously suggested its value ranged between $175 million and $225 million, though a formal appraisal has not been done. However, Blue said, he expects the hotel's value has increased over the past year as its performance has improved. The city took out $350 million in bond debt to finance construction of the hotel.
Blue said the hotel was an important piece of "infrastructure" needed to help Phoenix's convention center open, but the city shouldn't hold onto it long term and be vulnerable to the ups and downs of the traditionally fluid hospitality industry.
“We stepped in because there wasn’t a private-sector actor interested in doing it," Blue said of building the hotel. "Now we feel like there are private-sector actors who can take the asset going forward. We think the timing is right to go expose this to the marketplace."
Councilman Jim Waring, who wasn't on the council when the hotel was approved, called the venture a "fiasco." He said the city will try to get as much as it can from the building, but the goal is to eliminate the financial risk going forward.
“I just think it’s important that we divest ourselves of a money-losing operation," Waring said. "I don’t know a taxpayer who’s going to say, 'Yep, that’s a great thing; glad they did it.'"
Plans for new sports arena affected
Selling the hotel could boost an effort to build a joint-use arena to host the Suns and Coyotes. City leaders are negotiating with the NBA and NHL teams, and talks have accelerated as the Coyotes have sought to end a turbulent partnership with Glendale.
Losses from the Sheraton have drained money from the city's sports-facilities fund, which receives tourism tax revenue that could be used to build a new city-owned arena. Without that cash, the city could be hard-pressed to find the financial means to help the basketball team renovate or replace Talking Stick Resort Arena, among the oldest in the NBA.
"We have to ensure that the sale of the Sheraton hotel makes sense from a financial perspective, separate and apart from anything concerning a new downtown arena," said Mayor Greg Stanton, who supported building the hotel as a City Council member. “But the sale of the hotel will be a positive thing for the sports-arena fund and put the city of Phoenix in a stronger financial footing for other projects, including the possibility of a new downtown arena."
Many questions remain, including whether the Suns and Coyotes can work out an agreement to share a facility. Keeping the Suns in downtown Phoenix isn't a guarantee, either.
The NBA team has a 40-year lease to operate Talking Stick Resort Arena, also owned by the city, 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, and team owner Robert Sarver has signaled he's looking for a new facility.
Building a new arena with taxpayer support would require voter approval.
Stopping hotel's financial 'bleeding'
Phoenix has a permanent tourism sales tax that was created to build Talking Stick Resort Arena, formerly known as US Airways Center and America West Arena, which opened in 1992. Selling the Sheraton ensures that revenue won't be used to cover hotel losses.
Denise Olson, the city's chief financial officer, said the Sheraton is no longer losing money. She said the city refinanced its hotel bond debt in August to "stop the bleeding from the sports-facilities fund" by lowering its annual debt payment to the point that it can be covered by hotel revenues. The hotel's performance has gradually improved as the city's convention business recovers from the downturn.
City officials had previously pegged the hotel's losses at about $38 million, but refinancing the debt allowed the city to recoup some of that loss, Olson said. Refinancing allowed the city to use some of its bond reserve funds to pay down its debt and get a lower interest rate, she said.