Archive for September 9th, 2009

We thought we’d take a hard look into the economics of the proposed hotel which will be the center piece of Rio Nuevo. The mismanagement has been legendary. The focus now has turned to a flagship hotel that just doesn’t seem to pencil out. It’s going to be guaranteed by general funds so the ramifications of the decision to go forward could potentially impact all of us.

The hotel loses about $54 million in the first few years – most of this is during construction (2010 – 2012) and the first year or two of operations.

This negative cash flow is address by the following:

1) Capitalized Interest: More money is borrowed through the sale of bonds than is needed to build the hotel, about $38 million more. This cash reserve is used to fund the negative cash flow. It also saddles the hotel with higher debt service

2) Site specific taxes are used to defray the negative cash flow: Transient Rental tax (extra bed tax) 6%; City Sales Tax 2%; Convention Center Surcharge 2%. This is projected to generate about $1.5 million to $2.5 million per year. This would add 8% to the cost of a room and 2% to holding an event at the TCC. Seems to us this would make things less competitive for the hotel and TCC.

3) The projections have the city kicking in $1.1 million/year in direct cash subsidy.

4) The City needs to provide their credit support because Rio Nuevo has no money left and the TIF is already pledged to pay the other bond issue. More background HERE HERE HERE - HERE -

5) Since the hotel is owned by a public entity, they pay no real estate taxes or other taxes.

We question if the hotel can even get $157/night and 64% occupancy in 2014? $180 and 72% in 2016?

Two important footnotes from the financial statement that need to be pointed out:

Footnote #6 (page 30)
NOTE: Footnote on Pro Forma assumes convention center and arena will be renovated and expanded by 35,000 SF of exhibit space and 20,000-30,000 SF of meeting space otherwise projections would require reassessment. (this seems really big to us – where will the money come from? I don’t know of any specific plans to renovate?)

Footnote #5 (page 30)
Assumes hotel would be union run (a sure bet with the current council) If you remember Gaylor pulled out when strong union only language was installed into the bid process. Check out the post HERE.

The actual budget projection link can be found HERE

The bond will be sold for $189,000,000 at 6.25%

Here’s our analysis of the projections through 2017: