Posts Tagged ‘Garfield Traub’

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Rio Nuevo – Convention Center Hotel

Capital Plan 

I have reviewed the Capital Plan options as prepared by Garfield Traub (April 2009).  Here are the major points.

Four options are reviewed and 2 are immediately dismissed as not feasible at this point in time. 

It is important to note that Garfield Traub indicates that private investors are not interested at this point in time.

Here is a review of the 2 most likely financing options:

The hotel would be owned by a “Public Entity”; for all practical purposes the owner would be the City of Tucson.

The City would be required to contribute $17.7 million; $12.7 million cash would be needed during the design phase (June ‘09 – Dec ‘09 according to Development Schedule) with $5 million from sales tax, building permits and impact fees.

“Substantial City financial participation” would be required. This would include:

1)      Site specific transient rental tax (6%) + site specific city sales tax (2%) + a new convention center surcharge (2%)

2)      Additional pledged revenue: $1 to $4.5 million/year

3)      Credit support from City

 The City of Tucson would sell $189 million of Certificate of Participation (COP) bonds backed by the credit profile of the City.  Under different scenarios the City might need to make annual contributions to ensure there are sufficient funds to pay debt service: this could be zero or it could be $1 million or more if the projections end up being optimistic.

The financial projections are based on various assumptions that could turn out to be optimistic or pessimistic.  Also, please realize that the negative cash flows are quite large during the first few years.  It costs $200 million to build and loses money for several years before it breaks even.

Potential benefits to City:

City receives net profits when hotel begins to produce profits

City may realize residual value of hotel

Ancillary benefits of visitors on lodging, retail, entertainment…

My analysis:

I want to be optimistic where possible as the rebirth of downtown would enhance my family’s quality of life and indirectly enhance the business interest of my family.  However, the financial hurdles are many and high.  To build the hotel, the City needs to invest $12 million cash in the next few months, commit to fill any cash flow gap for several years, and sell almost $200 million of bonds in the next 7 months.

This is on top of many existing cash flow needs: balance the ‘structurally imbalanced budget’ (Standard and Poor’s); AND build the unreserved general fund balance by an additional $20 – $50 million ‘promptly’ or face a downgrade from Fitch and Moody’s.

The financial feasibility of the hotel is very sensitive to Tucson’s credit rating.  If the rating were to deteriorate, the annual cash contribution from the City increases.  In fact, the financial scenarios from Garfield Traub are based on Tucson’s credit rating before the recent downgrade from Standard and Poor’s (dated 5/18/2009).

The City’s ‘debt burden’ is already higher than other cities with the current credit rating (Moody’s).  Issuing another $200 million of new bonds would seem to aggravate this factor.

It is possible that the City could accomplish all this.  However, it would require rather significant spending cuts &/or revenue increases – significantly larger than currently being considered.

Please note that this is an analysis of the options presented by Garfield Traub.  There may be other options not discussed.  The figures presented by Garfield Traub are assumed to be accurate. 

Capital Plan begins on page 45:

http://www.tucsonaz.gov/rionuevo/docs/HotelReport_final_4.17.09.pdf