Phoenix may sell downtown Sheraton hotel

• Phoenix is positioning itself to sell the Sheraton hotel downtown
• A sale could come at a loss of tens of millions of dollars to taxpayers
• The Sheraton is the largest hotel in Arizona

Phoenix is positioning itself to sell the financially troubled Sheraton Phoenix Downtown Hotel, a move that could force the city and taxpayers to absorb tens of millions of dollars in losses.

City officials from Mayor Greg Stanton to Chief Financial Officer Neal Young said Phoenix is refinancing debt on the hotel so it can get ready to sell the 1,000-room Sheraton, the largest hotel in the state.

Selling the city-owned hotel would address concerns that the city is keeping it afloat with money that should be used to ensure the Phoenix Suns stay downtown. The hotel has performed so poorly that Phoenix is spending money that some City Council members say is needed to help pay for a new arena to replace US Airways Center, which the basketball team leases from the city.

The hotel has lost more than $38 million since its doors opened during the height of the recession in 2008, city officials said. Phoenix leaders at the time said the project was an investment to draw more convention and tourism dollars, and they suggested it would perform well.

Concerns that the hotel could cripple Phoenix's ability to keep the NBA team downtown are stirring as Suns management has quietly begun talks with city leaders about the future home of the franchise.

The team has a 40-year lease to operate at US Airways Center, 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 In 2019, the Suns can initiate the process to determine if the building is obsolete.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 timeline for a major urban-development project.

Phoenix owes about $330 million on the hotel, but city estimates suggest its value ranges between $175 million to $225 million, though a formal appraisal hasn't been done.

City Council members voted late last month to refinance the hotel debt so the city can lower its payments and start putting money aside for a Suns arena or other projects.

Phoenix is covering the hotel's losses with revenue from a sports-facilities fund that gets money from a special tourism sales tax. That sales tax was created to build US Airways Center, which opened in 1992. The hotel received about $16 million of that tax revenue last year alone, leaving virtually nothing to save for a new Suns arena or renovation of the existing facility.

City officials hope that refinancing the hotel debt will immediately lower the city's annual payments on the hotel to the point that it doesn't siphon money from the sports fund and lowers the amount of principal it owes on the debt to about $300 million.

In the long term, the aim is to remove the financial risk the hotel poses to taxpayers by selling, officials said.

Deputy City Manager Paul Blue, who oversees the city's downtown-redevelopment efforts, said the hotel was an important piece of infrastructure needed to help Phoenix's convention center open, but it's time to move on. He said the city did its part by getting the Sheraton built at a crucial time as the city opened its convention center and invested in other projects downtown.

Blue said the city is interested in selling the hotel so that Phoenix isn't vulnerable to the ups and downs of the traditionally fluid hospitality industry. He said the city doesn't have a timeline for a potential sale, but it could come as early as next year.

"If you continue to own the hotel, you always have to have an eye looking backwards," Blue said. "Government is not good at owning this class of assets. We clearly think the private sector is probably better suited."

Phoenix 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.

But selling the hotel in the near term, before its market value improves significantly, could force the city to take a loss of tens of millions. That could mean the total hit to taxpayers on the Sheraton project would far exceed its current $38 million of red ink.

Council members would ultimately have to vote to approve a sale of the hotel. The looming question: How much of a monetary hit are they willing to take, if necessary?

Councilman Bill Gates, who chairs the body's finance subcommittee, said it would be in the city's best interest to sell in the short term if the loss is closer to $10 million or $20 million, but higher amounts become questionable.

"I would support the city selling the hotel at a price that would constitute a small loss if that means we could stop the red ink," he said. "I don't want to see us waste the money away by owning a hotel that continues to lose money over a long period of time."

Meanwhile, Councilman Michael Nowakowski, whose district includes the hotel, at Van Buren and Third streets, is a vocal proponent of the sale and building an arena in the near term, possibly on the site of the Phoenix Convention Center's south building. He said the city needs to get the most it can for the hotel and free up funds for a next chapter in the Suns franchise.

"We really need to look at building a new arena for the Phoenix Suns," Nowakowski said.

Another hurdle to a new arena likely would be getting residents to support city financing for a new facility — a move that requires a public vote under state law. The team's performance on the court, if it remains lacking, could make that prospect more difficult.

A spokeswoman for the Suns declined to comment Thursday, but Suns owner 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.

US Airways Center is among the oldest arenas in the NBA, and there are concerns it lacks 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 need a face-lift.

Scot Mussi, director of the Arizona Free Enterprise Club, a conservative advocacy group, said he welcomes the city's move to prepare to sell the hotel regardless of whether it has to take a loss. He said the hotel is an "albatross" for the city and will likely accumulate far more red ink if it stays in the hands of government.

"There's a reason no one in the private sector wanted to build the Sheraton hotel," Mussi said. "Instead, the city took the risk with taxpayer money and now the taxpayers are going to lose out on it."

However, he cautions the city against backing a new downtown arena, saying, "The last thing they should be doing is going from one venture to another."