Tucson's downtown hotel: City Council tosses the hot potato back (Part 4)

The debate about whether or not the City of Tucson should go hundreds of millions of dollars into debt to build a mega-hotel downtown crescendo'd yesterday during a 2-hour Executive Session of the Mayor and Council.

You'll remember that at last week's City Council meeting, Councilman Steve Kozachik couldn't get a second on a motion that began with the question: "What is the City of Tucson’s legal obligation to the design, development and building of the Convention Center Hotel?" and ended with a formal motion that would tell the Rio Nuevo Multipurpose Facilities District Board (RN) that the city would "not backstop or issue any bonds to secure the completion of the Tucson Convention Center Hotel, Parking Garage and Convention Center Expansion" and the city would "not approve any additional expenditures for the Convention Center Projects until RN has negotiated an acceptable GMP [guaranteed maximum price] and funding plan for the project."

Later in the week, the RN Board tossed that hot potato back at the City Council.

At yesterday's City Council meeting, the Council voted 7-0 on the following motion by Kozachik:

I move that we direct staff to proceed as discussed in Executive Session, and to negotiate the following:
a) an agreement with RN for financing the Project that satisfies the direction given by the Legislature.
b) a reduced GMP for the project, as well as reduced developer and design/build fees
c) resolution of issues relating to the use of local subcontractors; and
d) acquiring additional security from the hotel operator

I move that staff not return to Mayor and Council for any further action unless these terms are accomplished.

"Direction given by the Legislature" refers to the RN Board's original charge by the Arizona Legislature to oversee expenditure of RN funds. According to Kozachik, that means that RN cannot "toss it into our lap"... again.

Tucson's downtown hotel: Historical context of a complicated project (Part 3)

The saga of Tucson's proposed downtown mega-hotel has been a continuing drama for a few years. To offer an historic context to the current pending decisions, here is a series of news articles.

The original Request for Proposals
Downtown Revitalization Development Opportunity, Convention Center Headquarters Hotel
July 2007-- three years ago! No wonder Tucsonans are frustrated!

Economic downturn in the west
Brookings report finds LV among hardest hit
Las Vegas Review-Journal, December 2009.

City Council starts to debate the wisdom of the hotel project
Dialogue is changing on downtown hotel project
Inside Tucson Business, February 2010.

Local businesses are pro-development
Downtown vision, future is in new hotel, TCC
Inside Tucson Business, February 2010.

Are convention centers and hotels the great investment that developers say they are? (AKA the $190 million question.)
Space Available: The Realities of Convention Centers as Economic Development Strategy
by Heywood Sanders for the Brookings Institution, 2005.
This reports reveals not-so-rosy statistics about many cities that have built new convention hotels and convention centers to boost economic development. Sanders, an academic, was interviewed by local media in the spring of 2010, but the City Council gave him minimal time to explain his findings. It's important to note that the Brookings report was published in 2005; the economy has only gotten worse since then. In his interview on the John C. Scott show, Sanders said many US cities have traveled the convention center hotel road that the City of Tucson is now on. Some put up the funds and built the hotels; others decided to be more prudent and not build. It is scary to ponder what this huge debt could do to these heavily-leveraged cities if the US economy, in general, and unemployment, in particular, do not pick up soon.

Hotel Industry Fights Back
The Rhetoric vs the Facts: What the Brookings Report Fails to Reveal
The International Association of Exhibition Management pushed back after the Brookings Report was published in 2005.

Another "debunking" of the Brookings' Report, 2005.

Local hotel owner/opportunist wants a piece of the action
Chamber backs city lease after hotel upgrade
Arizona Daily Star, June 2010.

OUR VIEW: 99-YEAR PROPOSAL FROM BUSINESSMAN LOPEZ NOT GOOD FOR TAXPAYERS
Using city bonds to upgrade hotel is a bad idea
Even the Arizona Daily Star doesn't go for Lopez's idea for lining his own pockets with Rio Nuevo funds. June 2010.

Desperate construction workers want jobs
'WE NEED THE JOBS,' RIO NUEVO BOARD IS TOLD AT TOWN HALL
Workers flock to back TCC hotel construction
Arizona Daily Star, June 2010.

More questions than answers
These questions need to be answered before we OK a convention hotel
In Inside Tucson Business, Councilman Steve Kozachik uses the media to push for answers from Garfield Traub (the hotel developer) and from the Mayor and Council, June 2010. This article is a thorough overview of the funding and the issues.

Phoenix convention hotel occupancy less than 50%
Downtown Hotel Hell
A dose of convention hotel reality from Phoenix, thanks to the Tucson Weekly, September 2010.

Hotel hell devolves as bloggers offer options to City Council
Give downtown hotel site to the Apache Indians
A View from Baja Arizona blog on the Tucson Citizen website, September 2010.

Sensing the fear of local politicians, the hotel's developer offers another funding plan
New hotel-finance plan unveiled
Sensing that local politicians lack the will to go hundreds of millions of dollars in debt to finance and build the hotel, Garfield Traub offers an alternative funding plan, according to Arizona Daily Star, September 2010. GT suggests the creation of a real estate investment trust (REIT) which would finance the hotel. The problem with this idea is that the city would own all of the risk if the hotel sits empty, but the REIT would reap the profits if all goes well. (This is a really bad idea for the City of Tucson!)

The City Council and the Rio Nuevo Board play hot potato with the project
To build or not to build-- who's decision is it anyway? Apparently, we don't know. When the Arizona Legislature created the Rio Nuevo Board to oversee expenditure of the RN funds, Kozachik and others (including me) thought that meant they would oversee and make decisions on projects like the downtown hotel, but the RN Board passed the buck back to the City Council last week. On Sunday, the Arizona Daily Star called for someone to make a decision.

Three years, many plans, and millions of dollars later, Tucson still doesn't have a downtown hotel. Now what? As I have said many times, I do believe that Tucson would benefit from a larger, updated downtown convention hotel, but after having heard multiple interviews with Sanders about his convention hotel research, I am convinced that now is not the time for Tucson to take on massive debt and that the GT proposal is not the right plan for Tucson in 2010.

Stay tuned for future developments.

Tucson's downtown hotel: Who's on first? Rio Nuevo Board passes hotel back to M&C (Part 2)

The tortured saga of Tucson's new downtown hotel has been a long and twisted one.

Do we need a giant, glittering new hotel downtown?

How much will it cost?

Who should pay for it?

Who will own the debt?

Who will get the profits?

Tucson's Mayor and Council have been waffling around these questions for years with no resolution. The downtown development drama got exponentially more complicated when the Republican-controlled Arizona Legislature created the Rio Nuevo Board to oversee how Rio Nuevo's funds are to spent in the future. Over the summer there were public squabbles between the Mayor and Council and the Rio Nuevo Board. (One example: the RN Board didn't approve of the M&C using downtown parking garage spaces to pay off a legal settlement with developer Scott Stiteler because of a contract dispute.

These stories led me-- and I'm sure other Tucsonans-- to wonder who's really in charge? Did the Legislature clearly delineate the responsibilities of the RN Board and how they are to interact with the Mayor and Council? It appears not.

Tucson City Councilman Steve Kozachik has been pushing the City Council to drop the mega-hotel project-- at least until the economy improves. He also believes that whether or not to finance and build the hotel is in the hands of the Rio Nuevo Board-- or it was until they punted late last week and said the hotel fiasco belonged to the city.

According to the Arizona Daily Star, "...the project is in … well, "chaos" may be too strong a word, but "confusion" is not. Mix in confusion with political posturing by both the City Council and the Rio Nuevo board and the result is unacceptable. Especially on a project of this size and involving so much taxpayer money."

Here is the text of Kozachik's September 24, 2010 memo to the Mayor and Council, which he released after the RN Board ducked out of the hotel business (even though it is not clear that they lawfully can walk away from it-- since they are supposed to be in charge of how the Rio Nuevo funds are spent.)

SUBJECT: Responsibility for Decision-Making on the Proposed Convention Hotel

There seems to exist a condition of leadership paralysis with respect to making a decision about proceeding with the Convention Center Project. The Rio Nuevo Board has suggested shifting the decision-making responsibility back to the City, where that authority resided prior to the Board having been seated by the State Legislature. With over $230 million in taxpayers’ dollars in the balance, the City must make sure that all relevant questions are answered openly and publicly.

1. Who is legally responsible to make the decision to proceed with the Hotel?
State Legislation placed the legal obligation to adopt a Guaranteed Maximum Price (GMP) and finance plan on the Rio Nuevo Board. And, the Master Development Agreement for the project is between Rio Nuevo and the developer Garfield Traub. What is the role of the Legislature in the decision by the Board to shift that burden to the City? Legally, how does the change in relationship affect the Master Development Agreement? Does a new agreement need to be negotiated?

2. If the District shifts responsibility to the City for the hotel decision, what role does the District now play in approving any contracts related to the project?
The Legislature stated that no TIF money could be spent on any projects other than the Hotel and related project elements until a Notice To Proceed had been issued by the District. If no such NTP is issued, what are the City's options with respect to funding any other projects with TIF revenue? What role does the District then have in those decisions if they have shifted the duty/right to negotiate a hotel package to the City?


3. What other areas are affected by a change in the relationship?
What is the cost for putting together a finance program, that is, a bond package? Does the District have any financial obligation to assist in funding those costs with TIF dollars, or is it a General Fund obligation? Who negotiates the bond package? Who is involved in approving the terms of the package?

Subcontractor bids have expired. There will be a cost involved with re-submitting and re-evaluating a new set of bid documents. Do TIF dollars pay for those new costs, or is that a Developer cost to be borne by Garfield Traub? With the "owner" now out of the decision-making picture, who is to review and approve the bids with Garfield Traub?

There is no GMP. Previously, the District and the City have both been evaluating the proposed GMP submitted by Turner/Sundt. Is the City now in the position of making a unilateral decision with respect to the acceptability of the GMP and negotiating a new one in the event it concludes the existing price is too high? What role does the District now play in that process?

If the City puts together a funding package, does the District have any remaining role in its approval? If not, does this, in effect, constitute tacit agreement by the District that the City now controls the use of the TIF for this, and other projects the City deems appropriate use of those funds?

What we know is this:
a) There remain serious questions to be answered with respect to the financial viability of the Hotel.
b) In the present Convention Center Hotel market, there are numerous real-life examples that demonstrate the financial down-sides possible in operating a facility such as this.
c) There is no private sector money included in the financing of this project and the developer has openly indicated that he is unwilling to absorb any of the risk.
d) The “Team,” as described in the Master Development Agreement, with whom the District is to negotiate a Guaranteed Maximum Price and a finance plan, is comprised of commission-based firms who therefore have no incentive to produce for the City the lowest possible price for a high-quality product.
e) The taxpayers’ voice has been left out of the conversation. If the Rio Nuevo Board passes to the City the responsibility for making this decision, it is the Mayor and Council who are responsible to the taxpayers for whichever choice is elected, not the Rio Nuevo Board.
f) The voters are being asked to approve a sales tax increase along with a package that includes a significant salary increase for Mayor and Council. When the voters see those propositions on the ballot, their vote will reflect the level of trust they have for the governing body.

There appears to be a strong sense of urgency on the part of those who stand to benefit financially from this project that the District step aside and the City simply approve a funding plan that ultimately places the taxpayers at risk for what may well become an under-performing property. The decision to make this level of commitment comes while we are in midst of negotiating a GMP, in the midst of our trying to balance the FY2011 and FY2012 budgets, and in the midst of an effort by some in the City bureaucracy to convince the taxpayers of our need to adopt a sales tax increase. To take on a debt of this size while so many critical fiscal issues are unresolved is irresponsible.

It is time we protect the taxpayers’ interests and make a firm decision that, at this time, we cannot take on the burden of a risky capital project such as this. It is unfortunate that the District is now trying to absolve itself from fulfilling the leadership role in this matter that it was formed to exercise.

Nonetheless, the Board’s decision to stand down on the decision and place it back in the hands of the City does not obligate us as leaders in this community to approve a debt burden that is clearly inconsistent with the other fiscal realities with which we are faced. The timing is wrong, the finances are uncertain, and therefore the project must stop now until the market has improved to the point where some level of private sector investment can be included in the plan. (Emphasis added.)

Tucson's downtown hotel: To be or not to be? (Part 1)

Since he took office, City Councilman Steve Kozachik has been trying to hold the Mayor's and other council members' feet to the fire on the new downtown hotel deal.

The issue of whether or not to build a mega-hotel downtown has been complicated by Tucson's ongoing budget problems-- thanks to a downturn in the US economy, high unemployment and poverty in Arizona, cuts in funds from the state government and an over-reliance on tourism, sales tax, and the housing boon statewide.

All of this has been coming to a head since the City Council voted to send Prop 400, a 1/2 cent sales tax increase, to the voters this November. Labeled the "core tax", it theoretically will be spent on core services-- police, fire, and parks-- but, as I understand it, that is not an iron clad promise.

City Manager Mike Letcher proposed 2 plans to balance Tucson's budget-- Plan A being pass the sales tax and Plan B being across the board 15% cuts in all city departments (including police and fire). (Plan B, I think, is a particularly stupid idea because it plays into the hands of the people who tried to pass Prop 200 last fall. They contended that the City Council didn't value police and fire and would cut those services unless they were protected by the charter changed proposed in Prop 200, and here you go-- not even 1 year later, Letcher's Plan B proposes just that!)

As his answer songs, Kozachik has proposed Plan C and the hybrid, updated Plan D. I am not endorsing Kosachik's Plan D whole hog, but I do agree with him when he says that there are steps that the City Council can and should take now--regardless of whether or not the sales tax passes. For example, included in Plan D are items like eliminating cars and car allowances for city employees (check this link and scroll down to see who gets this now); a 2% decrease in pay for city employees making above $96,000; increased "cost recovery" related to Parks and Recreation programs (ie, increased fees); a sliding scale Sun Tran fare increase; and much more. The kicker at the end of Plan D is killing-- at least for now-- the hotel project:

"Because of the uncertain impact on the General Fund, advise Rio Nuevo Multipurpose Facilities District Board that the City will not entertain any further consideration of funding proposals associated with the Downtown Convention Hotel until the sales tax has sunsetted (see below.)

"In the event sales tax fails at the ballot box, City will not entertain funding proposals for the Hotel until State-shared sales tax receipts to the City exceed those identified in “sunset” provision cited below."

According to Kozachik (the sole Republican on the City Council), he presented Plans C and D as points of discussion and wants to discuss/debate the ideas with other members of the City Council. The problem is that the Democrats on the City Council didn't want to discuss the plans.

At the September 21, 2010 City Council meeting, Kozachik also made this motion to tell the Rio Nuevo Board that the city was washing its hands of the hotel project proposed by Garfield Traub.

Convention Center Hotel and the City of Tucson

What is the City of Tucson’s legal obligation to the design, development and building of the Convention Center Hotel? The Master Development Agreement identifies the Agreement is between the Rio Nuevo Multipurpose Facilities District (The Owner) and Garfield Traub (The Developer).

The signature page of the Master Development Agreement states that the Mayor signs “Solely in connection with the City’s obligation and agreements pursuant to Sections 2.2.2, 4.1.14 and 4.2 of this agreement”

Section 2.2.2 relates to the construction of the East entrance and states that the agreement “obligates the City to expeditiously pursue mutually agreeable methods for funding the CC East Entrance Construction Fund” The City complied with this obligation by issuing additional Certificates of Participation.

Section 4.1.14 relates to the City issuing permits during the design phase and states “City agrees to expedite to the fullest extent possible plan review and approvals as well as the issuance of all permits and consents required for the project.” The City has complied with this obligation.

Section 4.2 relates to the City issuing permits after completion of the Design Development Period and states “City agrees to expedite to the fullest extent possible plan review and approvals as well as the issuance of all permits and consents required for the project” The project has not been approved and therefore the permits will not yet be issued.

Clearly, The City of Tucson has no contractual obligation to fund the project. In light of the dire financial condition in which the City finds itself, the City should not risk one more dollar of the taxpayer’s money on this project.

I move that the City of Tucson advise Rio Nuevo Multipurpose Facilities District Board that 1) at this time we do not intend to backstop or issue any bonds to secure the completion of the Tucson Convention Center Hotel, Parking Garage and Convention Center Expansion and 2) The City will not approve any additional expenditures for the Convention Center Projects until RN has negotiated an acceptable GMP and funding plan for the project.

This declaration of intent will allow the RNMF Board to decide if the project is financially viable in its current form and to decide if alternative funding methods are available. That obligation is clearly delineated in the MDA under Sections 4.1.13 and 6.6.

Section 4.1.13 assigns to Garfield Traub the responsibility of securing a Design Build Contract with Turner/Sundt and to negotiate a GMP, advising Rio Nuevo as that is developed.

Section 6.6 assigns to Rio Nuevo the responsibility of obtaining funding for the Project. The City of Tucson is explicitly not mentioned in the development of a financing plan.

We, as the City of Tucson, cannot simultaneously tell our citizens that we need for them to pass a ½ cent sales tax because we are in dire financial straits and also tell them that we are obligating their money to a $225 million project that has significant risks and assumptions associated with it. The turn in the economy has dictated that this type of risky project should not be placed on the shoulders of the citizens of Tucson. (Emphasis added.)

The motion didn't go anywhere because no one seconded it. For Kozachik's Ward 6 update on the meeting, check this link. To watch the City Council meeting online, check out Channel 12.

I do believe that Tucson needs larger, updated hotel accommodations downtown, but I don't agree that the city should go hundreds of millions of dollars into hock for decades to build it. (Here's a hint: there is a reason why the bankers aren't financing this.)

An Congress-- Not?

If you follow downtown politics and development/non-development, you know that it has been a rocky road littered with bad real estate deals, broken dreams, and random glimmers of hope.

Last fall there was a big hullabaloo when downtown landlord and developer Scott Stiteler evicted 3 businesses (Tooley's, Preen, and Metropolis Hair) and 4 galleries (Dinnerware, Firestone, Rocket, and Central Arts [above]) on Congress to make way for a 7000-square-foot sports bar owned by Mr. An of Sakura fame.

I'm sure, at the time, Stiteler thought that Mr. An would be a more solid tenant than these funky small businesses and galleries, but that Congress Street gallery row-- coordinated for the most part by David Aguirre of Dinnerware Artspace-- created a very popular art scene and drew large crowds downtown to view rotating exhibits (1,2,3,4, 5, 6, 7).

Construction-- or destruction, actually-- started in the spring. Walls were knocked down to make way for the glittering new sports bar. The Arizona Daily Star trumpeted Mr. An's move downtown.

Now, construction appears to be stalled. Word on the street is that Stiteler is stuck with an empty shell with dirt floors, no tenants paying rent, and no Mr. An.

As Joni Mitchell sang, You don't know what you got 'til it's gone. You paved paradise and put up a parking lot..

Sept. 18, UPDATE: I received e-mails from Stiteler and Councilman Steve Kosachik on this story. According to Stiteler, construction and renovation inside structures on 200 block of Congress Street continues. He said that An and others are interested in the space but would not be more specific regarding future tenants. No time frame for completion was offered. Apparently, when the 1912 structures were gutted, they were found to be in rougher shape that anticipated. Watch for further developments on this story..

Who writes Tucson's real estate development contracts? Cuz I don't think they know what they are doing (Part 2)

This downtown development saga begins back in December 2008, but it keeps on... well...developing...

The Cliff Notes version is that the City of Tucson was going to swap land for development services to be completed by Scott Stiteler (and his various other partners who have come and gone in the past year and a half).

The Tucson Citizen (December 17, 2008) made a rosy announcement of the downtown "predevelopment plans" and the land/cash swaps.

Later in the Spring of 2009, the Tucson Weekly (April 9, 2009) published an extensive article on multiple downtown deals.

Quoting from the Weekly:
"The concept is the city has no money," explains Jaret Barr, of the city manager's office. "What if the DTDC [Downtown Tucson Development Company, Stiteler's business] could do the work, and our compensation (to the DTDC) would be properties?"

Under the terms of the predevelopment agreement, the developers would be given options to acquire numerous parcels of valuable property for $1 each. This land was to be transferred when the DTDC finished specific tasks.

This is not a new idea. Cash-strapped municipalities have used this redevelopment tactic for many years: Give a developer some vacant land (or sell it for a token amount of money) and allow the developer to build on it, in a specified way. In the end, everyone is happy, theoretically. The developer owns a money-making property, and the city benefits from sales taxes and the value of having gleaming new construction where there once was a blighted property or a vacant lot.

During the spring of last year, several trial balloons were floated regarding which properties would be traded to Stiteler in exchange for his services. At one point, he was asking for the the Historic Train Depot and the Congress Street frontage of Ronstadt Center (which would have made it unusable as a bus station). This is when I started to pay attention. As I mentioned, these land-for-services swaps are common, but generally the municipality doesn't trade property that the city has spent millions developing. (In fact, last spring I even wrote letters to all of the City Council members asking, "The Ronstadt Center? The Train Depot? Really? What are you thinking???")

To add to the ongoing drama downtown last spring, there were two other city government/development stories also brewing in the local media. In April, the City Council fired Tucson City Manager Mike Hein. Was Hein scapegoated because of the city's problems and Rio Nuevo's ... well... sluggish progress? I don't know, but for a variety of opinions on this high-profile political action, check out these links 1,2,3,4, 5.

And, of course, who could forget the landlord-tenant food fight that sprang up between Stiteler and the the Rialto Theater Foundation, reported in the Weekly in late May 2009. The Rialto eventually lost this battle. (Note to self: never fight publicly with your landlord.)

On June 11, 2009, the Tucson Weekly reported that the Train Depot had been removed from the land swap, but the specific deal between Stiteler and the city seemed to be evolving-- just days before the June 16 deadline for a City Council decision. Furthermore, the Weekly reported that "the city could owe Stiteler and Martin [one of his partners] more than $900,000 if the document isn't ratified by June 16, due to language that was included in an earlier agreement."

Why did the city apparently sign a contract that had a deadline for their decision but not a deadline for submission of the plan? In the June 11 story, the Weekly reported several different possible multi-million-dollar scenarios-- just days before the final decision was to be made. In fact, Stiteler delivered the final plan to the City Council on the Friday before the Tuesday City Council meeting. Three days over a weekend was obviously not enough time for them to make an informed decision.

Ultimately, the City Council did what they do best; they delayed making a decision. This-- among many other Rio Nuevo snafus-- caused City Councilwoman Nina Trasoff to lose her City Council seat to Republican Steve Kozachik in the November 2009 election and gave Councilwoman Karin Ulich a very tight race. In October 2009, the Tucson Choices blog published a series of "Player Reports" with tidbits of information on several downtown deals.

Now let's fast forward to this summer 2010.

Remember the fee that the city "could owe" Stiteler? Well, the city did owe him a settlement because the 2009 deal fell through. On June 17, 2010 (a year and a day after the historic non-decision) the Tucson Weekly reported the city's settlement with Stiteler.

But, wait, there's more!

In the past year, the Arizona Legislature and Governor Jan Brewer created the Rio Nuevo Multipurpose Facilities District Board to oversee future development in downtown and to manage the Rio Nuevo funds.

On June 18, 2010 Inside Tucson Business reported that the Rio Nuevo Board (now in charge of spending the Rio Nuevo funds) doesn't approve of the city's lawsuit settlement with Stiteler. According the Inside Tucson Business, the Stiteler settlement includes a shared asset-- parking spaces in a downtown parking garage-- and the City Council didn't clear the deal with the Rio Nuevo Board. Sigh.

Again, I ask, "Who writes Tucson's real estate development contracts?"