The City Council has approved the construction of a $200 million, 707-room, municipally owned Sheraton Hotel to be partially paid for with funds from the Rio Nuevo redevelopment district.
The new hotel would serve a renovated convention center and potentially produce significant revenue to help finance a new arena to be built nearby.
Some downtown investors, however, have serious doubts about the financial viability of the proposed hotel project.
"I became convinced four years ago that 300 to 400 new rooms could be absorbed downtown. ... That's a substantial number, and trying to absorb more rooms could be a real potential problem," says Tom Tracy.
Based on that philosophy, Tracy, of the Tucson-based The Lodging Company, joined forces with developer Roger Karber and Humberto Lopez, owner of downtown's Hotel Arizona. They proposed renovating the 307-room existing facility, located next to the convention center, and constructing an additional 400 rooms close by.
The city, however, later decided to pursue a competitive process for a new convention-center hotel and eventually selected the Sheraton proposal. While the council at one point investigated purchasing the Hotel Arizona as part of the Sheraton deal, because of disputes between the parties, that prospect now appears to be on life support.
Because of that, Tracy says of a rehabilitated Hotel Arizona: "We're moving on and will either redevelop or sell (the hotel). I think it can kick their ass in a competitive market, and there's nothing they can do to mitigate that."
Believing the 35-year-old Hotel Arizona can be renovated to first-class standards much more cheaply than a new hotel can be built, Tracy and Karber think a refurbished Hotel Arizona would have a substantial competitive advantage in room-rate charges.
Two years ago--before their recent flare-up with the city--Karber and Tracy hired the C.H. Johnson consulting company of Chicago to look at their 707-room proposal. That report found it to be economically feasible.
The city then employed Johnson to review a generic 700-room concept, and the firm similarly concluded it would be practical. (See "The Risks of Revitalization," Jan. 10.) In his June 2007 report to the city, Johnson also states: "At this juncture of analysis, it is assumed that the existing 307-room Hotel Arizona will be part of the solution."
This latter report is the only financial-feasibility study on the convention-center hotel that's been publicly released, and it doesn't address the Sheraton proposal specifically.
Jaret Barr, assistant to City Manager Mike Hein, reports that a financial study on the Sheraton by the Chicago office of the HVS International consulting group won't be completed until December.
"It absolutely may say (the hotel) won't work," Barr says of this pending study. "It will determine if the project makes sense."
Both Tracy and Karber say they are dumbfounded by the city's hotel-development process to date.
"I find it amazing that one year after the city issued a request for proposals for development of a convention-center hotel, they are just now trying to analyze its feasibility. The process should have been reversed," Tracy says.
For his part, Barr believes the city's report from Johnson fulfills that requirement. He adds that the upcoming study by HVS will include a look at a range of options for the size of the Sheraton hotel.
This study, Barr continues, will recommend a room number for the new hotel which makes the most sense. "I'm not an, 'If you build it, they will come,' kind of person," Barr says. "I want to see all the data."
So far, the working assumption at City Hall has been that the convention-center hotel would turn a substantial profit. That conclusion is based on Johnson's earlier work, which shows the new hotel having an occupancy rate in its first year of 65 percent at an average room rate of almost $145.
Whether such rates are feasible remains to be seen.