2017: Phoenix wants to make the Sheraton everyone's problem

The Arizona Republic
Tuesday, August 15, 2017
Sean McCarthy


It must be odd for City of Phoenix officials to admit they cannot sell their prized jewel, the Sheraton hotel, without guaranteeing the buyer won’t pay Phoenix’s high business property taxes. The incentive deal they are offering the buyer adds insult to this injurious affair.

Government Property Lease Excise Tax, or GPLET, is a boorish term designed to snooze the public. The basic premise is a city will use the tax revenue that would otherwise go to school districts, the county and the community college as a tax break for a private developer. The justification is that without the deal, a vacant lot or dilapidated old building goes unused.

It’s difficult to justify this one.

Taxpayers paid $350 million for the Sheraton and operated it at a loss. Instead of admitting this was a failed venture, the city is overselling the public benefit of the proposed sale and soft-peddling the tax incentive.

To offer the incentive, the city must acquire an independent analysis of the deal and prove the tax incentive does not outweigh the public benefit. The hotel sale study is thorough but makes a few critical errors.

The report claims the incentivized sale provides $391 million of public benefit over 20 years, which counts the $255 million sale of the hotel as gravy and doesn’t net it against the taxpayer’s investment or existing debt. Furthermore, the new owner reportedly keeps the $13 million reserve account, dropping the sale value to $242 million.

It also presumes moderate growth in hotel occupancy resulting from a promised $38 million remodel. The notion that customers are avoiding the Sheraton today because of its appearance is curious. After kindly ignoring the loss on the hotel itself and accepting the other assumptions, the public benefit is at most $136 million over 20 years.

The report also incorrectly assumes the current hotel valuation from the assessor is dramatically wrong and presumes a new owner would get a whopping 30 percent value reduction on appeal. They cut the value of the hotel to $126 million in their analysis, which conveniently understates the tax incentive.

The property is actually valued based on its net operating income. So if the remodel does drive increased occupancy rates, its valuation would increase, not decrease. A fair estimate of the GPLET incentive using their current valuation is $119 million over 20 years, which is 23 percent higher than the reported $97 million.

The hotel is a sunk cost and the city has two choices moving forward: A straight-up sale or an incentivized sale. Instead of letting other jurisdictions get their fair share of the property tax revenues, they will get far less so the city can get more cash up front.

The hotel probably would not fetch $255 million if the owner had to pay full property taxes in downtown Phoenix, which sports some of the highest rates in the state. That’s a Phoenix problem. But with GPLET, they can avoid that unpleasantness and offer a far reduced rate ― and that is your problem.