City sells Sheraton, awards buyer controversial incentive

The city sold the Sheraton Grand Phoenix Hotel Wednesday, awarding the buyer a controversial Government Property Lease Excise agreement. (Nick Serpa/DD)

City Council approved sale of the Sheraton Grand Phoenix Hotel at its formal meeting Wednesday and awarded the buyer a controversial tax incentive commonly used to increase density downtown.

TLG Phoenix LLC bought the hotel for $255 million which is $51 million less than the $306 million the city invested in its construction. The group will take over the property in January 2018.

A similar deal to sell the hotel to TLG fell apart last year because the price was too high.

City Manager Ed Zuercher maintained the hotel had an overall positive impact on the city, supporting the large crowds drawn by the convention center.

“The convention center has been shown by the state auditor general to have significant impact on the state and the city and has met its obligation for its investment,” Zuercher said. “It has accomplished the goal of building downtown into a convention and tourism destination.”

Zuercher and his team pushed to close the sale now because, while the hotel has been profitable in recent years, it is predicted to begin losing money in the near future.

“I recommend we sell the hotel to mitigate financial risk going into the future,” Phoenix Chief Financial Officer Denise Olson told the council.

Part of the reason the Sheraton is predicted to lose money is that, in order to stay a competitive 4-star hotel, it will require renovations upwards of $20 million dollars.

(Nick Serpa/DD)

The city will also have the ability to collect taxes on the property once it is sold, although because of the Government Property Lease Excise Tax (GPLET), revenue will not be as high as it would be otherwise.

The foundation for GPLET is a provision in Arizona’s tax code which exempts land owned by governments from property taxes. GPLET allows the city to take over the rights to a piece of land and lease it back to the developer at a significantly reduced rate that replaces the normal property tax.

The tax has been used extensively by the city to incentivize developers to build high-rises downtown. Opponents say it picks winners and losers because wealthier developers can afford the extensive legal fees it takes to negotiate with the city.

The Goldwater Institute is suing the city on grounds that a similar agreement given to a different downtown developer violates several clauses of the Arizona Constitution. If the city loses the case, the future of the tax incentive would be in question.

Taxes collected on the Sheraton by the city would only be $53 million over 20 years in contrast to a possible $97 million with normal property taxes and no GPLET agreement, Zuercher said.

“We set up a system where the hotel doesn’t pay any taxes, and now it’s gonna pay some taxes.. And we’re gonna call that progress. I guess I disagree with that,” said District 6 Councilman Sal DiCiccio said.

Cliff Friedman, a Phoenix resident, also opposed the sale of the Sheraton.

“The hotel is now profitable and the value or appraisal of the hotel should be reconsidered,” Friedman told the council members. “I ask you, the city council members and mayor, to vote no on this measure.”

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Clarification: October 7, 2017

An earlier version of this story misidentified the buyer of the Sheraton as Thayer Lodging Group. The story has been update to show the buyer is TLG Phoenix LLC.