By Kevin Lane and Agnel Philip
The new Sheraton Grand Phoenix hotel owner will not have to pay property taxes on the building next year under the terms of the deal approved by City Council. The new owner will have to pay property taxes starting September 2017.
It is unclear how much tax revenue will be missed for 2016, or the way the money would have been used. The land will not be taxed because the city still owns it, but TLG Phoenix, the company buying the hotel, will be liable for taxes on the building starting in 2017, as well as a $1 ground lease for 99 years.
The deal, which City Council approved on Feb. 3, has not been finalized. For budgeting purposes, the deal had to be completed before the Dec. 31, 2015 to allow the county enough time to calculate the tax bill for September 2016, said Lesley Kratz, executive advisor to the Maricopa County Assessor. Arizona law requires properties be valued by Jan. 1 of the year before they are to be taxed.
Jeremy Legg, an economic development project manager for Phoenix, said his office isn’t sure if the hotel building will be subject to property taxes and didn’t respond to requests to confirm the Assessor’s office analysis of the hotel’s property tax status. Representatives of TLG Phoenix did not respond to requests for comment.
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The hotel, which is valued at $143 million by the county assessor, is one of the most valuable properties in Phoenix, and its eventual inclusion in the downtown tax base will likely have a significant impact on tax bills. Kratz said her office hasn’t done the calculations necessary to determine the exact impact.
Since opening in 2008, the hotel hasn’t been subject to property taxes because it was owned by the city. Under private ownership, the hotel and land could have been liable for $4.8 million in property taxes in fiscal 2015, based on tax rates provided on the Maricopa County Treasurer’s website. The actual tax bill would have been different if the Sheraton was included on the tax rolls due to its value.
Beginning in fiscal 2017, the building will be subject to property taxes, Kratz said, under an Arizona statute that allows governments to own the land where private buildings stand.
“The hotel and all of the fixtures and furniture and everything inside the hotel will be taxable,” she said.
Kratz said Desert Ridge Marketplace in Scottsdale operates under the same arrangement. The city of Scottsdale owns the land and leases the land to businesses who pay taxes on the buildings where they operate.
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The largest beneficiaries of downtown property taxes are the two area school districts: Phoenix Elementary and Phoenix Union High School. Under 2015 tax rates, Phoenix Elementary would have collected a total of $1.9 million from the Sheraton, according to rates provided by the county treasurer. This estimate is based on the total value of the hotel and land and includes both the primary rate and the rates for bonds and overrides for the school district.
Representatives from the Phoenix Elementary School District didn’t respond to multiple requests for comment.
Legg said the purpose of the $1 per-year ground lease was to keep Phoenix in control of how the hotel is used and operated.
“This lets us make sure that the convention center stays successful,” Legg said. “Also to make sure that we have enough hotel rooms within walking distance of the convention center.”
The city built the hotel to help make more rooms available near the convention center so that event goers would stay in the downtown area, Legg said.
The Sheraton has bled money for the city since its opening during the Great Recession. The city will still have between $40 and $50 million in debt related to the project if the sale is completed. The money freed up by the sale could be used to finance the construction of a new arena for the Phoenix Suns.
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The Sheraton sold for $300 million, far above its $225 million expected sale price, according a city official who spoke to the council on Feb. 3.
“Clearly they are basing the price not on what we have done in the past, but what they can do in the future,” Legg said. “They are valuing it on the upside potential that they see.”
Contact the reporters at Kmlane5@asu.edu and aphilip3@asu.edu.
