The city of San Antonio still owes approximately $ 173,085,000 towards the construction of the downtown Grand Hyatt. He does not own the hotel. Hyatt does. While the city is currently looking to taxpayers to pay off bond debt, the hotelier is still realizing about a 12% return on investment.
Since the start of the pandemic, the city has used $ 4.6 million in hotel occupancy taxes to pay off construction debt. Next week he will pay an additional $ 5.8 million.
How is it possible? Because in 2005, the city created an association and sold 208 million dollars of bonds to build the hotel, which is attached to the convention center. The developers contributed $ 74 million.
City officials and tourism promoters have said the hotel will increase the number of conventions.
“It’s a big part of all this ability to sell conventions, to market San Antonio,” said Ben Gorzell, CFO of San Antonio.
City staff see the hotel as a key component in hosting high profile events like the NCAA Final Four in 2018.
The travel industry is one of the city’s top five industries and contributes billions to direct and indirect economic impact each year.
The plan was that the money from hotel stays would pay off the debt. But the pandemic has struck, travel has plummeted, and the Grand Hyatt closed for five months last year. The hotel had an abysmal 17% occupancy rate for 2020. No heads in the beds means no money to pay back the deposit.
Technically, the tax money the city uses to cover the bond deficit is a loan. According to Gorzell, it must be repaid. But repayment is not a priority in the structure of the bond covenant.
In its next semi-annual payment on July 15, the city will have loaned $ 10.4 million to repay the construction debt. This money comes from visitor taxes that would normally be spent on operating the Alamodome and Henry B. Gonzalez convention center, public art, historic preservation, and marketing of the city’s tourism industry. The city says that will make up for what is being taken out for the Grand Hyatt from a contingency fund.
According to the deal, the money people spend at the Grand Hyatt would have to fill 10 more buckets before landing in the one that pays the city back. There is only one bucket below. It’s for the excess income and there hasn’t always been a dollar in it. Money runs out before it gets there.
Thus, it will probably take 18 years before the hotel begins to repay the town’s loan and accrued interest. That would only be after the bond matures in 2039 and payments to bondholders are completed.
If Hyatt sold the 1,003-room Grand Hyatt luxury hotel, the city would have to be repaid on its loan immediately, according to Gorzell.
Travel to San Antonio is increasing as COVID-19 infections decline and vaccination rates improve. As a result, City staff said they would no longer have to use taxpayer money in their Jan. 15 debt payment.
But Moody’s Investors Service is not so sure about the health of bonds. The rating agency downgraded the bond rating from A3 to Baa1 at the end of May and changed its outlook to negative on June 15. This follows the downgrade of S&P with a negative outlook eight months earlier.
“The negative outlook on special hotel tax obligations reflects the potential for a prolonged impact of post-pandemic consumption patterns,” read a June 15 credit advisory from Moody’s.
It’s a long way to say that they expect the hotel to have a hard way to go, like all travel-based entities. According to Moody’s, the hotel could return to pre-pandemic income levels as early as next summer. Other travel analysts have predicted the industry will suffer until 2024.
“What Moody’s is telling bondholders and us is that the money to pay these bonds is much less certain at this point, and, in many ways, much less certain in the future,” he said. said Heywood Sanders, professor of public administration at the University of Texas. San Antonio – and a staunch critic of using state guaranteed bond tax money to build hotels and convention centers.
This means there is a higher risk that San Antonio taxes on visitors will be needed to float the hotel.
Moody’s also criticized the bonds for a lack of governance and said its downgrade was in part due to “a lack of robust planning for several alternatives in response to the coronavirus pandemic for special hotel tax obligations.”
The city disagreed.
“I’ve never been in a position where I’ve been sitting here like, ‘I’m afraid the bondholders aren’t getting paid,’” Gorzell said.
Gorzell said the city has done everything it is legally required to do and there is no need to explore additional pots of money: the real target of Moody’s criticism.
“From our perspective: we watched it, we watched it very closely,” Gorzell said. “I never felt that bondholders risked not getting paid in July. And we’re not just going to make a deal that could add additional costs to the project for us and our partners. “
But bond analysts aren’t the only ones acknowledging the damage done to the travel industry and the Grand Hyatt in particular. The Bexar County Assessment District – which partially examines a company’s commercial health in its property value assessments – said the effects of the pandemic have reduced Grand Hyatt’s value to $ 140 million, that’s a drop of more than $ 30 million.
If the bond was a 30-year mortgage on a house, that would mean the city was under water, when you compare the value of BCAD to the amount the city still owes bondholders for its construction ($ 173 million). of dollars).
But that’s not a 30-year mortgage for two big reasons.
First, because the city does not own the property. For example, Bexar County built the AT&T center and then leased it to Spurs. In this case, Hyatt owns 100% of the Grand Hyatt but not the debt to build it. According to documents filed by the company, it is one of the largest Hyatts in the world.
Second, because when the travel industry rebounds and the hotel is open for a whole year, that value will grow faster than a house.
This project was funded by state guaranteed bonds for property the city does not own, which is not unprecedented.
Gorzell pointed to Toyota south of town. The training center and site preparation for the factory were paid for with money from a bond secured by CPS revenues.
The Grand Hyatt was, like the Toyota plant, built with the expectation of exceptional economic gains.
But the impact of the hotel has never been greater than expected by bond boosters.
According to the bond documents, within a few years the hotel should have seen 76% of its rooms rented out on an annual basis until at least 2017. But it’s been a dozen years and he’s never reached those heights. Sanders said he came close to 2 percentage points just once, in 2014.
“Unfortunately (it) was unlucky to open around the same time the economy collapsed in 2008,” he explained. “Thus, the hotel never reached the level of performance that the consultants expected.
According to city documents, over the past five years, the hotel has been off forecast by up to 10%. Until the 2020 pandemic, revenues had never failed to cover or come close to debt. Now, starting next week, he will owe the city a total of $ 10.4 million from future hotel revenues in better times.
When will those times be, it’s still a question.
“We’ve been pretty happy the past month or two as we’ve observed our HOT (hotel occupancy tax) revenue in terms of what’s entered, as well as the hotel, seeing an increase in operations. We are optimistic, ”Gorzell said.
Gorzell said when speaking to Moody’s about the bond’s downgrade in May, they found themselves in a very different situation than they are today just over a month later. He said that over the past 30 days the numbers have increased.
But while leisure travel has rebounded to some extent, convention center activity is expected to lag behind. And in the 12 years since the Grand Hyatt opened, the convention industry has grown increasingly crowded.
“We have cities across the state and across the country that have done what we have done. they have expanded their convention centers, ”said Sanders. “They have invested public funds in hotels at the Convention Center, not just here, but in places like Austin, Dallas and Houston. “
And in addition to competition from other cities, the Grand Hyatt must also compete with other hotels in the city, including itself. Hyatt also owns the Hyatt Regency and the new 162-room luxury Thompson hotel.
The obligation did not provide for a global pandemic. He had not planned to expand the hotel offer in the city center or in other cities, which would increase competition for conventions. And in the end, his predictions about the hotel’s popularity turned out to be wrong.
The city may be emerging from the pandemic and the economy may improve. But the hotel isn’t about to pay tens of millions of dollars. San Antonio is on that hook, and no one knows when he’ll be released from it.
Clarification: This story has been updated to reflect that the City of San Antonio will pay $ 5.8 million for its July 15 bond payment. An earlier version of the story referred to an incorrect number provided by city officials.
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