Why Is San Antonio Loaning Millions In Taxpayer Funds To Pay For The Grand Hyatt’s Construction?
The city of San Antonio still owes about $173,085,000 in the construction of the downtown Grand Hyatt. It does not own the hotel. Hyatt does. While the city is currently turning to taxpayers to pay down the bond debt, the hotelier still makes around 12% return on its investment.
Since the pandemic began the city has used $4.6 million in hotel occupancy taxes to pay debt on the construction. Next week it will pay another $5.8 million.
How is this possible? Because in 2005, the city created a nonprofit and sold $208 million in bonds to build the hotel, which is attached to the convention center. Developers chipped in $74 million.
City officials and tourism boosters said the hotel would increase convention business.
“It's an important part of that whole ability to sell conventions, to market San Antonio,” said Ben Gorzell, San Antonio chief financial officer.
City staff see the hotel as key in getting prestige events like the NCAA Final Four in 2018.
The travel industry is a top-5 industry for the city and contributes billions in direct and indirect economic impact every year.
The plan was that money from hotel stays would pay back the debt. But the pandemic struck, travel plummeted and the Grand Hyatt closed for five months last year. The hotel had an abysmal 17% occupancy rate for 2020. No heads in beds means no money to pay back the bond.
Technically the tax money the city is using to bridge the bond gap is a loan. According to Gorzell, it has to be paid back. But repayment is not a priority in the structure of the bond covenant.
With its next biannual payment on July 15, the city will have loaned $10.4 million to pay off the construction debt. That money comes from taxes on visitors that would normally go towards operating the Alamodome and Henry B. Gonzalez Convention Center, public art, historic preservation, and marketing the city’s tourism industry. The city says it will make up what's being taken out for the Grand Hyatt from a contingency fund.
According to the agreement, the money people spend at the Grand Hyatt would need to fill 10 other buckets before it lands in the one that repays the city. Only one bucket sits below it. It’s for surplus revenue and it has always had zero dollars in it. Money runs out before getting there.
So, it will likely take 18 years before the hotel begins to pay the city loan and accrued interest back. That wouldn’t be until after the bond has matured in 2039, and payments to bondholders have ceased.
If Hyatt sold the 1,003-room luxury Grand Hyatt hotel, the city would have to be paid back its loan immediately, according to Gorzell.
Travel to San Antonio is increasing as COVID-19 infections drop and vaccination rates improve. As a result, City staff said they won’t have to use tax dollars again in its Jan. 15 payment on debt.
But Moody’s Investors Service isn’t as sure about the health of the bonds. The ratings agency downgraded the bonds from A3 to Baa1 in late May and changed its outlook to negative on June 15. This follows S&P also lowering its rating with a negative outlook eight months prior.
“The negative outlook on the special tax hotel bonds reflects the potential for a prolonged impact of consumer patterns post-pandemic,” read a June 15 credit opinion from Moody’s.
That’s a long way of saying they expect the hotel has a rocky path ahead as do all travel-based entities. According to Moody’s, the hotel could return to pre-pandemic revenue levels as early as next summer. Other travel analysts have predicted the industry to suffer into 2024.
“What Moody's is telling bondholders and us is that the money to pay those bonds is far less certain at this stage, and, in many ways, far less certain going forward,” said Heywood Sanders, professor of public administration at the University of Texas San Antonio — and a ardent critic of using tax money publicly-backed bonds to build hotels and convention centers.
That means there is a higher risk that San Antonio taxes on visitors will be needed to float the hotel.
Moody’s also dinged the bonds for a lack of governance and said its ratings downgrade was in part due to “a lack of robust planning for multiple alternatives in response to the coronavirus pandemic for the special tax hotel bonds.”
The city disagreed.
“I wasn't ever in a position where I was sitting here going, ‘I'm worried the bondholders aren't going to get paid,’” said Gorzell.
Gorzell said the city did everything it was legally bound to do and it wasn’t necessary to explore additional pots of money: the real target of Moody’s criticism.
“From our standpoint: we've monitored it, we've watched it very closely,” Gorzell said “I never felt like bondholders were in jeopardy of not getting paid in July. And we're not gonna go out and just do a deal that might add additional cost to the project for both us and our partners.”
But bond analysts aren’t the only ones recognizing the damage done to the travel industry and the Grand Hyatt in particular. The Bexar County Appraisal District — which in part looks at a company’s business health in its property value assessments — said the effects of the pandemic reduced Grand Hyatt’s value to $140 million, a drop of more than $30 million.
If the bond were a 30-year mortgage on a home it would mean the city was underwater on it, when you compare the value from BCAD to the amount the city still owes to bondholders for its construction ($173 million).
But it isn’t a 30-year mortgage for two big reasons.
First, because the city doesn’t own the property. For example, Bexar County built the AT&T Center and then leased it to the Spurs. In this case, Hyatt owns 100% of the Grand Hyatt but not the debt to build it. According to company filings, it is one of the biggest Hyatts in the world.
Second, because when the travel industry rebounds and the hotel is open for an entire year, that value will increase quicker than a home.
This project was financed by publicly-backed bonds for a property the city doesn’t own, which is not unprecedented.
Gorzell pointed to Toyota south of the city. The training center and land preparation for the plant was paid for with money from a bond backed by CPS revenue.
The Grand Hyatt was, like the Toyota plant, built with the expectation of windfall economic gains.
But the hotel’s impact was never quite as big as the bond boosters forecasted.
According to the bond documents — within a few years — the hotel should have seen 76% of its rooms rented on an annual basis lasting till at least 2017. But it’s been a dozen years and it has never reached those heights. Sanders said it came within 2 percentage points just once, in 2014.
“Unfortunately (it) had the misfortune to open at about the same time the economy cratered in 2008,” he explained. “So, the hotel never reached the level of performance that the consultants forecast.”
According to city documents, in the past five years the hotel has been off forecast as much as 10%. Until 2020’s pandemic, revenue had never failed to cover the debt, or come close. Now as of next week it will owe a total of $10.4 million to the city from future hotel revenues in better times.
When those times will be is still a question.
“We've been pretty pleased the last month or two as we have watched our HOT (hotel occupancy tax) revenues in terms of what has come in, as well as the hotel, seeing some increased operations. We're optimistic,” said Gorzell.
Gorzell said when they were talking to Moody’s about the downgrade of the bond in May they were in a very different situation than now a little over a month later. He said in the past 30 days the numbers have picked up.
But while leisure travel has rebounded to some degree, the convention center business is expected to lag. And in the 12 years since the Grand Hyatt has opened, the convention industry has gotten increasingly crowded.
“We've got cities around the state and around the country that have done what we've done. they've expanded their convention centers,” Sanders said. “They've invested public funds in Convention Center hotels, not just here, but in places like Austin and Dallas and Houston.“
And in addition to the competition from other cities, the Grand Hyatt also has to compete with other hotels in town, including itself. Hyatt also owns the Hyatt Regency and the new 162-room luxury Thompson Hotel.
The bond didn’t plan for a global pandemic. It didn’t plan for expanded hotel offerings in downtown or other cities increasing competition for conventions. And in the end, its predictions for the hotel’s popularity fell short.
The city may be emerging from the pandemic, and the economy may be improving. But the hotel is not on the hook for the tens of millions of dollars. San Antonio is on that hook, and no one knows when it’ll be freed 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 referenced an incorrect number provided by city officials.
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