City Buying Hotel - Information and Talking Points

Key Information:

The city manager proposed and the Mayor and three Council members agreed (Laegeler, McElroy & Stockard) to have the city buy the former Holiday Inn Hotel for $6.5 million. The transaction was negotiated by the city manager and agreed to by the "four-block" (affectionately referred to) prior to the long planned auction that had been advertised nationally. The city believed that there will be no "appropriate" buyers at the auction. According to the Herald & Review:

Mayor Paul Osborne conceded the plan "sounds crazy at first." But he quickly added that the hotel and conference center is "critical" to the success of the community.

What We Think - We agree it is "crazy"

1. While many of us feel that the hotel is an important amenity for our community, the city should not be in the hotel ownership business.
2. It is not the role of government, nor is the city competent to operate a strugling business in a very difficult and complex industry.
3. The purchase and decision was unnecessarily rushed and unknown throughout the community.
4. Adequate due diligence was not done. Serious economic issues were not addressed.
5. There were a number of viable alternatives for the city to support the continued operation of the hotel that were either ignored or pre-empted by the rush to enter into this transaction. These unknowns include whether or not other buyers would have presented themselves at the auction to make a legitimate offer to buy.

What We Know

• The purchase has been highly controversial in the community and within the Council. The Council was split 3 to 3 with the Mayor voting in favor of buying the hotel. The three opposing votes were strongly opposed. One Council member voting in favor said he "felt it was a gamble" and another voted in favor "against his better judgement" all said publicly during the meeting that votes were cast. The possible purchase was announced to the community two days before the vote and only a portion of the community knew about it when the Council voted. The Chamber of Commerce president supported the decision even though we have heard from numerous members of the the Chamber that they opposed the decision.
• Whatever the City spent to acquire this property, the risk and costs of this hotel purchase will be born by taxpayers.
• The hotel has been in private investor hands for several years and has had several different hotel managers.
• The hotel has suffered declining revenues for several year which are currently appoximately $7 million per year
• The hotel has limited operating profits that have been declining for several years
• The hotel has experienced a declining occupancy rate that was reached 30%. we understand that successful hotels have an occupancy rate of 60% or better.
• The court and bank have been going through an auction process for the hotel over the last three months. The auction was supposed to be held (8/16/2006)
• The city/council had expressed concern that the hotel may not be acquired by an appropriate operator for the interests of the city and therefore the city thinks it is critical to the city.
• There is $12 million in debt on the hotel and that foreclosure proceedings have lead to this auction. We have been told that any shortfall in sales proceeds covering outstanding indebtedness will be made up by former owners. (We do not know if there is a private arrangement about this.)
• We don't know where the city will get the funds for this purchase. We suspect the city will increase city debt in reliance on the full faith and credit of the taxpayers of the city. Despite comments to the contrary, whether the city borrows money or simply uses tax payments, it is taxpayer money that will be at risk.
• We are unaware of any appropriate due diligence, turn-around plans, financial projections or property inspections done by the city. We don't believe they have made any formal arrangements for the management or subsequent sale of the property. (Most of these items are standard practice when a private enterprise buys hotels). If the city has done any of these things, the community isn't aware of it and has not had any chance to understand it.
• The city has on its plate numerous major financial commitments that have their own controversy. These include a major lake project (over $50 million) and a new law enforcement center (at least $10 million). Existing city debt is approximately $50 million.

Unanswered Questions-that were pending when the decision was made

Public Policy Questions:

1. Why can’t we have more time to debate this publicly? Can’t the bank/court agree to give the city more time?
2. What message does this send to other private enterprises in Decatur? To potential investors that may be concerned with competing with the City using taxpayer resources? Is this good policy?
3. Who does this “appear” to be “bailing out”? If facts are “no one” then what are the appearances? Is this good policy?
4. Does the food and beverage business of the hotel compete with Decatur private clubs, bars and restaurants? These are enterprises that pay 10% sales tax on their business? Is this good public policy for the city to compete with these small businesses?
5. What will the effects be on the city’s borrowing capacity and debt rating? Interest rate? Access to debt markets? How will bond buyers view the willingness of the city to engage in private enterprise with such limited due diligence? Will they perceive this as a risky activity for city government?
6. Does this property compete with other enterprises engaged in the group meeting business in Decatur? Like Tuscany? DecaturClub? Decatur Park District? Olive Garden? Others? Is this an appropriate use of taxpayer funds?
7. Is it a level playing field for other hotels and restaurants in Macon County to compete with the City of Decatur in this business? Simply is it fair?

Business Plan & Strategy Questions:

1. What leads the city to believe that it will better operate the hotel than anyone else over the last five years?
2. What is the marketing/turn-around plan for the hotel? Should the city be using taxpayer funds without one?
3. What will be the tax increases from this? Who is accountable if the property doesn’t break even?
4. What will be the city’s action when the manager/operator says “we need to invest $2 million” in the property? And then occupancy/profits don’t increase?
5. Who will be the professional manager of the hotel? What are the terms of that deal?
6. Why haven’t any other commercial enterprises stepped up to buy this?
7. What are the current requirements for capital investment in the property?
8. Will this property be licensed to a national hotel chain? Will they mandate investments in the property? What does that do to the city/property?
9. What will the city sell this for? When? Will the city have a sale/marketing plan? Will it be listed for sale?

Other Questions:

1. Who will hold the liquor license? Who will issue the liquor license?
2. What will be the city’s position on workers that want to organize/unionize? Will they resist the effort? Will workers be AFCSME members?
3. Does this distract the Council and others from appropriate city business?