City sale of The Chattanoogan proves complex

City sale of The Chattanoogan proves complex

September 3rd, 2018 by Dave Flessner in Business Around the Region

The Chattanoogan is seen on Oct. 23, 2017 in Chattanooga.

Photo by C.B. Schmelter

The Chattanoogan is seen on Oct. 23, 2017 in Chattanooga.

The Chattanoogan is seen on Oct. 23, 2017...

Photo by C.B. Schmelter

Despite a surge of interest in downtown Chattanooga by hotel developers and operators, the city of Chattanooga is finding it hard to sell its own hotel.

More than two years after the Chattanooga Downtown Redevelopment Corp. voted to sell the city-owned Chattanoogan, city officials are still negotiating to sell the downtown property.

Daisy Madison, the city's chief financial officer and CDRC chairwoman, said selling The Chattanoogan has proven to be the most difficult and complicated dealing in her 26 years of work in city hall finances.

The city is negotiating a $27 million sale of the conference hotel to an unnamed buyer, which the CDRC board approved four months ago after a $32 million purchase agreement last year from the Schulte Hospitality Group fell through. Originally, the city planned to sell the hotel and use the sale proceeds to reduce its pro rata share of the bonds associated with the hotel. But the buyers said for their deal to be completed, the city will have to first pay off the existing bonds, which include a secured interest in The Chattanoogan and other facilities as collateral for the debt.

"This is a very, very, very complex deal — much more complex than I would have imagined when we started this process," Madison said. "There are a number of complicated issues being worked on by the buyer and us, but bottom line we still think this is the right approach and will save us significantly over the life of this issue. The debt service costs will go down; the new owner is looking to invest more money in the hotel, and The Chattanoogan will go back on the tax rolls, which we anticipate will generate up to $280,000 to $300,000 a year in additional property tax revenues."

The city erected the 199-room downtown conference center in 2001 to help bring more business groups to town. The facility was aided by a special state tax break that allows the city to keep a portion of the sales tax generated in and around the hotel and by a half-cent increase in the local sales tax approved by Chattanooga voters to pay for hotel and other downtown improvements along with other economic development programs.

The hotel's income and tourist zone tax payments have not been enough to pay all of the annual debt costs for the hotel, which still has more than $31 million of debt as part of a larger city bond issue. But with the sales tax revenue from the additional half-cent sales tax approved by voters, the city has been able to pay the annual debt service costs on the $129.2 million of bonds issued nearly two decades ago to pay for the construction of The Chattanoogan along with the Chattanooga/Hamilton County Development Resource Center, a parking garage and the expansion of the Chattanooga Convention Center.

The CDRC voted in July 2016 to put The Chattanoogan up for sale to help pare that debt, which now totals just under $90 million for all of the downtown Chattanooga facilities. The city estimates the unpaid portion of the bonds associated with The Chattanoogan totals just over $31 million.

Last month, the CDRC voted to issue the new bonds to remove the lien on the hotel from the bonds and give the prospective buyer a clear title from the purchase, said CDRC board member and city hall spokesman Kerry Hayes.

Despite the complications involved in its sale and the subsidies required to pay off its debt over the past decade and a half, Madison said The Chattanoogan has still been an economic gain for downtown and helped to propel its growth, especially in spawning the continued growth of the Southside.

"While the city has been contemplating for a while to sell the hotel, it has been a tremendous catalyst for growth and economic development in that area," she said. "We're selling it because it is time to continue that contribution under private ownership."

Jon Kinsey, a hotel developer himself who promoted the building of The Chattanoogan two decades ago when he was mayor, said the hotel has helped bring "a tremendous growth in visitors" to Chattanooga.

"There's been a tremendous amount of sales tax and room tax that would not have happened [without the Chattanoogan]," Kinsey said when the city sale was first proposed. "Certainly we've seen a tremendous growth in visitors, and I think it has played a role in that."

Indeed, the popularity of downtown Chattanooga has led to plans or actual construction underway for another 10 hotels in the downtown area, which collectively could add nearly 900 more hotel rooms if all of the proposed facilities are actually built.

The Chattanoogan is currently operated for the city by Benchmark Resorts and Hotels, which is expected to continue to run the hotel until any sale is completed.

Benchmark has made lease payments to the city in the past of about $1.1 million a year, but that is less than a third of the city's annual $3.4 million of debt service on the bond issue from The Chattanoogan's portion of the city bond issue.

The city and the CDRC hired PFM Financial Advisors LLC as a consultant on local bond and financial issues for the city, including the sale of The Chattanoogan and the bond issue used to finance the hotel.

"We are hoping that we can get this (new bond issue) done by mid-September or no later than the first of October," Madison said.

The bonds will be issued by the CDRC but must be authorized by the city and the Chattanooga Industrial Development Board. The term of the new bonds will be the same as the bonds they replace, allowing for a repayment of all of that debt by 2030.

Once the bond issue is complete, the sale of The Chattanoogan could occur this fall, assuming the CDRC is able to reach an acceptable agreement with the buyer.

Contact staff writer Dave Flessner at dflessner@timesfreepress.com or at 423-757-6340.