Sacramento City Council OKs sale of Sheraton-Grand

The Sacramento City Council approved the $130 million sale Tuesday of its Sheraton Grand Hotel and garage on J Street – along with an unusual agreement to return about $23 million of the city's profits to the buyers as subsidies for additional downtown projects.

Council members voted 8-1 in favor of the sale despite a public admonition by interim city Treasurer Tom Berke that more review is needed, particularly given the depressed state of the real estate market. He suggested the city might hold on to the hotel longer and wait for prices to rise.

"By all means, if the price is fair and if the timing it right, let's do the sale," Berke said. "But why are we rushing into this?"

Councilman Kevin McCarty, who called Berke the city's "top fiscal watchdog," cast the only no vote.

"Our treasurer said he'd like to have more time to evaluate it; I don't think that's an unreasonable request," McCarty said.

Other council members called the price fair, and expressed fear that market conditions would deteriorate further and the deal would evaporate. And other high-level city staff advocated the sale, which is expected to close by April 15.

Councilman Steve Cohn, addressing Berke, said, "If you're correct about how severe this recession is, now is exactly the time to sell. None of us has a crystal ball, but what we've been presented with has great benefits for the city. Frankly, I want to get out of the hotel business and invest in other things."

After the vote, Mayor Heather Fargo said, "I think we made a good decision, and a big decision."

A team of two developers, David Taylor and the CIM Group, plan to pay $130 million to buy the hotel and the city-owned garage used for guest parking.

After money is set aside to pay off the hotel's construction bonds, the city expects to receive proceeds of between $40 million and $45 million.

On Tuesday, the City Council agreed to the developers' request that half of the city's profits be set aside to help underwrite future, as-yet-unspecified downtown projects by Taylor and CIM.

Of the remaining money, 25 percent will be put in the city's budget reserve account, potentially helping with its deficit crisis. The remaining 25 percent will be directed to the Sacramento Housing and Redevelopment Agency for additional projects that could come from any developer.

Tax revenue from new projects built using this money will offset the loss of about $350,000 in annual city parking fees from the Sheraton garage, said Assistant City Manager John Dangberg.

The agreement to earmark city funds for two particular developers is unusual, Dangberg said. He could think of no similar arrangement elsewhere, and council members asked questions about the arrangement Tuesday.

They wondered whether the city should seek bids from other developers interested in buying the hotel, which was built by Taylor's company in partnership with the city and opened in 2001.

"If other developers had come to the table with offers, we would have been happy to evaluate them, but nothing else has," Dangberg said.

"Our concern is that every day and week that goes by, we get more bad news from the financial market," Dangberg said. "We've been pressed by David Taylor interests to move quickly, that this deal could go away."

Dangberg noted that any other developer seeking to buy the hotel would have had to buy out Taylor's management contract of about $500,000 a year.

A windfall of $40 million or more represents a healthy return on the city's initial subsidy of $8 million, he said. The hotel was constructed with $92.8 million in bonds issued by the Sacramento Hotel Corp., a nonprofit corporation set up by the city and Taylor, who contributed the historic public market building, which now forms the hotel lobby.

Money from hotel operations has been used to pay back the bonds.

The hotel produces tax revenue for the city totaling about $3.4 million annually, a figure expected to grow by $600,000 after the sale.

Dangberg praised Taylor, who spoke only briefly Tuesday, as one of the most successful contributors to downtown revitalization.

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