City Council last week gave its blessing to a prospective deal in which the Grand Hyatt — a hotel the city has subsidized in various forms since its construction — would be sold by Hyatt to a little-known nonprofit in Arizona.

The deal was praised by city staffers and Mayor Ron Nirenberg, who called it a “win-win.” The city would be paid back the hundreds of millions of dollars it had put into the hotel, avoid responsibility for any future bailouts, and would be awarded complete ownership of the hotel at the end of an estimated forty-year bond timetable.

Hyatt for its part would be freed of a hotel whose performance is estimated to be rarely profitable, and would in turn collect some $140 million as a purchase price (the deal’s exact numbers won’t be priced until late March).

But largely absent from the discussion of the deal — “an excellent opportunity for both sides,” San Antonio’s chief financial officer Ben Gorzell called it — was the third party in the transaction.

Community Finance Corp., a 501(c)(3) nonprofit based in Tucson, is soon to be the new owners of downtown San Antonio’s largest hotel, which sits on city-owned property and is connected to the city’s convention center.

“What’s the benefit of this transaction to the nonprofit partner? Why are they doing this?” asked Councilman John Courage (D9) during last week’s meeting in one of the few questions mentioning the Arizona entity.

Gorzell referred the councilman to the nonprofit’s stated mission, described on its website as “lessening the burdens of government” and financing public buildings.

“I’m trying to wrap my head around this because it seems like too good of a deal,” Council member Mario Bravo (D1) said, before voting for it.

The quick nature of the proposal’s passage through city hall unsettled some. Three Council members — Jalen McKee-Rodriguez (D2), Teri Castillo (D5) and Ana Sandoval (D7) — abstained from the vote, citing concerns with transparency in the process. Heywood Sanders, a UTSA professor of public administration, questioned how quickly the deal was done and approved.

“It’s a short-term fix on what is fundamentally a long-term disaster of poor policy making in the first place,” Sanders said, referring to the city’s investments in a property that has rarely performed as well as consultants said it would.

A nonprofit with no grants

The purchase would likely be the largest yet by Community Finance Corp., if it does so with a $450 million bond issuance from the Wisconsin public entity, the maximum authorized by San Antonio. Pricing on the bond has not yet been finalized.

The project with the next-highest price tag listed on Community Finance Corp.’s website is for a $297 million municipal bond for a a Louisiana-based private prison operator, LCS Corrections Services. A little less than half of the projects listed on Community Finance Corp.’s website are for private prisons.

“It is a significant project, no doubt,” Gary Molenda, a Community Finance spokesman, said of the Hyatt deal. He said the company has a 20-year track record and in that time has been involved in $1.6 billion worth of projects, some of which have been with bonds exceeding $200 million.

Molenda is also the president of a closely-affiliated Arizona-based nonprofit, Business Development Finance Corp.

Administrative fees from projects are the primary revenue generator for Community Finance Corp., Molenda said. The nonprofit, set to purchase the Grand Hyatt hotel and enter a ground lease with the city through a special-purpose limited liability company, does not receive donations or grants from any source. It’s not clear how much in administrative fees Community Finance Corp. would collect through the Hyatt deal.

Public filings show the nonprofit has no paid employees or officers, and its director, Michael Hammond, who is also the president of a prominent Tuscon-based real estate company, works six hours a week, the most of any officer.

Community Finance Corp.’s model allows governments to access tax-exempt financing, provided by another public entity, without the risks involved with putting the relevant asset on their books or balance sheets.

Community Finance Corp. offers an efficient model for governments looking for help on public projects, Molenda said, because as a nonprofit, it has no stockholders and does not take profit for itself. It can “apply what would otherwise be profit into retiring the bonds sooner, paying ground rent sooner, and those types of things,” he said.

Gorzell, the city’s chief financial officer, also said the city is more likely be paid for ground rent under the pending bond because the old, city-backed bond was also accompanied by private debt, which is more expensive for the hotel to maintain. The upcoming bond, issued by the Wisconsin entity, will be entirely public debt that is exempt from federal taxes.

Hotel’s underperformance

Complicating the recently approved pending deal is the hotel’s history of sagging performance.

When the city first bankrolled most of the hotel’s construction with $208 million in bonds in 2005, it did so after HVS, a hospitality industry consulting group, pitched it as a boon for the downtown travel industry. But occupancy failed to meet the forecasts. And the same consultancy group was cited by Gorzell when he said the pending bond could be paid off sooner than the estimated 40-year timetable, allowing the city to gain ownership of the hotel faster than expected.

Last summer the credit rating agency Moody’s issued a negative outlook on the city’s bond for the hotel because of “the potential of a prolonged impact of consumer patterns post-pandemic.” But even before the pandemic, when ensuing lockdowns prompted Hyatt to close the hotel for much of 2020, the facility likely rarely broke even.

Source Strategies, a San Antonio-based hotel consulting firm, estimates that the hotel needs to make $140 per available room to break even. It appears to have done so in just 11 out of the 56 quarters since it opened in 2008.

Paul Vaughn, senior vice president for Source Strategies, said the hotel is “a little oversized and a little underperforming.” Its performance — highly dependent on conventions and business gatherings at the convention center next door — is hampered by competition from more affordable hotels of equal quality within walking distance, he said.

Vaughn said the hotel hit its stride in 2018 and in 2019, shortly before the pandemic. Conventions have made an anemic return to the city in the years since, but Vaughn said they are expected to return in full pre-pandemic force by late this year or early next year.

“So it’s possible this hotel could come back and be a good performer,” he said.

Out-of-state bonds

For investors, perhaps the biggest difference between the pending bond and the city-backed one it’s replacing is the lack of public backing.

The bond is being issued, but not backed, by the Wisconsin Public Finance Authority, one of a handful of state authorities with the ability to issue bonds across state lines. The authority issues more bonds of this kind than any other, said Toby Rittner, president of the Council of Development Finance Agencies. He said the Wisconsin entity likely will receive transaction fees every year before the bond is matured.

Rittner said these kind of bonds backed by nonprofits are common for hospitals and public housing. He said accredited, institutional investors typically buy these nonprofit bonds. “They know the risks,” he said.

Under the former bond arrangement, the city was on the hook for bond payments the hotel couldn’t make, as happened in 2020, when the city ponied up more than $10 million.

Under the new arrangement, if the hotel can’t generate enough revenue to make its payment — there is a $75 million reserve fund in the bond structure, but Community Finance Corp. is ultimately on the hook.

“If it got to that point, the parties — the nonprofit, the asset manager, Hyatt, all of us — will be looking at that and trying to understand what the best path forward is,” Gorzell said to council members last week. “But I think we’re talking about a scenario where a lot of things are going to have to go wrong to get to that point.”

Councilman McKee-Rodriguez had a quick response. “If anything, 2020 and 2021 has taught me that a lot of things can go wrong.”

Waylon Cunningham

Waylon Cunningham writes about business and technology. Contact him at waylon@sareport.org.