West Valley City is providing a loan of $30 million to a private developer to build a hotel as part of the city’s Fairbourne Station project. If the hotel fails, then the city will be responsible for covering any losses. Watch this new report to learn more about the project:
Should government be in the business of providing loans to private companies when private lenders are unwilling to do so? Should West Valley City own a hotel?
Here’s the script for the video:
VOICE-OVER: A half-billion-dollar project, called the Fairbourne Station in West Valley City, was recently announced as a way to give Utah’s second-largest city an economic boost. West Valley City Mayor Mike Winder explains the centerpiece of this project.
MAYOR MIKE WINDER: “The anchor of this Fairbourne Station, as we’re calling it, is this four-star Embassy Suites Hotel, beautiful second story hotel, but it needs the private sector investment to spur and kick off this development.”
VOICE-OVER: According to a document provided by West Valley City, the potential risks of financing such a project in this tough financial environment make it difficult for developers to get a loan for a hotel. The most generous lending terms to developers from banks are, quote, “an unrealistic 60 percent cash down and require the project to be entirely paid for within five years.”
MAYOR WINDER: “We had people in the private sector that came to us and said, ‘Hey, we have an Embassy Suites that we’d love to be part of your project.’ The problems were they couldn’t get the financing and their pockets weren’t deep enough to self-finance it.”
VOICE-OVER: Because the private developers could not get favorable terms on the loan, West Valley City Redevelopment Agency stepped in to borrow $30 MILLION from Bonneville Mortgage and will loan that money to a private developer to build and operate the hotel. The developer will then make monthly lease payments to West Valley’s Redevelopment Agency until the loan is repaid. This means that taxpayers are responsible for the loan. If the development goes under, the city has a backup plan.
MAYOR WINDER: “We have in the agreement in an escrow, two years of payments they have already made that will automatically go to the city if they default at all.”
VOICE-OVER: Despite this backup plan, if the city can’t find a new business to lease the land, the city will still have to repay the loan and may have to use taxpayer dollars to do so.
STAND UP: So if banks are unwilling to loan to private hotel developers on good terms, why will they lend to the West Valley City Redevelopment Agency for a hotel development project? Royce Van Tassell, vice president for the Utah Taxpayers Association, explains why.
ROYCE VAN TASSELL: “The bank doesn’t really care whether or not they think West Valley City can succeed in the hotel business. They know they have got the full faith and credit of the taxpayers to back them up. If West Valley City can’t make its payments, West Valley City just raises taxes on the taxpayers and the bank is totally protected. That’s why they don’t need the same terms from West Valley City that they do from the private sector: The private sector can’t raise taxes.”
VOICE-OVER: There are at least seven existing hotels in West Valley City; none of them have the ability to raise taxes if their company doesn’t make enough money. In other words, the city government is competing against taxpaying businesses in West Valley. So should West Valley City’s government get involved in the hotel business? Private hotel owners don’t think so, and neither does the Utah Taxpayers Association.
ROYCE VAN TASSELL: “The city, state, government should not be competing with the private sector. If the market demanded a four-star hotel in West Valley City, the market would build a four-star hotel.”
VOICE-OVER: By getting involved in a hotel business that the market isn’t demanding, West Valley is taking a significant risk. Ed Robinson, director of Sutherland Institute’s Center for Limited Government, explains the risks of government getting involved in the hotel business.
ED ROBINSON: “The risk being taken by people who aren’t experts in assessing that risk, and related to that, if it doesn’t work out they have to figure out how to take it over and make something of it or how to get rid of it at a profit or not too big of a loss. None of those are things I think governments are experts in or set up to do.”
VOICE-OVER: Only time will tell if taxpayers will have to pay for the city’s $30 million gamble. For Sutherland Institute, I’m Alexis Young.