Aerial photos of the land around Frank Lloyd Wright Boulevard and Scottsdale Road from 1979 show a barren desert landscape with little development.
Fast forward to today and the bustling area is packed with residential, commercial and industrial sites with only a few pockets of empty state land remaining.
Scottsdale officials helped jump-start that development in the 1980s when it sought a developer to build a first-class resort on city-owned land in the area to support what would become the nearby TPC Scottsdale Golf Club.
Despite the growth associated with that decision, some Scottsdale residents have questioned whether the resulting 99-year land lease for the Fairmont Scottsdale Princess resort still benefits residents in a city that is no longer short on hotels.
A number of resort-friendly amendments to the lease agreement over the years have only furthered that sentiment, leading some residents to call for changes to the agreement, including increased rents and accountability.
However, city staff insists the resort not only benefited the city when the lease was originally signed but continues to provide substantial value today.
Resident Mike Norton, who has not been shy about his criticisms of Scottsdale government in the past, argued that the current lease rates paid by the resort’s owner are well below market rate.
Norton said he does not believe the current lease payments accurately reflect the value of the land.
Scottsdale Real Estate Asset Manager Martha West said it is not fair to look at the rent solely based on what the land value is now, because much of the resort’s value to the city is tied to its role in sparking development throughout the area over time.
“To go and build a valuation on what the land is worth now…I’m not sure it tells you much, because you have to understand the history of what was there at the time that that ground lease was negotiated,” West said.
The original lease agreement signed in 1985 required the Princess to pay annual rent equal to two percent of the hotel’s gross sales.
West and Scottsdale Real Estate Management Specialist Laurel Edgar said tying the hotel’s performance to the city’s rent payments is important.
“So if they do well, great, they’re doing well, but we do better also,” Edgar said.
The city agreed to changes to the lease in 2011 that went into effect in 2012 that lessened the correlation between increasing sales and increased city revenues, though.
In 2012, an amendment to the hotel’s lease agreement approved by the City Council went into effect that changed the rent calculation to a flat rent of $1.5 million plus 1.25 percent of sales over $75 million from July 2011 to December 2014.
The rate then went to $1.5 million in base rent plus 1.5 percent of sales over $100 million from January 2015 to December 2020.
In January 2021, the rent reverts back to two percent of gross sales.
The 2012 amendment also extended the lease an additional 25 years through 2110 and allowed for wireless communication facilities on site at the Princess, for which the city receives 50 percent of gross sales.
Based on rent totals provided to the Progress by the city, it appears the city may have left money on the table by renegotiating the lease, at least in terms of rental payments.
Under the current agreement, the city has taken in rent payments of $1,811,946 in 2015, $1,562,501 in 2016, $1,751,554 in 2017 and $1,921,486 in 2018.
Those totals do not include annual payments of $42,000 to $46,000 for sales related to wireless facilities over that time.
The rent total for 2018 of $1,921,486 is equal to $1.5 million plus 1.5 percent of gross sales over $100 million, meaning $421,486 is 1.5 percent of the resort’s gross sales over $100 million.
That pegs the resort’s total gross sales at approximately $128,099,067 for 2018.
Using that number, the city would have collected $2,561,981 in rent payments in 2018 under the old two percent model – over $600,000 more than the actual rent payment the company received.
Norton argued that the amendments to the lease have disproportionately advantaged the resort, as evidenced by the change in lease rates.
A 2011 City Council memo about the lease amendment stated that resort ownership was in the process of restructuring the hotel’s debt. According the memo, one stipulation to accomplish that goal was the ownership had to reduce the ground lease percentage to the City of Scottsdale.
West and Edgar said those amendments are always the subject of negotiations between the city and the resort. They said the city has derived significant value, including the construction of a $20 million ballroom paid by the resort that was part of the 2012 amendment.
Edgar also said the resort’s ownership constructed parking available to the public on land it owned adjacent to the resort.
“They provided more parking available to the public, which means like during the (Phoenix Open) they’re available to be parked on, we didn’t and we didn’t pay anything for that and they invested more money into their facilities there,” Edgar said.
“And as you can see in the amendment, we backed off slightly on how much went we would get as a percentage for a number of years,” he added.
Edgar said the owner is required to maintain “first-class resort” and various ownership groups have continually invested in the facility over time to meet that requirement.
A City Council memo from 2011 related to the last amendment showed that then-owner Strategic Hotels and Resorts would invest $60 million beyond the price of the ballroom construction to renovate the hotel, restaurants and other amenities.
Part of that expansion included an addition of over 100 rooms to the resort, which Edgar said would increase the city’s rental income by increasing the hotel’s overall sales.
In questioning the city’s agreement with the Princess, Norton also pointed to findings in a 2015 audit that found the resort had underpaid the city in 2011 and was late in making payments 75 percent of the time in the preceding four years.
The audit found the resort had underpaid the city by $220,959 but later made an $86,369 payment, bringing the underpayment amount to $134,590.
“And what do they do? They go back and say ‘I know you caught us cheating, but we would like to have a decrease in our lease rate…and increase the term of the lease for another 25 years,’” Norton said.
“Why on earth would you reward a tenant who has cheated on their least payments?” Norton said.
West said several changes have been made on the city side since the audit to ensure those mistakes don’t happen again.
In 2015, the city formally designating Edgar as the contract administrator to create one point of contact for contract requirements and oversight. Edgar monitors monthly rent payments and gross sales documentation.
Edgar, or any successor as contract administrator, is also responsible for ensuring that annual sinking fund accounting an annual listing of deposits and expenditures from the account on an annual basis and that the appropriate Certificate of Insurance is received on an annual basis.
Edgar said the Scottsdale Princess has only made three late payments in the past three years, the most recent in November 2018, but that the delays were not significant.
How much benefit the resort and its associated improvements have benefited the City of Scottsdale is difficult to pin down and is also central to Norton’s criticism of the current deal.
He cited the Arizona Attorney General’s recent amended complaint filed against ASU and Arizona Board of Regents in Tax Court alleging that the university and ABOR violated Arizona’s Gift Clause in a deal to bring an Omni hotel and convention center to university land.
The complaint is part of an attempt by the Attorney General’s Office “to end ASU’s practice of using ABOR’s tax-exempt government status to facilitate special property deals for favored corporations,” according to a press release. Central to that argument is Arizona’s gift clause, which prohibits cities and other municipalities in the state from favoring one business over others in the state through the issuance of subsidies, donations and other monetary benefits.
Norton argued that, like the ASU deal, the Princess could be unduly benefiting from its lease of Scottsdale city land, which is not subject to property tax. He said that could be seen as the city offering an economic incentive to one Scottsdale hotelier over others.
A spokesman for the Attorney General’s Office confirmed that it had received complaints from residents about the deal but would not comment further.
A spokesman for the City of Scottsdale did not return a request for comment about whether or not the City Attorney had ever provided an opinion or other information to the City Council about the lease agreement’s standing as it relates to the gift clause.
Despite those disagreements, the Fairmont Scottsdale Princess remains a sought-after asset. In fact, the hotel has changed hands multiple times in recent years and is once again on the market.
The resort was sold to Strategic Hotels and Resorts in 2008 for $345 million.
Blackstone Group, a private equity firm, then bought out Strategic Hotels & Resorts in 2015, acquiring the Princess in the process, according to real estate information service CoStar Group.
That is where things get interesting.
In 2016, China’s Anbang Insurance Group Co. bought a portfolio of 15 hotels, including the Princess, from Blackstone. Then, in June 2017, Chinese authorities arrested Anbang’s former chairman and later took control of the company.
In November 2018, Bloomberg reported that Anbang had hired Bank of America to sell its portfolio of American hotels.