A Fortune Runs Through It

Tempe has long given the impression its Rio Salado project costs $45 million. The actual taxpayer tab could surpass $200 million.

The city's burgeoning sales taxes provided plenty of money to repay the projected $3 million-a-year bond payment for Town Lake construction without a further increase in taxes.

"All the construction costs were covered," Flynn says.
More important, Flynn's plan allowed the council to issue bonds without asking for voter approval. Unlike most of Tempe's bonds, which are repaid by property taxes and require a public vote, the Rio Salado bonds would be secured by sales taxes and could be issued without a vote.

Flynn says the council seized the opportunity with gusto.
"They said that's what we want to do with the money," Flynn says.
Only one council member, Joseph Lewis, objected to the bonds being issued without a vote.

"I thought it was a golden opportunity to really get the public to buy in on the project with a vote on Rio Salado," says Lewis, who remains on the council.

Lewis' effort to put the bond issue before the public was rejected by the council on a 6-1 vote.

"I got hammered on the idea," he says.
Mayor Giuliano says there was no need to ask the public for approval to sell the bonds because the council knew the public favored the project. He says this belief was based on city polls and the reelection of city council candidates who supported Rio Salado.

"The city wouldn't be moving forward with Rio Salado if the public didn't support it," Giuliano says.

If the city had put the matter to a vote, there was every indication it would have been very close. In 1987, Maricopa County voters rejected by a 2-1 margin a plan to hike property taxes to pay for an expanded version of Tempe's Rio Salado project.

Voters in Tempe narrowly favored the county plan, although a majority of Tempe precincts voted against the proposal. The day after the election, then-Tempe mayor Harry Mitchell announced that Tempe would move ahead with its own version of Rio Salado.

Tempe voters have never voted on the city's own Rio Salado plan.

Tempe's courtship of the Peabody Hotel began in earnest on May 2, 1995, when city officials rolled out the red carpet for Peabody chairman Marty Belz and his partners.

The evening began with a rendezvous at the Buttes resort's Presidential Suite, where a trolley picked up the entourage and took them to the Arizona Cardinals' training facility for cocktails and hors d'oeuvres. From there, the group was ferried to House of Tricks in downtown Tempe for dinner before finishing the evening with dessert at Coffee Plantation on Mill Avenue.

Tempe officials were thrilled that Belz and company were interested in building a luxurious, 1,000-room Peabody Hotel and convention center on what would become the south shore of Town Lake. Peabody has long had a stellar reputation for service and hospitality at its hotels in Memphis and Orlando.

Attracting a Peabody Hotel to Tempe would put Rio Salado on the map. Tempe officials made it clear the city would do nearly anything to have Peabody's famous parade of ducks grace the shores of Town Lake.

Peabody got the message--and has been taking Tempe for a ride ever since.
The city selected Peabody as the master developer for the hotel, a convention center and retail and commercial projects in December 1995.

Soon after, Peabody began hinting that construction was imminent. "The market is getting better, and it's time to put this project together," Marty Belz said in April 1996.

Negotiations for the Peabody project, dubbed Cuidad del Lago, continued into 1997, when it became clear that the city was going to have to place a fortune in front of Peabody to get the hotel built.

At first, Flynn says he was astounded at what Peabody was demanding. He says he recalls thinking, "This is bullshit."

But the city submitted the question to outside consultants, who advised the city that if Tempe wanted a grand hotel, it would have to pay a grand ransom.

"If you want to do this deal, this is what you have to do. These are the parameters you have to work in," Flynn says the city was told.

Flynn says the council wanted the Cadillac of hotel projects, complete with marble walls and glittering chandeliers.

"This was their dream. A destination hotel, retail shops, a 125,000-square-foot conference center," Flynn says.

The grandeur of the project quickly infected the city staff.
"We couldn't help but get caught up in this," says Tempe Economic Development Administrator Jan Schaefer.

Bewitched by Peabody's prestige, the city agreed in May 1997 to provide $64.8 million in incentives to the hotel group, which is privately owned by the Belzes, whose family fortune is estimated to be worth several hundred million dollars.

The city also agreed to lease Peabody the land for the hotel, which the city had purchased for $7.1 million. The land would be deeded at no cost to Peabody after 10 years.

In addition, the city promised Peabody development rights for land owned by other property owners on the north shore of the lake, and 50 percent of all concession revenues generated by a marina that would rent boats.

In exchange, Peabody agreed to pay the city $1.3 million a year to help cover the lake's operating costs. The company also agreed to pay Tempe half of any profits--after the hotel's investors had achieved a startling (but not unheard-of for luxury resorts) 27.5 percent rate of return.

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