For HSL Properties, the purchase of the Hilton El Conquistador represents a big opportunity and a big risk.
The opportunity is clear: to own and run one of Southern Arizona’s area’s premier resorts.
The risk: to acquire that resort’s golf courses, which have lost about $1 million a year.
HSL’s solution should be a familiar to anyone who has watched the company interact with local governments over the years: Get the government to assume the risk while HSL enjoys the opportunity for profit. In the past, the city of Tucson was HSL’s mark as it tried to unload the burdens of the downtown Hotel Arizona, but now it’s the town of Oro Valley’s turn.
The Town Council is scheduled to decide Dec. 17 whether to spend $1 million to buy El Conquistador’s two 18-hole and one nine-hole golf courses as well as the country club building, which is the town’s main interest. The council also will vote that day on whether to impose a new half-cent sales tax to help turn the country club into a community center.
From an abstract point of view, the cost of purchasing the property is low, as Town Manager Greg Caton pointed out to me on Wednesday. The town is getting its own appraisal, but it estimates the value of the country club and golf courses at $2.5 million to $3 million.
Caton compared that to the cost of building a new community center, perhaps $15 million to $20 million.
“We really see it as an opportunity to fulfill a community need,” he said.
But really, the upfront price is irrelevant. Even if HSL were paying the town to take the properties, the key question would be how much it will cost Oro Valley to operate the golf courses, which, Caton said, have been losing about a million per year.
To the million-dollar purchase price, the town plans to add about $5.5 million in capital improvements, Caton said. It also expects to lose money for the first three years of operating the courses — a projected total cost of about $2.5 million.
Add those costs together, and you’re already at $9 million before the town can think about breaking even.
Is it realistic to think the town will make money at Year 4 or 5 of ownership? Mayor Satish Hiremath pointed to the commitment of Troon Golf Management as a vote of confidence in the project. Troon would manage the courses for the town.
“Troon is to golf like Rolex is to watches,” Hiremath said.
Troon’s senior vice president in charges of business development, Scott Van Newkirk, told me Troon breaks even or makes a profit on 65 percent of the golf properties it manages.
Speaking of the El Conquistador courses, Van Newkirk said, “We see the opportunity to bring the quality back, and through a variety of resources, bring more people in to grow the business.”
A reasonable forecast? I asked longtime Tucson golfer Leo “Chip” Plowman about the El Conquistador courses and their prospects for new owners.
“When they’re kept in shape, they’re good golf courses,” Plowman said. “They’re not in as good shape as the Tucson city courses.”
Plowman was for a time chairman of the greens committee for Tucson’s city courses and knows them especially intimately. He also has seen courses close and decline in Green Valley, where he lives.
“I would think that the city getting into the golf business right now is something they would not want to do because there is no revenue in golf,” he said. “Golf is not going to show a profit, at least in the short term. No golf course is showing a profit.”
Tucson’s five public courses lost a combined $688,000 last fiscal year, and have been losing money for years. As of June, golf owed the general fund about $9 million. The city began contracting with a private operator earlier this year.
Hiremath is convinced this situation is different, because the town would pay cash for the property, leaving it with no debt to service. It would also immediately hand over management to an outside company, rather than trying to run the courses on its own for a period, as cities like Tucson have done without much success.
But if it can really be run profitably, why wouldn’t HSL just pay Troon to run the courses for HSL? I asked Omar Mireles, executive vice president of the company.
“We’re not really golf course operators,” he explained, adding that another, unnamed buyer is interested in the courses if Oro Valley doesn’t buy. “Clearly if there’s a private party coming in, they have to have a profit, and a significant profit at that. Ultimately the municipal ownership is not necessarily looking for a profit.”
So that’s what it comes back to: HSL wants a local government to take over a company asset on which it can’t reliably make a profit.
If the prospects are that questionable, why wouldn’t Oro Valley simply forget the El Conquistador properties and the attached costs, pass that half-cent sales tax and put the money toward its own custom community center?