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Disagreement over tax incentives for Gaylord project in Aurora continues

February 7, 2015 Updated: February 7, 2015 at 6:37 pm
photo - A September 2014 rendering of the proposed Gaylord Rockies Hotel and Conference Center, a 1,500-room hotel and water park in Aurora.
A September 2014 rendering of the proposed Gaylord Rockies Hotel and Conference Center, a 1,500-room hotel and water park in Aurora. 

DENVER - A financing document released more than a year ago showed that the developer taking over the Gaylord Rockies project in Aurora could build the hotel and conference center for less while promising a handsome 19 percent return on investment thanks, in part, to millions in state and local tax incentives.

"That's more insult to injury," said Steve Weil, president of the international western clothing manufacturer Rockmount, headquartered in Denver. "The fact that they are getting the same incentives but their cost of doing business has come down . it's just absurd."

Weil was among those who testified against giving state sales tax incentives to the Gaylord Rockies hotel and conference center in May 2012.

"It's the first time I've been involved in something like this, and sadly, those of us who testified were wasting our breath."

The Colorado Economic Development Commission approved $81.4 million in Regional Tourism Act incentives for the project that spring, money that will flow to the developer in the form of a state sales tax rebate over 30 years. The money is a percentage of the increased taxes that would be generated by the development of vacant land near Denver International Airport.

That decision was far from the end of the discussion, and a year later, the leaked financing document coupled with changes in project developers and concern over how hundreds of millions of dollars in city tax incentives were awarded have sparked a maelstrom of accusations.

Are incentives necessary?

The city and the state have stuck by the incentives they offered the developer, saying the deal could not go forward without them. And without the project, the land would remain vacant instead of creating hundreds of jobs and millions in other tax revenues that will flow to state and some local coffers.

"The question practically speaking is how much longer will those who filed suit continue to fight and how much longer do they force everybody to sit and wait for this truly regional project to break down?" Aurora Mayor Steve Hogan was quoted as saying in the Denver Business Journal at a forum for mayors last month.

"You're talking about a project that will have over 10,000 construction workers," Hogan said in the article. "You're talking about a project that will have over 2,500 permanent (hotel) employees. You're talking about a project that will bring more than 400,000 people to Colorado to spend money here that don't come to Colorado now."

But opponents of the project claim that some of these numbers will never be achieved.

City of Aurora spokeswoman Kim Stuart did not return repeated phone calls requesting comment on the project and the conflict surrounding it.

The financing document, which was intended to drum up investors for the $800 million hotel, projected sweeter returns after five years of operation, with a 29 percent return on investment and reduced construction costs of $735 million, down from the original $824 million.

Critics, like Weil, say the project never met the strict standards set forth in state law for the Regional Tourism Act. Those standards include language that "but for" the financial incentives the project would not move forward.

Weil and others argued from the beginning that the money wasn't necessary, and when an internal financing document turned up a year later showing developers were projecting a nearly 20 percent return on investment, the state should have reconsidered its award.

The state refused to take the new financing document into consideration. Ultimately, the Attorney General's Office weighed in on the issue, saying reconsidering the project would be untimely.

Ken Lund, the former executive director of the state Office of Economic Development and International Trade, said when the deal was approved that the state hired an outside consultant to analyze the finances of the project.

That report, along with the city of Aurora's application, was enough to satisfy the board's concerns about the need for the incentives, Lund said.

The exact language in the Regional Tourism Act requires the applicant or local government "has provided reliable economic data demonstrating that, in the absence of state sales tax increment revenue, the project is not reasonably anticipated to be developed within the foreseeable future."

Colorado economist Tucker Hart Adams said 20 percent is a "very attractive profit margin." Most lay investors are content with single-digit returns and thrilled with anything in the teens.

But Adams said it's all related to risk and she hasn't had a chance to analyze the Gaylord project's risk level to an investor looking to pour millions of dollars into a hotel and convention center.

"Normally a very risky project has to offer a very high rate of return because you may not get anything at all, or you might lose everything," Adams said.

Tom Clark, CEO of the Metro Denver Economic Development Corp., has been a vocal proponent of the Gaylord project moving forward uninhibited.

"Once we win the big fight with Seattle or Phoenix, then we encourage competition inside the state. Local governments are encouraged to put their best feet forward," Clark said of economic development projects.

The Gaylord deal was no different, he said, when the developer at the time, Gaylord Entertainment, narrowed its options to Aurora, Commerce City and Broomfield.

Clark said Gaylord shopped around for the best incentive package possible.

Aurora won, signing an agreement in June 2011 that gave away almost every local tax to be generated by the project over 30 to 33 years. The deal - which was offered before the state incentives were finalized - also created two special districts that allowed a single voter, not from Aurora, on the developer's behalf to raise lodging and property taxes for the benefit of the development.

A third-party analyst hired by the state to examine the deal estimated those incentives could be worth as much as $800 million over 33 years, but the city suggests a much more modest estimate of between $300 million and $400 million.

"That historically should have been the end of it," Clark said. "This was an honest competition, and the other two communities have not tried to run around Aurora and sabotage the deal."

But hotel industry leaders and two taxpayers in Aurora are leading legal fights that threaten to derail Gaylord Rockies and the projected economic boon it would bring to Aurora in jobs and the small amount of tax revenue that would reach city coffers.

Lawsuits from both sides

Eleven hotels filed a lawsuit against the state and Aurora aimed at getting a judge to order the state to reconsider the RTA application given the new projected finances and the new owner and developer.

That case was dismissed because a Denver District Court judge ruled the hotels didn't have standing. The hotels, including The Broadmoor, which is owned by the same company that owns The Gazette, filed an appeal last month in the Colorado Court of Appeals.

"The argument is that we do have standing, that we are directly affected as competitors, and a competitive interest is a protected one in this state," said attorney Jim Lyons with Lewis Roca Rothgerber, who is representing the hotels.

"We believe that the record before the Colorado Economic Development Commission is legally deficient," Lyons said. "They did not consider the material changes to the second Gaylord project. They have not considered the fact that the developer does not need the subsidy to be profitable, by their own document."

Ira Mitzner, president and CEO of Rida Development, told the Denver Post recently that the litigation has muddied the waters.

"We believe much of this litigation is motivated by people who don't want to see fair competition in the market," he was quoted as saying in the Denver Post.

Luke Charlton, senior vice president of Rida Development, declined to comment about the ongoing conflict.

The city of Aurora filed a counter lawsuit against the 11 hotels, accusing them of filing a frivolous lawsuit that interfered with a business contract. That lawsuit was dismissed without progressing to evidence or deposition gathering. The city has appealed that case as well.

The conflict began in July 2013.

Twenty-two hospitality-related entities signed a letter to then-Attorney General John Suthers asking that the Colorado Economic Development Commission reconsider the $81.4 million in state sales tax incentives awarded to Gaylord Rockies in May 2012 when it was owned by Gaylord Entertainment. Since then, the scope of the project has changed and the original grant expired.

"The total project cost is now being estimated at $735 million, down from the original $824 million," the petition for reconsideration notes. "Such a significant adjustment in the estimated project costs requires re-evaluation of whether the project would reasonably be anticipated to be developed without the state's assistance."

The Regional Tourism Act requires that projects receiving the tax incentives are unique and likely to significantly increase tourism. It also requires applicants to demonstrate that without incentives "the project is not reasonably anticipated to be developed within the foreseeable future."

Lund, former executive director of the state Office of Economic Development and International Trade, said the Economic Development Commission analyzed the six projects that applied in 2012 for the incentives based on criteria in the then-new Regional Tourism Act created by lawmakers.

"We certainly had a tremendous amount of public input both for and against," Lund said. Seven of the nine commissioners supported the Gaylord project. Also approved that year were state sales tax incentives for a convention center expansion and Professional Bull Riders facility in Pueblo.

Clark said it has become the norm for hotels to receive some sort of financial incentive largely because they generate huge tax revenue for local jurisdictions.

"It's like a shopping mall. There is so much money in play that goes directly into the city's coffers," Clark said. "It's factored into the proforma. It's an expected deal."

Clark said financial incentives sometimes offend the public, but from a municipal standpoint, it makes more sense to give the incentives and get some of the revenue rather than lose a project to another jurisdiction.

In the case of the Aurora project, for some it's the sheer size of the incentive package that offends.

Weil sees it differently.

"These subsidies create an unfair advantage that hurt every other nonsubsidized business in the local area," Weil said, including retail stores such as his in LoDo.

Incentives not a cure-all

But even with lucrative incentives on the table, other Gaylord projects have failed to materialize.

Nashville-based Gaylord was known for developing large hotel and convention centers. The first was the Gaylord Opryland in Nashville in 1977.

Three others have opened in suburbs near Dallas, Orlando and Washington, D.C. All three received millions of dollars in incentives.

Gaylord was poised to build a hotel in Mesa, Ariz., after voters approved a $51 million incentive package in 2009. That project has been put on hold despite city efforts to revive it with Marriott after the Gaylord sale.

And in Chula Vista, Calif., Gaylord's plans to construct a massive waterfront hotel fell through in 2008 despite tax incentives for the project.

Colorado economist Hart Adams said it's a bad practice for municipalities to try to purchase business.

"I think good businesses make their decisions about where to locate or expand based on the bottom line," Adams said.

"I think that we have seen around the country cases where cities were desperate or really paying companies to relocate and what they got were companies that were on the verge of failure."

She said incentives can prop up a failing company for a few years but not rescue it permanently.

Other projects prompt comparison

In Colorado, there is a long history of hotel developments receiving incentives.

Voters approved the estimated $286 million expansion of the Denver convention center in 1998, but the project wasn't completed until 2004.

Initially, the city awarded a developer $55.3 million in tax-increment financing to build a hotel adjacent to the convention center.

When those plans did not materialize, in part because of protests by union employees about the process and their demands the incentive plan be approved by voters, the city created a nonprofit to build and run the hotel.

Bill Mosher is CEO of the Denver Convention Center Hotel Authority, the nonprofit that built and now contracts with Hyatt Regency to run the hotel.

Mosher said the hotel did not receive any tax incentives for construction and has made several payments in excess of debt payments to the city's general fund.

Between 2006 and 2013, the hotel paid $21.3 million in state taxes and $67.6 million in lodgers, sales and use taxes to local governments, Mosher said. Additionally, the hotel authority has given $3.1 million directly to the city.

Mosher declined to comment on the Gaylord project but said the two hotel projects are often erroneously compared.

The other project frequently compared to Gaylord Rockies is Denver's Union Station.

Hogan, Aurora's mayor, announced the city's counter lawsuit against the 11 hotels that sued to challenge the incentives for Gaylord Rockies at Denver's Union Station, a voter-approved transit-oriented redevelopment of the historic train station.

Hogan was drawing attention to the fact that among those who sued to stop the Gaylord incentives was Sage Hospitality, the same company that owns the new Crawford Hotel in the highly subsidized Union Station.

In addition to other funding sources for the Union Station project, the city of Denver created five metropolitan districts that are expected to generate more than $1 billion through a special 30 mill property tax. The project also will receive sales and lodging tax reimbursements through the new Denver Downtown Development Authority.


Contact Megan Schrader: 286-0644

Twitter: @CapitolSchrader

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