Scottsdale would cut the rent for the Fairmont Scottsdale Princess resort under a new deal the hotel owner is seeking to help reduce its debt and build new meeting space.
Strategic Hotels and Resorts, the Chicago-based resort owner, bought the 642-room hotel at the height of the market in 2006 for $360 million.
It has invested $60 million in the property and is planning to spend up to $25 million on 57,000 square feet of new convention meeting space.
The resort operates on land leased from the city.
Scottsdale might be wise to give some short-term concessions in the land lease to allow Strategic to invest in the hotel and keep it up to the high standards that luxury-resort guests expect, said Bill Murney, senior vice president of HREC Investment Advisors, a hotel brokerage.
"They're all trying to figure out a way to balance their debt service with their revenue sources," Murney said of resort owners.
Strategic, which has a portfolio of 17 hotels in North America and Europe, and other U.S. hotel owners were hit hard by the recession and a downturn in corporate travel.
Scottsdale tourism rebounded this spring, but Strategic recently reported a $35 million first-quarter loss despite a 16.6 percent increase in per-room revenue over last year at its U.S. luxury hotels. Strategic's hotel brands include the Ritz-Carlton and Four Seasons, and it has a one-third ownership stake in the Hotel del Coronado in San Diego.
Strategic executives were unavailable for comment over the holiday weekend.
The Scottsdale City Council is scheduled to consider the restructured land lease for the Princess at its meeting next Tuesday.
Paul Katsenes, Scottsdale's director of community and economic development, said the new deal is intended to give Strategic some relief to prevent bankruptcy or foreclosure.
It also will allow the company to build more meeting space to compete with the Westin Kierland and JW Marriott Desert Ridge resorts in Phoenix, he said.
"It's not unusual in this environment for landlords, hundreds and thousands of them across the Valley, to renegotiate their leases to keep their tenants alive and their doors open," Katsenes said.
The Fairmont Scottsdale Princess is one of Scottsdale's major conference resorts.
It was built in 1987 on 38 acres of city-owned land adjacent to the TPC Scottsdale golf course, site of the Waste Management Phoenix Open.
The Princess' ground-lease fee has averaged $1.34 million annually over the past decade, and it peaked at $1.9 million in 2006-07. That is based on the resort paying 2 percent of its annual revenue to Scottsdale.
Scottsdale would cut the base annual rental fee to $1.4 million for 2011-14. Strategic would pay an additional 1.25 percent to the city for any annual revenue over $70 million.
The Princess would pay 1.5 percent of its revenue to Scottsdale from 2015 to 2019 and 1.75 percent from 2020 to 2024.
The fee would reset at 2 percent in 2025 and beyond under the 99-year lease.
The amended land lease requires Strategic to complete the new meeting space by the end of 2013.
The deal would be canceled if Strategic filed for bankruptcy or its lender foreclosed on the property.
Strategic paid $560,748 per room when it bought the Princess in 2006.
KSL Capital Partners LLC of Denver recently paid $105 million - or about $358,362 per room - for the 3-year-old Montelucia Resort and Spa located in Paradise Valley.