The financial risks of Topeka’s hotel purchase are significant and multifaceted, encompassing high upfront and ongoing costs, uncertain revenues, potential operating losses, and challenges in exiting ownership.

 The City of Topeka’s $7.6 million purchase of Hotel Topeka at City Center in October 2023, coupled with plans for significant renovations, exposes taxpayers to substantial financial risks. Below is a detailed analysis of the financial risks associated with this decision, focusing on the costs, revenue uncertainties, and broader fiscal implications of the city’s foray into the private sector.

1. High Upfront and Ongoing Costs

• Purchase Price: The city paid $7.6 million for the hotel, a distressed asset previously in receivership after its private owner, Heart of America, defaulted on loans. This upfront cost was funded through public resources, likely from the city’s general fund or borrowed capital, increasing debt or reducing available funds for other priorities.
• Renovation Expenses: The city estimates $20 million for renovations to modernize the hotel’s 224 rooms, convention facilities, and amenities, which have been criticized for being outdated (e.g., non-functional air conditioning, poor maintenance). These costs could escalate due to unforeseen structural issues, supply chain disruptions, or labor shortages, a common issue in large-scale renovations.
• Operational Costs: Running a hotel involves significant ongoing expenses, including staffing, utilities, maintenance, and marketing. Even with a private management company under the Topeka Development Corporation, the city remains financially liable for deficits if revenues fall short. For a property with a history of declining performance, these costs could be substantial.

2. Uncertain Revenue Projections

• Optimistic Revenue Goals: The city projects $1 million in annual sales tax and $440,000 in Transient Guest Tax (TGT) from the hotel, based on achieving 50,000 room bookings annually by 2027 and $20 million in economic impact. These figures, sourced from Visit Topeka, assume a fully renovated, competitive hotel in a robust tourism market, which is speculative given current conditions.
• Historical Performance: The hotel, formerly Capitol Plaza, has struggled since 2013 under prior ownership, with declining occupancy and guest complaints about quality. Recent TripAdvisor reviews (e.g., 2.8/5 rating, mentions of bed bugs) suggest it underperforms compared to competitors. There’s no guarantee that renovations will restore its market position to meet revenue targets.
• Market Competition: Topeka faces competition from nearby cities like Kansas City and Wichita, which offer larger convention facilities and newer hotels. The hotel’s ability to attract 50,000 bookings hinges on capturing a significant share of regional conventions, a challenging prospect given Topeka’s smaller market and the hotel’s past struggles.

3. Risk of Operating Losses

• Subsidization Risk: If the hotel fails to break even, the city may need to subsidize operations, diverting funds from critical services like public safety, infrastructure, or education. Publicly owned hotels in other cities (e.g., Chattanooga’s Tivoli Theatre hotel) have required ongoing subsidies when projections fell short, a precedent Topeka risks repeating.
• Management Contract Costs: The city’s plan to hire a private management company introduces additional costs (e.g., management fees) while not fully shielding the city from financial liability. If the management company underperforms or terminates the contract, the city could face higher costs or the burden of directly managing the property.
• Economic Downturns: The hospitality industry is sensitive to economic cycles. A recession, rising interest rates, or reduced travel spending could depress occupancy rates and revenues, leaving the city with fixed costs and insufficient income to cover them.

4. Exit Strategy Risks

• Temporary Ownership Challenges: The city aims to redevelop the hotel and sell it back to a private owner. However, there’s no guarantee of finding a buyer willing to pay a price that recoups the $7.6 million purchase plus $20 million in renovations (totaling $27.6 million). A weak sale price would result in a direct loss to taxpayers.
• Market Timing: The commercial real estate market is volatile, with hotel valuations affected by interest rates, tourism trends, and regional competition. If Topeka seeks to sell during a market downturn (e.g., post-2027), it may face losses or be forced to retain ownership longer, compounding operational costs.
• Depreciation of Improvements: Renovations may not yield proportional increases in property value. For example, over-investing in amenities that don’t align with market demand (e.g., luxury features in a mid-tier market) could reduce the hotel’s resale value, leaving the city with unrecovered costs.

5. Opportunity Costs

• Alternative Investments: The $7.6 million purchase and $20 million renovation budget could have been allocated to higher-priority projects with more predictable returns, such as road repairs, affordable housing, or economic development incentives for diverse industries. These alternatives likely pose lower financial risks and align better with core municipal responsibilities.
• Debt Service Costs: If the city borrowed funds for the purchase or renovations, interest payments increase the total cost, straining future budgets. For example, a $20 million loan at 5% interest over 20 years would add approximately $13.2 million in interest, bringing the total cost to over $40 million when including the purchase price.
• Budget Constraints: Topeka’s 2023 budget was approximately $260 million, with significant portions dedicated to public safety and infrastructure. Committing over 10% of an annual budget to a single, risky project limits fiscal flexibility for unforeseen needs, such as natural disasters or economic shocks.

6. Lack of Contingency Planning

• No Clear Risk Mitigation: Public statements from city officials, including Mayor Mike Padilla and City Manager Stephen Wade, emphasize potential benefits but lack detailed contingency plans for scenarios like cost overruns, lower-than-expected revenues, or failure to sell the hotel. This absence of a robust risk management strategy heightens financial exposure.
• Limited Transparency: The purchase process faced criticism for limited public input and undisclosed details (e.g., the purchase price was not initially shared). Without transparent financial modeling, it’s unclear how the city assessed risks or established revenue projections, raising concerns about due diligence.

7. Broader Fiscal Implications

• Credit Rating Impact: Large-scale financial commitments, especially if they lead to deficits or increased borrowing, could jeopardize Topeka’s credit rating. A downgrade would raise borrowing costs for future projects, affecting the city’s ability to fund essential infrastructure.
• Public Backlash and Political Costs: Financial losses or the need for subsidies could erode public trust, as seen in dissenting votes from council members Sylvia Ortiz and Christina Valdivia-Alcala. Political fallout could pressure the city to divert additional funds to salvage the project, compounding losses.
• Precedent for Future Risks: A successful or failed hotel venture could embolden the city to pursue other private sector investments, potentially leading to further financial missteps. The philosophical argument against government involvement in private enterprises underscores the risk of setting a costly precedent.

Quantitative Risk Snapshot

To illustrate, consider a simplified financial scenario:

• Total Investment: $7.6M (purchase) + $20M (renovations) = $27.6M.
• Annual Operating Costs: Assume $5M/year (staff, utilities, maintenance, management fees, based on industry averages for a 224-room hotel).
• Revenue Projections: $1M (sales tax) + $440,000 (TGT) = $1.44M/year, far below operating costs, requiring subsidies unless occupancy significantly exceeds projections.
• Break-Even Timeline: At $1.44M/year net revenue (optimistic), recovering $27.6M would take ~19 years, assuming no cost overruns or economic downturns.
• Loss Scenario: If revenues are 50% below projections ($720,000/year) and costs rise 10% ($5.5M/year), the annual deficit could exceed $4.7M, requiring taxpayer subsidies or budget cuts elsewhere.

Counterpoint Consideration

Proponents argue the hotel is a strategic investment to boost tourism and protect the Stormont Vail Events Center’s viability, projecting $20 million in economic impact by 2027. They claim renovations will restore competitiveness, ensuring long-term tax revenue. However, these benefits are speculative, rely on untested assumptions about tourism growth, and do not mitigate the immediate financial risks of ownership, operational losses, or an uncertain exit strategy.

Conclusion

The financial risks of Topeka’s hotel purchase are significant and multifaceted, encompassing high upfront and ongoing costs, uncertain revenues, potential operating losses, and challenges in exiting ownership. The $27.6 million commitment, combined with Topeka’s lack of hospitality expertise and competition in the regional market, creates a high probability of taxpayer-funded subsidies or losses. Opportunity costs and the lack of robust risk mitigation further exacerbate the fiscal peril. The city’s intervention in the private sector, absent a clear path to profitability, represents a gamble that could strain public finances for years.