What’s in the Box III: Feasibility of the Valiant Proposal (Part B)

This is a continuation from the previous post, Part A.  We are discussing the factors that bear on the feasibility of the Valiant proposal both in terms of business sense and of benefits to the city.

3. The parking question

The subject is a hotel and conference center (plus some other development) to rest on top of the underground parking structure that the DDA is building on South Fifth Avenue (the location we call the Library Lot).  The question of who will be using that structure for parking has been bandied about quite a lot. As reported by the Ann Arbor Chronicle, public comment on February 17, 2009 (when council authorized the parking structure) indicated a hope on the part of downtown merchants that this would provide lots of customer parking.  CM Leigh Greden even said “If you vote against this garage…you’re voting against our locally, independently-owned businesses.”  Then-DDA board chair Roger Hewitt, who also owns a business on State Street, cited the fact that the Maynard Structure is almost 100% full at times, and also the pent-up demand for parking permits (presumably for people working in the downtown). As Sabra Briere commented in a message to constituents shortly after the vote, “The underground parking structure…will add nearly 530 new parking spaces (altogether 677 spaces will be built)…The new parking will be a mix of hourly parking and permit parking. The permit parking will move from other structures, such as Maynard – thus opening up more hourly parking near State Street. Both merchants and shoppers will benefit.”

There was an additional push for the new structure to promote the location of businesses downtown. Newcombe Clarke, speaking at the February 17 meeting while representing the Chamber of Commerce and the Main Street Association, cited the loss of businesses who are locating elsewhere than downtown because of the lack of (permit) parking. An article in Concentrate at the time said  that “The Library Lot underground structure is expected to facilitate the future growth of Google’s AdWords headquarters (one block away), the planned redevelopment of the library and old YMCA site and perhaps the construction of more office and residential buildings nearby.” And of course, the Ann Arbor District Library  itself will need some parking for library visitors.

The exact number of spaces in the new structure is not clear yet.  Originally the plans called for 777 spaces, but 100 were whittled off by an amendment introduced by CM Carsten Hohnke, removing the portion proposed under 5th Street all the way to William. The recent story on AnnArbor.com claims 717 spaces on the basis of contractor’s ongoing counts, but the official DDA site says there will be 600 spaces.  According to an email from Susan Pollay (Dec. 17, 2010), the exact number has not yet been fixed because some issues such as location of the parking office, etc. are still being worked out, but it is likely to be in the “middle 600s”.  Let’s say 650 for the sake of argument.

Valiant clearly expects that some of them will be assigned to the project.  As they state in the original proposal (page 8), “Further, it is estimated that average daily underground parking demand would be created by the various activities of the Town Plaza as follows: (1) Hotel – 75 spaces; (2) Conference Center – 35-50; (3) Residences – 25 (permanent for an annual fee); (4) Banquets/social events – 20. Total 155 spaces (not including Restaurant and Bar). About half of these cars would occupy spaces for full days, the balance for 3 – 6 hours per day.”

Visitors to the Conference Center could just take their chances with the hourly parking spots, and any condominium owners could just contract separately with the DDA for permits.  (Any effort to set aside spaces for this purpose as a contractual entitlement should be resisted, especially not at the rate of two spaces per condo!)  But the hotel and banquet facility probably does need permanent assignment of spaces.  (Are 75 spaces for 150 rooms really enough?)  And Valiant has figured in parking as both an expense item and a revenue item.  For example, for Year 2, there is a line item for Parking Expense for $152,319 but a line for Parking Revenue at $169,243.  Clearly, they are expecting to reserve some spaces from the DDA and then have hotel users pay an upcharge.  Also, the attractiveness of the hotel as an investment (for private financing) probably depends on secure parking access.

There are three problems with this scenario.

1. Loss of use for the public, including local businesses.

As already indicated, customers and employees of local businesses and the AADL, will expect to use the structure, especially if permit holders are transferred from Maynard.

2. Loss of the city’s Federal subsidy.

As explained in a cautionary letter from the Great Lakes Environmental Law Center, the Build America Bonds (Recovery Act) that the city used to finance the structure are for public facilities.  If more than 10% of the facility is used by a private entity, the city could lose the subsidy that these bonds represent.

“… there is a legal risk that the bonds used to construct the parking structure and other infrastructure at the site will violate the private activity test, risking millions of dollars in federal subsidy for the City, if the parking structure spaces are contracted to or if special parking entitlements are provided to a private facility. Further, given statements made by the Downtown Development Authority regarding the significant portion of bond proceeds being used for site infrastructure to benefit a future developer including the private development’s share of costs for Library Lane, the service alley, the 12” water main, site work, and building structural support (which appears to solely benefit the private building), even a limited allocation of parking spaces for a private hotel could put the city at risk of losing millions of dollars in federal subsidies.”

If the number of spaces is about 650, clearly 10% (65) does not meet Valiant’s hopeful expectations.  Yet clearly this is still an important part of the deal.  The draft “letter of intent” by Roxbury states

“The DDA shall reserve not fewer than ____ parking spaces in the Deck in support of the Project.  The precise location of such spaces, consideration for such spaces and the means of access to the elevators and stairwells serving the Project shall be agreed upon between the parties as part of the Development Agreement.”

Meaning – even the fees paid for use of the parking are a matter of negotiation and subject to a future contract. But costs of permit parking are currently decided by the DDA and the City Council on a year-to-year basis.

3. Loss of revenue and cost to the system.

This was a very costly parking project.  Just the face value cost of the bonds cost $49,420,000, though the cost with interest is much higher according to the settlement statement.  The total cost to the city of building the structure is $80,766,324.99, even after the Federal subsidy of nearly $17 million. The payment due next year is $1,787,539.81 and in 2012 we will begin paying the principal as well as interest.  The payment due in 2012 is $2,442,539.81 and by the end of the bond life the yearly payment is $3,491,537.50.  (There were also a million or so in upfront costs paid by the DDA and the city.)

We were assured when the bonds were sold that their costs would be covered by parking fees.  “No taxpayer dollars were harmed in making this bond sale.”  (OK, I made up that quote, but not its meaning.)  If not just income from the structure, then the entire parking system would pay for it.   This was an important selling point, since, as we explained at length earlier, the city has issued full-faith-and credit bonds and could be stuck with general fund payments for any part of the debt repayments that parking fees don’t cover.

It was understood at the time the project was approved that a raise in parking fees would be necessary.  Here’s what was reported by the Chronicle from that February 2009 meeting:

Q: Would the DDA be able to build the underground parking garage and make bond payments if they didn’t raise parking fees?

Crawford didn’t mince words: “No.”

And indeed, parking fees have gone up already, and we are not done yet. As was reviewed recently by the Ann Arbor Chronicle,  the DDA is experiencing huge stress in its parking fund.  Because the city has been draining $2 million a year from the DDA parking fund to plug the holes in its general fund, the parking fund is currently operating at a deficit.  The Chronicle asks some very good pointed questions about this state of affairs, which seems to have the DDA leaning on its TIF fund to remain solvent.

Clearly, it is not a benefit to the city to have Valiant remove some of the parking spaces from their dynamic management by the DDA.  Yet we are caught in a Chinese finger puzzle here.  Without the parking spaces, the hotel and conference center are not likely to be successful.  But the cost of supplying them is dreadfully great. (In Year 2 for the hotel, the 650 spaces are costing $4,780 per each just for that one year, and Valiant’s 75 spaces would cost $358,534, but they have only budgeted $152,319.)

That’s if we don’t lose the Federal subsidy, which is worth nearly $1 million just in that year.

Yes, this post must continue for yet another segment.  Watch for Part C in the near future.  And there will be a recap and “balance sheet” in the last post.

Explore posts in the same categories: Business, civic finance

One Comment on “What’s in the Box III: Feasibility of the Valiant Proposal (Part B)”

  1. Tom Whitaker Says:

    I had a slightly different take on the 10% private activity limitation of the Direct Payment Build America bonds. From my reading, what the GLELC letter states is that no more than 10% of the proceeds of the bond issue may be used for the benefit of a private entity (as opposed to 10% of the physical facilities).

    The bond issue for the underground parking structure was about $49 million. That would appear to limit expenditures benefitting a private development to about $4.9 million.

    According to the GLELC letter, the DDA and the City have been tracking these expenditures to date, “…including the private development’s share of costs for Library Lane, the service alley, the 12” water main, site work, and building structural support (which appears to solely benefit the private building)…” I recall reading that these costs alone already totaled well over $4 million. If I’m understanding this correctly, that leaves very little room, under the 10% cap, to subsidize parking spaces (or anything else for that matter) for a private development on top.

    Depending on the final count of parking spaces, and whose calculations you trust, the average construction cost of each parking space, paid from bond proceeds, could be anywhere from $50,000 to $75,000. But assuming the spaces will cost $50,000, and assuming only $4 million has already been spent to benefit a private development, that would mean that no more than 18 spaces could be handed over to the private developer without at least some reimbursement. This is a liberal estimate, with reality probably being closer to 9 or 10 spaces.

    Perhaps this is a moot discussion. We were told this structure was only needed because current parking demand was exceeding supply, and/or to replace other lost spaces in the system, not because it was a necessary prerequisite to some future private development on top? If suddenly there is plenty of space to give or sell to a new development on top, that would seem to negate the arguments used to justify building the structure in the first place.

    P.S. – What ever happened to the new park that was to be created at the current parking lot at First and William? As I recall, the lost spaces there were supposed to be offset by an equal number of spaces in the new structure.

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