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

As we noted earlier, the Roxbury Group was hired to assist the City of Ann Arbor in reviewing proposals for the Library Lot.  The City issued RFP # 758 in seeking this assistance.  But in addition to failing to address the call in that RFP for analysis of the financial feasibility of the project, the consultant also left incomplete another task:

  • Determine if respondents are financially stable and have the capacity to complete their projects as proposed

The original presentation of the idea of the consultant, outlined by DDA Executive Director Susan Pollay (as quoted by the Ann Arbor Chronicle),  was to “(assess) whether the developers are financially solvent, including what other projects they might be committed to already”.  The finished report does address this, very briefly, but not reassuringly.

Here is what the report says:

… the Valiant team has been assembled specifically for the purpose of developing a project for the Library Lot. As such, Valiant Partners LLC itself lacks a specific track record of development involving all team members from which to measure it against the criterion. …

Valiant team members do present a satisfactorily deep level of experience in financing, developing and managing complex, mixed use projects, many involving elements of the project they have proposed for this site, and some involving far more aggressive public-private partnerships than are being proposed by this site. In particular, the development experiences brought to the team by Michael Bailkin, along with the depth of design and construction experience offered by Carl Luckenbach and Skanska suggest that the team has sufficient depth of experience under this criterion.

That said, the successful implementation of a project of the scale and complexity proposed by Valiant would likely require the identification by them…of locally-based project management expertise as an extension of their team. Valiant indicated in the interview process that their intention would be to engage such a resource during the predevelopment phase of the project.

The credibility of the development team is a key factor in whether the City should entrust a major project like the Library Lot development to it, especially because it will ensnarl the City in a complex financial arrangement.  Since Valiant has now asserted that they will seek bonds to finance the conference center “on their own credit”, this is especially key.  (Note: Luckenbach and Skanska are not members of Valiant Partners, but are merely consultants to it.)  Thus, the last segment of this series will be to examine what we know of this entity.

7. The  Valiant Partners LLC

As their proposal states, this group of four men (or three men and the principal of a corporation) came together in April 2008 to “to plan, design and develop the Ann Arbor Town Plaza mixed-use project”.  But they are not actually a partnership.  They are a Limited Liability Company (est. in Connecticut).  Here is what the IRS says about LLC-form businesses:  “LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.”  While members of a general partnership are liable for all actions and debts of the partnership, members of an LLC are not vulnerable to having their personal assets at danger.

Three members of the LLC are individuals who have been involved in various forms of business initiation and management, but only one of them, Michael Bailkin, has been involved in real estate development projects.  Bruce Zenkel is described as an investment banker and Fritz Seyferth was a UM football player in the glory days of Bo Schlembechler who has since served as a management consultant, worked for a time in the UM Athletic Department, and has been a fundraiser for numerous nonprofit causes.  The fourth member is Gemstone Hotel & Resorts, via its principal Thomas Prins, who has had a career in the hospitality industry.

Michael Bailkin has been given the title “Mr. Incentive”.  His real estate practice (mostly in the New York area and nearby) has been closely involved with obtaining government incentives for big development projects.  (Note to reader: “government incentives” means tax breaks, subsidies, etc.)  As an article in the New York Observer noted, he ” is known as the best go-to guy if you’re a company looking for a tax break from the city”.

So unlike another development company that has worked in the Ann Arbor area, Joseph Freed & Associates, whose website states that they are “entrepreneurial real estate company that develops, acquires and operates retail and mixed-use properties nationally with dedication to long-term value creation”, this is a group of three deal-makers and a hotel chain, with no long-term involvement in specific projects.  (Freed was the developer of Ashley Terrace in Ann Arbor, which has been in foreclosure according to AnnArbor.com.)

Here is the team’s balance sheet from the proposal:

As you can see, the amount of cash the group actually had on hand when they submitted the proposal was about $38,000.  My interpretation of the other figures is that they had collectively spent $327,000 on the project up to then (including the money in the cash account) but had some debts (slightly over $100,00) outstanding.

Several questions arise.

1. What does Valiant hope to get out of this deal?

One of their members is a hotel developer and it presumably hopes to operate a hotel.  The other partners, we assume, would have some small remuneration coming directly from that.

The project budget contains a number of contingency lines, but also a $500,000 development fee and $1,000,000 in commissions.   These sums would compensate them immediately for cash out of pocket and some of their effort.

While the city is paid in part from condominium sales, likely those and the retail and office portions would return a fair profit to the developers, after construction expense.

2. Are they likely to get private financing?

The answer is probably Yes. Note that the Primary Mortgage pays for most of the upfront construction (other than the conference center) and don’t forget that it takes precedence over all other financial arrangements, including the bonds and any payment to the city. Also, it appears that Capital is stirring and is looking for opportunities.  According to a recent article in the New York Times, even hotel and apartment developers who have had properties go into default are finding backers.

3. Is it reasonable to ask them to take on long-term debt in the form of Economic Development Corporation bonds?

The answer from here is No.  It appears that the whole reason for existence of this group is to pull off a complex real estate deal.  The only long-term aspect is the hotel operation, which of course could be sold or simply partitioned off to the hotel operation member.  They have no real assets.  And they are an LLC, meaning that they are not individually liable for debts the group incurs.  We have tried to illustrate in this series that the money is not likely to be there to pay debt service on the bonds, and as stated in a previous post the conference center itself might be at some risk if a lender did not receive payment.  (Recall again that the bonds are subordinate to the primary mortgage.)

4. Wait, what was that about a project management group?

As commented by Roxbury, the Valiant LLC does not itself have the expertise to actually manage the fine details of bringing the project to completion, but would have to depend on its consultants, including an as of yet unnamed project management group.  We don’t know where that expense would be assigned, as it was not part of the original project budget.

In sum, it looks from here as though there is considerable risk to the city in getting into a business relationship with this group.

We’ll try to wrap it all up in a future post on the balance sheet.

Note to readers: this series began with the first What’s in the Box post on December 3, 2010.  A complete listing of related posts is on the Library Lot Conference Center page.

UPDATE: A recent story on AnnArbor.com relates the sale of another Joseph Freed property, 4 Eleven Lofts on Washington, to a Texas company.

Explore posts in the same categories: Business, civic finance

4 Comments on “What’s in the Box III: Feasibility of the Valiant Proposal (Part F)”

  1. Barbara Carr Says:

    Thank you. Vivian. I have appreciated your comments on AA.com. Knowing about this blog (via Mary Hathaway)is a real plus.

    • varmentrout Says:

      Thanks, Barbara. I’m glad to know that you find this useful and I’m happy that the word is getting around.

  2. DTS Says:

    This analysis reaches several naive and incorrect conclusions, most notably that the city would be at risk for the ED bonds – the City is only a conduit for these not a party to their liability. The bonds would have to be underwritten based upon the revenue of the project and creditworthiness of the LLC and its members – it is likely, as with any bank financing, that to sell the bonds the principals would have to enhance them or provide adequate financial resources or personal guarantees to assure their repayment should revenues fall short. Additionally, while an LLC may protect its members from the actions of the LLC, it does not guarantee the protection of members financially as a reasonably diligent bank will encumber their assets as a condition of credit in addition to the assets of the LLC.

    • varmentrout Says:

      I didn’t mean to imply that the city would be directly at risk for the EDC bonds. I agree that the City (or County)is only a conduit in terms of issuing the bonds.

      The main way in which the city would be at liability would be that if it assumes responsibility for the conference center (as the proposal implies, though it begins with setting up a 501(c)3), the conference center itself might possibly be at risk.

      I’ll have to reread what I wrote to make sure that I didn’t make that incorrect statement.

      Your points about the LLC are interesting, in terms of what a bank might demand as surety for a letter of credit.

      I’d be glad to hear any other comments.


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