Local in Ann Arbor

Throughout our long discourse on the possibility of a conference center on the Ann Arbor Library Lot,  we have been pointing out the need for an authoritative description of the likely success and economic effect of such a facility.  (And we attempted to gather as much information as possible in a series on economics of an Ann Arbor conference center.)  When a report was released from the consultant (The Roxbury Group) hired by the City of Ann Arbor with money allocated by the Downtown Development Authority, we pointed out the deficiencies in that report.  In recommending the proposal by Valiant Partners LLC, they performed the amazing gymnastic feat of declaring that the scheme must be financially viable because the development team proposing it said that it was.  Thus the thing proves itself.  But if the “Balance Sheet” for this project is to be believable, an analysis and current report on the market and likely outcomes is needed.

Now, by one of those extraordinary events that it was impossible to predict, one of the most authoritative national voices in the area of hotel and conference center economics has provided City Council with a masterful report on the feasibility of such a facility in his home town.  Charles “Chuck” Skelton, who has been mentioned in earlier posts, dropped off a report to Council (dated November 10, 2010 but distributed on January 25, 2011) with a nice cover letter.

We are providing a  scanned copy of the report, which does not do justice to the color illustrations. It is an in-depth study, using data from many sources, specifically aimed at a facility on the Ann Arbor Library Lot.  It does not discuss specific proposals at any length, though there are several mentions, directly or indirectly, of the Valiant proposal, like this one:

“We understand that one of the current proposals is for a conference center of approximately 25,000 to 32,000 square feet in conjunction with a hotel and restaurant.”  (This is a description of the Valiant proposal.)

Here are the areas considered, as listed in the introduction:

• An analysis of economic and demographic data representative of the area such as population, employment, retail sales, household income and traffic, to determine the health of the market area pertaining to such a facility.

• An investigation of the meeting industry on a local and regional scale to determine conference and meeting trends in terms of market sources, size, utilization characteristics, duration, purpose, format, frequency, and services required. This also included an evaluation of the preferences of the market with regard to extent, size and nature of meeting facilities, lodging accommodations and amenity packages. Demand for such additional services such as availability of audio/visual equipment and operators, graphics and ancillary presentation aids, and conference planning has also been considered.

• An evaluation of comparable regional properties in terms of rate structure, size, and scope of facilities and services, utilization characteristics and degree of success in the market, types and styles of events and groups attracted and trends in general.

• An analysis of utilization trends in the region to include utilization, market impact and revenue potential and what that might mean for a facility in downtown Ann Arbor.

The conclusion of the report is that the plan is not feasible.  “…we calculated the estimated profit or loss after debt service, which shows there will be a substantial annual shortfall both before and after debt service. Our estimated shortfall is approximately ($1,105,000). Our research concludes that a conference center, whether it is 25,000 square feet or 32,000 square feet, will fall far short of meeting debt service.”  It also criticizes the modest size of the conference center, saying that it “would not attract or create significant new business unless it was more than twice the size of the proposed conference center.”  Later, after surveying all the conference facilities already available in the area, the report states, “In order to open new markets, a significantly larger facility of at least 60,000 square feet would be necessary, and given downtown development costs and market trends, this undertaking would be a high-risk real estate venture”.

The study includes a long parade of  “comparable” facilities in other cities, especially those near Ann Arbor.  The news has been unremittingly bad and none of them appear to have broken even in recent years.   The beautiful facility in Madison, Wisconsin caught my eye:  (quoting)

Monona Terrace was inspired by Frank Lloyd Wright and faces out on Lake Monona. The subject is also located in a state capital with a downtown location and captures most of the state-oriented business although it is down significantly. However, in 2008, Monona Terrace experienced a $4.5 million loss before debt service. In 2009, it lost $4.57 million before debt service.

Note that is before debt service, i.e. bond or mortgage payments.

The Seagate Center in Toledo, Ohio is (as proposed for Ann Arbor) a 501(c)3 facility, “part of the entertainment district in downtown Toledo…in 2008 (it) lost 2.3 million dollars before debt service. In 2009, it lost 1.67 million dollars before debt service.”

In addition to reviewing comparable conference facilities, the report uses these in estimating both costs and revenues for the proposed Valiant facility, and it also even estimates construction/development costs.  It “pencils out” every possible consideration.  It also lists all the hotel – conference opportunities in Ann Arbor and discusses the national as well as local hotel and conference market over the last several years.  It enumerates the trends in loss of conference traffic in general over the last several years.   It points out the many conference facilities available at the University of Michigan itself, some marketed to the public.  It mentions the possibility that the former Pfizer facility is being readied for conference business.

In short, this is a devastatingly thorough demonstration that the Ann Arbor Library Lot Conference Center idea (and both by reference and by implication, the Valiant proposal) is a money-loser.

I recommend that you read it for yourself.

Note: Hospitality Advisors Consulting Group, Mr. Skelton’s firm, has a very impressive client list.  Here are the qualifications given in the report.

This entry was posted on February 19, 2011 at 7:52 pm and is filed under Business, civic finance. You can subscribe via RSS 2.0 feed to this post's comments. You can comment below, or link to this permanent URL from your own site.