Local in Ann Arbor

We recently noted the arrival in Council members’ mailboxes of an authoritative study on the viability of conference centers generally and the Valiant proposal specifically.  This study, informally referred to in these parts as the Skelton report, predicted that the Valiant proposal would generate a money-losing hotel and conference center.

Now a second report has followed the (electronic) mailbox route to Council’s desk.  It is the mysterious report that we cited in our original complaint about the Roxbury report’s failure to do any real economic analysis.  This is the report that was actually commissioned by Valiant Partners and it is a good one, professionally and competently done.  The report, dated April 14, 2010 and executed by PKF Consulting (a New York firm), uses a different set of data and perspectives from the Skelton report to examine how competitive a conference center as described in the project proposal would be.  (They were working from the larger 30,000 square foot center originally proposed.)  The conclusions and analysis are thought-provoking reading in themselves.  It does not appear to be a “push” report, making a sales case, but rather to be an honest study based on the best assumptions available.

A quick overview of the conclusions: they state that the conference center (as a whole) would be competitive in the Ann Arbor market, and might even draw some new business.  But mostly it would be more attractive for some events than currently available venues.  The report writers also say that the debt burden anticipated would mean that it would be necessary to charge rates at the high end of the market.  They state emphatically that it is not a financial feasibility study and make no predictions about whether it would actually operate at a profit.

The report was available to the Roxbury group, but when the consultant, David Di Rita was asked about it, dismissed it as a “paid for” study that could not be credibly used by his firm in making an assessment – as he also dismissed the Skelton report as being “paid for” by the opposition.  It is too bad that he didn’t instead give us an intelligent comparison and reconciliation of the two reports.

This post will be updated.

The continuing saga of the Ann Arbor Library Lot and the effort to build a hotel and conference center there.  For more, see this page.

As was ably reported by the Ann Arbor Chronicle,  the March 8 RFP Advisory Committee meeting resulted in the committee’s transmittal of the Letter of Intent produced by the consultant to the City Council for its consideration.  The consultant, David Di Rita, who looked remarkably lizardlike in his olive-green suit and French cuffs (sorry, I stared at him for two hours and the room was overheated) showed the value of a legal education as he threaded his way through the explication of what is after all a very vague and troublesome document.  The committee looked and sounded a bit troubled by it and had some fairly pointed questions.  The chair, CM Stephen Rapundalo,  even used the subjunctive “were we to approve this…”, but in the end, with vigorous advocacy by DDA director Susan Pollay and outgoing City Administrator Roger Fraser, the committee sent the Letter of Intent on to Council.  (Here are the minutes of the meeting.)  The room was crowded – a small conference room with no chairs left and people left in mostly stunned silence after learning that there would be a City Council working session the next week (March 14).  (The urgency of the proposal was made clear by an aside from Pollay, who said “we thought this would be decided on Monday” [the Council meeting on March 7]).

At the March 14 working session (also very well attended and televised), there was another rehearsal of the LOI by Di Rita (who has been criticized by a local attorney, Tom Wieder, for his history and qualifications).  Ryan Stanton of AnnArbor.com reported that “Ann Arbor City Council members will be asked in the coming months to make one of the most difficult decisions of their political careers.”  Stanton accurately captured both the tension among council members and the intense interest of the audience.  Note: the meeting was chaired by Mayor Pro Tem Marcia Higgins.  Mayor John Hieftje and CM Christopher Taylor were absent.

The outcome of the meeting, announced by Man in Charge Roger Fraser  (didn’t council and the mayor used to set the agenda?), was that there would be a vote of the Council on April 18 to approve a revised version of the Letter of Intent.  If approved by Council, it would commit the City to serious negotiation and a decision on a development agreement within four months.  While the development agreement (similar to a sales agreement for real estate) would be the final commitment by the City, the LOI binds it in many ways.  But CM Stephen Rapundalo showed real determination and courage (though it earned him a scowl from Fraser) by insisting that the April 18 meeting would include a public hearing.  This was not a given – technically, a public hearing is only required under certain circumstances, usually an ordinance change or property disposition.  So CM Rapundalo deserves, in my opinion, kisses and roses for this stand.  (Or chocolates, whatever.)

Nevertheless, the cumulative effect of the two meetings was that many members of the public left with heightened feelings of outrage about the way the Valiant proposal has succeeded in besting all tests of reason to make it this far.  (My name for it is the “undead”.)

This feeling of outrage has resulted in the beginning of a full-blown campaign.  One outcome is a website hosted by Citizens Against The Downtown Conference Center.  (As of this writing, still in embryonic condition.)

The next post will examine the LOI in detail and its implications.

UPDATE: The Council meeting date has been changed to April 19, to avoid the first day of Passover.

Note: if you are looking for a list of Library Lot posts, visit Library Lot Conference Center page.

What passes for drama among those interested in following the Ann Arbor Library Lot issue came and went with the postponement of the March 3 RFP Advisory Committee meeting.  It has been postponed until March 8, in case you didn’t get the notice.  If you did get the notice, you are among a privileged few, since it was not posted on the RFP website.   Here is the official notice, duly posted with the City Clerk’s office but not transmitted further.

The group of Ann Arbor citizens, Public Land – Public Process (see statement of purpose)  has been working for over a year to address the Library Lot issue.  A group statement was prepared and we (yes, I’m one) requested the favor of making a public statement through one of the committee members, but it was not approved.  Thus, the statement was published on our group blog.

Tom Wieder is a prominent attorney who has been involved in Ann Arbor politics and issues for approximately 30 years.  He has long opposed a conference center and recently joined the PLPP group.  He has put together a hard-hitting review of the city’s consultant, The Roxbury Group, and the recent process.  His statement (prepared for the March 3 meeting but also refused a hearing) is now published on the group blog.  It contains some thought-provoking information.

UPDATE: The City of Ann Arbor sent out a reminder of the meeting change today, March 7.

SECOND UPDATE: The Ann Arbor Chronicle published a very complete account of the RFP Advisory Committee meeting. The committee voted to send the letter on to Council, and a Working Session is scheduled for 7:00 on March 14, where Council can ask questions (but others cannot speak).

An edited, compiled summary of posts on the Roxbury report and the Valiant proposal for the Ann Arbor Library Lot.

Local in Ann Arbor has been following the saga of the effort to put a conference center on the Ann Arbor Library Lot since June 2009.  See the Library Lot Conference Center page for a complete list of posts. After the November 23, 2010 RFP Advisory Committee meeting where the Roxbury report was presented, we began what became a seemingly endless series on the report and the revised proposal from Valiant Partners LLC.  Now that a decision on this proposal is possibly drawing near, we present this slightly condensed form of the “What’s in the Box” series on the Roxbury report and the revised Valiant proposal that it discloses.

I. What’s not in the Roxbury Report pointed out that the report provides no market feasibility study of the Valiant and Asquest proposals, though that was asked for in the RFP for a consultant.  Instead, the report says:

“It should be noted that this report does not include and is not intended to serve as a feasibility study for the concepts included in the two proposals. Accordingly, for purposes of this report, it is generally assumed that the overall concepts included in the uses for the Library Lot contained in each proposal are valid and supportable from a market and demand standpoint.”

II. The New Valiant Offer for the Conference Center compares the revised proposal from Valiant with its original cost proposal.  Note that the revised proposal exists as a single sheet (Attachment B to the Roxbury report) that was prepared by Valiant. Here are two summary tables from the post:

III. A series on Feasibility of the Valiant Proposal.  (Note that links to the original posts are labeled Part A, etc.)

Part A.

1. The Hotel Business discusses the unrealistic projections for both Average Daily Rate and occupancy.  The Net Operating Income, or NOI, is based on these projections.

So, for example, in Year 2 (2014), they assume 72.5% occupancy and ADR of $193.46, for a RevPAR of $140.25. With 150 hotel rooms, total room revenue for that year is estimated at $7,165,283. (The calculation is somewhat confused by the inclusion of suites with different occupancy and rate profiles.)  There is additional income from food service, suites, and parking. After expenses, the Net Operating Income (NOI) in Year 2 is estimated to be $2,627,869.  This just exceeds the payments due on the mortgage ($2,483,010) by $144,859.

2. The Conference Center discusses some of the costs and liabilities of the conference center operations, which are not funded by Valiant’s proposal.

So who will put forward the upfront money to furnish and staff the conference center?  How will operating expenses be covered in its early years, before a smoothly running calendar is in place?  (Most conferences book a year or more in advance.)  Who is responsible for setting up the nonprofit and who will appoint its board?  What will be the source of its own operating budget?   None of these questions are addressed in the Valiant proposal, though it does state that the city will own the conference center.  Thus it appears that the city will bear the full responsibility and cost for these operations, at least in the short term.This is especially a concern because articles continue to be published with negative news about publicly supported convention centers, with most operating at a loss and failing to bring the positive results expected.

Part B.

3. The Parking Question addresses at length the underground parking structure being constructed beneath the Library Lot and how the parking spaces there affect the cost and use of the hotel and conference center.  It lists three problems: (1) Loss of use for the public, including local businesses; (2) Loss of the city’s Federal subsidy; (3) Loss of revenue and cost to the system.

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.)

Part C.

4. The Ground Rent discusses the formula for the payment to the city for leasing ground and air rights.  In the revised proposal, that Ground Rent would actually not be paid to the city, but instead would be used to pay for the bonds.  (The bonds are to pay for construction of the conference center.)

a. Calculation of NOI The Net Operating Income is based on hotel revenues.

So for example, in Year 2 (2014) the Total Revenue is $13,753,971, from which expenses and administrative costs are deducted to obtain a Gross Profit of $3,702,862.  After subtraction of management fees, insurance and taxes, we finally arrive at a NOI of $2,627,869, which is about 19% of the gross revenue.  Obviously, if the revenue is below what is projected (as we predict), and assuming that the expenses and fees would remain nearly the same, the NOI could approach zero rapidly.

b. Calculation of Ground Rent: The Ground Rent is the amount that would theoretically be paid to the city for a 75-year lease of the land, or alternatively as an outright purchase of the land.  It is based on the NOI, as plugged into a very complicated formula.

A calculation is shown here to illustrate that if hotel revenues fall below expectations and NOI approaches zero, no Ground Rent would be paid.

c. Subordination of the Ground Rent to the First Mortgage: But even if the NOI is sufficient to pay the Ground Rent, another complication is that the developers would have financed the hotel with a first mortgage of approximately $28 million.  They state very explicitly that the Ground Rent must be subordinated to the mortgage: in other words, if the profit from the hotel is not sufficient to make both the rent and the mortgage payments (estimated at $2,483,010 per year), the Ground Rent will not be paid.  (Even by their estimates, Year Two falls short, since there is only $144,859 left over after paying the mortgage.)  Yet, in the updated proposal, the Ground Rent amount is increased to $775,000 (no explanation about the increase).

d. Use of the Ground Rent to Pay for the Bonds: But in the reconsidered proposal presented as a table in the Roxbury Group report,  the city would not actually receive the Ground Rent as cash.  Instead, it would be used to pay for the bond (confusingly noted as an EDC bond and a TIF bond in two different places) and to put money into reserve.

Presumably, if the NOI was not adequate to pay the Ground Rent, the bonds have a risk of going into default.

Part D.

5. The Bonds

a. Then and Now summarizes the change from the original Valiant proposal.

b. The Bond Alternatives discusses implications of using Economic Development Corporation bonds instead of full-faith-and-credit municipal bonds.  The city’s treasury is not at risk.

So what is an Economic Development Corporation bond and how does it work?  Municipal Economic Development Corporations are established under the authority of Michigan Act 338 of 1974. Actually, Washtenaw County has two, the Ann Arbor Economic Development Corporation (established in 1978), and the Washtenaw County Economic Development Corporation (established in 2001).

c. Where does the money come from? quotes Stephen Lange Ranzini (a member of both local EDC boards) about sources for EDC bonds.  Federal funds from the Recovery Act have lapsed.

Generally, in the absence of such exterior funding (as the Recovery Act money), the money to finance the EDC bonds must come from a bank, via a mortgage or simply a loan. Ranzini confirmed that in such a case an applicant would have to present an irrevocable letter of credit from a bank in order to be considered for bond issuance.

d. What happens if the debt payments are not made?

If a bank is to loan money to the Valiant partnership with bonds as the repayment mechanism, there must be a clear plan for how bond payments will be made.  The picture is more complicated since the idea is to finance a public facility (the conference center).  Here is what Ranzini said about this:

“Private individuals would need to secure credit from a bank (which would issue the letter of credit backing the bonds). The bank would of course use the public facility and other assets (such as corporate and personal guarantees of the sponsors) to secure their loan. These guarantees might be unsecured or secured but that is up to the bank’s credit committee to decide how much risk the bank is willing to take.”

So in other words, either the Valiant partnership would have to be able to persuade a bank to issue a letter of credit (and remember that an irrevocable letter of credit is absolutely binding) based on their own personal credibility and assets, or – as seems possible – the conference center itself might be required to assume some responsibility if the promised revenue does not materialize.

Part E.

6. Taxes Notes that much of the “return” to the City that Valiant promises is in tax revenue and examines each source.

(1) Payroll tax – but this goes to the Federal government for Social Security and Medicare.

(2) Sales tax – but the city does not collect those directly, and state revenue sharing is being cut.

(3) Accommodations tax – which goes to the county and the CVB.

(4) Property taxes:  But the proposal is mostly silent on the subject of property taxes. Property taxes are not included in the “benefits” summary and it appears clear that the developers do not expect to pay them.  Some possible explanations are advanced.

Part F.
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.

(Review of individual resumes) 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.

The rest of the post discusses what Valiant would hope to gain from the project and implications for their holding the bond debt.

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.