What’s in the Box (Compiled)

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:


Ownership or Operation



Valiant or partner 150 rooms 150 rooms
Residential Condominiums
Individuals 12 units 6 units
Conference Center
City or nonprofit 32,000 square feet 26,000 square feet
Valiant or partner none 48,000 square feet
Public Open Space
City? Unclear Ground level plaza, roof of conference center Ground level plaza only




Primary mortgage
Privately financed mortgage for $28 million.  All other debt and city payments subordinated to it. No change indicated
30 year Full Faith and Credit (city backed) bond for $8.1 million 30 year revenue bond issued by EDC (Economic Development Corporation) for $6.9 million
12 units, av. price $750,000; city receives 10% as sold for est. total $900,000City tax receipts est. at $75,000 per year 6 units, av. price $1.2 million, city receives 10% as sold for est. total $720,000City tax receipts est. at $60,000 per year
No property taxes for conference center (assumed)Property taxes from Hotel/Retail dedicated to cost of construction bond 


No property taxes for conference center (assumed)No change and reference to a TIF bond indicates dedication of the tax stream to bond 

Tax treatment for office portion not discussed

Ground rent (and air rights) payable to city
Self-liquidating Purchase Mortgage, value based on net operating income in 3rd year, estimated at $348,784 per year No change indicated in amount but dedicated to debt service for the EDC bond.  (No payment to city.)
A substantial revenue and expense item in pro forma No change
“PILOT” of $250,000 No such payment

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.

Source Original Revised Comment
Bond type Full faith and credit municipal bond Economic Development Corporation bond The developers say that the EDC bond will be issued on the basis of their credit
Bond amount $8 million $6.9 million Square footage of conference center also reduced (32 K to 26K)
Ground Rent about $350,000 $775,000 No explanation for increased amount
Property tax – hotel/retail $250,000 “plus” not included This is also referred to as a PILOT
Property tax – condos $75,000 $60,000 number of condos reduced from 12 to 6
Upfront sum from condo sales $900,000 “plus” no change indicated This amount also to support conference center initial development

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.

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