Local in Ann Arbor

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.

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.

As we recently reviewed, the RFP Advisory Committee met without fanfare on November 23, 2010 to hear a presentation from the consultant, David Di Rita of the Roxbury Group.  (The Roxbury report is available on the city RFP web page.)  After a fair amount of scrambling, notes from that meeting were finally posted on the web page as well.

The notes indicated that only three committee members were present: Chair Stephen Rapundalo, Councilmember Margie Teall, and DDA member John Splitt.  City administrator Roger Fraser was also present.  The notes indicate that Susan Pollay, executive director of the Ann Arbor DDA, was present, but apparently she was actually out of town.

Here is what transpired, according to the notes:

Mr. Di Rita proposed that the next steps include finalizing the Report and developing a draft Memo of Under-standing with Valiant that could serve as the basis for further discussions and negotiations between the City and Valiant over issues like site planning and financials.

J. Splitt moved that the Committee accept the Consultant’s Report and direct staff to work with Valiant on a letter of intent that could be presented to Council, along with the recommendation of the advisory committee. Motion was seconded by M. Teall. Splitt, Teall and Rapundalo voted in the affirmative. Motion passed unanimously.

Actions Taken: 1. Acceptance of Consultant’s Report 2. Directed staff and Consultant to draft a Letter of Intent or Memo of Understanding between the City of Ann Arbor and Valiant for review by the Advisory Committee and City Council.

Recently, a member of a DDA committee asked Susan Pollay what the progress with the Library Lot project was.  She replied that a letter of intent was being developed and would be on the City Council agenda in a few weeks.  After an inquiry from me to CM Rapundalo, a meeting of the RFP Advisory Committee appeared on the web page.  (The meeting is 9:00 a.m., March 3, 2011, 4th Floor, City Hall.)

But what about that letter of intent, or memorandum of understanding?

Considering the difficulty we had in obtaining information about the earlier meeting, I sent a Freedom of Information Act request to the City on January 27.  It requested, in part:

• Administrative emails and memos tasking staff to prepare documents based on votes taken at that meeting. Specifically, emails and memos directing staff to prepare or participate in a letter of intent or memorandum of understanding with Valiant Partners, LLC. “Administrative” should include any city staff delegated to manage this task, as well as City Administrator Fraser. Emails and memos from the Chair of that committee, Councilman Stephen Rapundalo in re preparation of documents based on votes taken at that meeting are also requested.

• Correspondence dating after November 23, 2010 with the consultant, The Roxbury Group (cf. RFP #758) regarding a letter of intent (with respect to RFP 743) or memorandum of understanding, and the preparation by or participation by the consultant in negotiations with Valiant Partners LLC.

• Documents prepared by The Roxbury Group and transmitted to the City after November 23, 2010. The report, “LIBRARY LOT PROPOSALS – RFP #743 REPORT AND RECOMMENDATIONS TO THE CITY OF ANN ARBOR” and its appendices (attachments) are specifically *excluded* from this request.

• Any letter of intent or memorandum of understanding between the City and Valiant Partners LLC. If a final, approved version of such a letter or memorandum is not available, please supply the most recent draft version. This request specifically *excludes* the draft form Letter of Intent supplied by The Roxbury Group as Attachment C of their report dated November 23, 2010.

The City opted to add a 10-day extension to the 5 days in which they are ordinarily supposed to respond to a FOIA “because of the time needed to process your request”.

The much-anticipated response finally arrived on February 17, 2011.  It was simply this:

Your request for records related to the November 23, 2010 Advisory Committee meeting held regarding RFP 743 is denied, as the City does not possess any records that respond to your request.

NONE?  Are we to assume that the consultant walked away with a verbal commitment from the committee and nothing else?  No directives, no discussion?  Or maybe he simply hasn’t gotten started with the work?

RFP advisory committee meetings are not bound entirely by the Open Meetings Act, but the product should be available to see what the Council will be asked to respond to.  I hope that it is not intended that this will be landed on their agenda for March 7, without any chance for the public to see what entanglements with Valiant are being proposed.

The debate about an Ann Arbor city income swung into full cry January 30 with a story on AnnArbor.com.  The companion story purports to show that a city income tax is a less dependable source of revenue than property tax.

We’ll get to the arguments about those two stories shortly.  But meanwhile, let’s define the issue.  First of all, the city is facing a budget crisis.  Thanks to the Neighborhood Alliance for reproducing the handout from the January 8 Council budget retreat that helps to show the deficits.  Although our city has done relatively well through the recent economic downturn compared to other cities, especially in Michigan, to use CM Rapundalo’s frequent metaphor, it doesn’t make it okay to lose your toes and one arm up to the elbow just because someone else lost both their legs.  As we’ve reported before, some unpleasant choices loom if we don’t do something soon.

As stated in the first post of this series, I believe that a city income tax is the best solution for the budget problems confronting the city, and I’m advocating that City Council should put the issue on the ballot for the voters to decide.  Here is one of the reasons:

There are structural (i.e., problems unrelated to current trends, but inherent in the way our tax system is set up) reasons for this current crisis.  Here is a brief review.  (In order to keep this discussion moving along, details of Michigan tax policy are kept to a minimum here. See the excellent summary by the Citizens’ Research Council for details.)

1. No local sales or use taxes:  Michigan law imposes major limitations on the taxing power of municipalities (that includes cities, townships, counties and villages).  Michigan cities are not able to tax any activity.  Whenever the subject of Ann Arbor’s problems come up, someone is sure to suggest a fee on UM football tickets, for example.  But we can’t do that,  or any local sales tax.  There is a surcharge on hotel rents, but that goes to the Convention and Visitors’ Bureau and the county, under a special provision.  So although Ann Arbor’s economy is increasingly as a tourist destination, we can’t take advantage of that to offset our expenses.

2. No help from the State of Michigan either. The lack of such local taxes were supposed to be offset by state “revenue sharing”. But as explained in a recent story on Michigan Radio, the loss of revenue sharing dollars over the last decade has put stress on cities.  The state legislature has found these dollars a good source to plug budget holes at the state level.  So cities are stuck – with neither the power to tax on their own behalf nor a share of those revenues.

3. Property tax is left standing alone. What this means is that the City of Ann Arbor must derive all its revenue from property tax or fees for service.  We’ll look at the question of fees at a future time, but for the moment we’ll assume that they are only applied to users of certain very specific services and cannot be used to support most governmental functions.

But Michigan state law has also restricted the way property tax is levied.

a. The Headlee amendment to the Michigan Constitution (passed in 1978) has several provisions intended to restrain the growth of taxation.    Two are especially important to cities:

• Headlee requires that any new taxes (like special millages) instituted after 1978 are approved by a vote of the people.
• It also requires taxation based on current valuation to increase no more than inflation.  So (excluding new construction) if the assessed valuation increases more than inflation, the rate at which property is taxed (millage rate) must be reduced.  This is the well-known and much despised “Headleeization” that brings previously approved millages down, down, down.  That is why the General Operating Millage of the City of Ann Arbor, originally approved at 7.5 mills, is now 6.1682 mills.

b. Proposal A, passed by popular vote in 1994,  limits the increase in taxable value for an individual property to 5% or inflation (the consumer price index), whichever is less.  Since the CPI has been very low (note that this measure specifically excludes housing) over the last decade, taxable values have been very stable for long-term owners.

• Cities were depending on transfers of property during the housing boom to keep their taxable values up.  When a property is sold, it reverts to an assessment based on the current market value – the so-called “pop-up tax”.
• During the housing boom, the prices of houses and other property were going up yearly.  This also increased taxable value.
• BUT – in the last half decade, fewer houses were sold, and the market price sank.

Here is a summary from the city’s Comprehensive Annual Financial Report (CAFR) for Fiscal Year 2010 (remember, that ended June 30, 2010).  It shows the effect of Headlee and Proposal A on property tax revenues.

Each July 1st the City property tax is levied and becomes a lien on the related property, the value of which is equalized by the State of Michigan and limited by Act 415 of 1994. The City’s operating tax rate levied July 1, 2009, as controlled by the Headlee Amendment, Act 415 and City Charter, is 6.1682 mills. Other tax rates are as follows: Employee Benefits (2.0560), Refuse Collection (2.4670), Ann Arbor Transportation Authority (2.0560), Street Repair (1.9944),Parks Maintenance & Repair (1.0969), Open Space and Parkland Preservation Millage (0.4779), and Debt Service (0.4806). Real and personal property located in the City as of December 31, 2008 were assessed and equalized at $5,787,470,424, representing 50% of estimated current value. Act 415 of 1994 limits annual increases in taxable value to 5% or the Consumer Price Index, whichever is less. The 2009 taxable value on March 18, 2010, was $4,730,622,646. Property taxes are due July 31st of each year and any delin- quent real property taxes are turned over to Washtenaw County for collection the following March 1st.

Note:

1. The “estimated value” was about $5.787 billion.  This was based on current assessments, which are then “equalized” by the state (this process is to keep overly favorable assessments from being delivered in some localities) to give a State Equalized Value (SEV).  As it states, this is 50% of current market value.
2. After Proposal A limits were taken into effect, the Taxable Value (TV), on which taxes are actually levied, was only about $4.73 billion, a reduction of nearly 20%.
3. The millage numbers are all strange fractions.  For example, the Open Space and Parkland Millage (aka the Greenbelt Millage) was approved by voters at 0.5 mills in 2003, but is now down to 0.4779 mills.  This is the “Headleeization” effect.
4. The taxes that Ann Arbor property owners paid in July 2010 were the result of an assessment conducted in 2008.  That is because taxes are paid after the year in which they are incurred.  So the tax collection for 2010 really reflects the value of property in 2008.

We said at the beginning that the City is facing a “structural” problem with regard to the taxes it collects.  Part of that problem is the almost complete reliance on property tax to fund the city.  The other part is the heavy presence of the University of Michigan as the main property owner in Ann Arbor – but which is exempt from paying taxes.

In future posts we will look at the impact of the UM and the reason that this makes a city income tax the solution to the budget problem that is most reasonable, feasible, and most stable over the long term.  We’ll also analyze the recently published arguments that seem contrary to that conclusion.

As readers of this blog know, we have been following the question of the Library Lot and the proposed conference center there for over a year.  (An index is on this page.) There was a flurry of activity about this time last year while the RFP Advisory Committee considered proposals in response to a Request for Proposals for the site (a new series on that history begins here).  Then there was a long dry period over the summer (discussed in the Signs and Portents post).  Finally,  information was obtained by the Ann Arbor Chronicle that an RFP Advisory Committee meeting was held on November 23, 2010.  The committee was reported (by a member, John Splitt, at a DDA board meeting in December) to have accepted the recommendation of the consultant, The Roxbury Group, to send a letter of intent to the Valiant Partners.  (See the account by the Chronicle.)

But since then, a mystery.  Every appearance was that the committee had met without public announcement and made a decision which was then not being explained. Was a letter being prepared? Had it been executed? Would it ever come to Council? Would the committee ever announce its findings in public?  Many of us who are interested in this question were sending emails and vainly checking the city RFP page for announcements over the last couple of months.

Finally, the clouds have parted.  The chair of the committee, CM Stephen Rapundalo, explained via email that the meeting was indeed posted (more about that in a minute) and has now made the minutes from the November 23 meeting available on the city website.  They are here.  There are several items of interest, much of which has been discussed in our (inexorably) lengthy series on the report.  But here is the key information:

“J. Splitt moved that the Committee accept the Consultant’s Report and direct staff to work with Valiant on a letter of intent that could be presented to Council, along with the recommendation of the advisory committee… Splitt, Teall and Rapundalo voted in the affirmative. Motion passed unanimously.”

(The minutes also make clear that only three members of the RFP advisory committee, CM Rapundalo, CM Teall, and John Splitt, were present.  Other persons present were Roger Fraser, City Administrator, and Susan Pollay, DDA Executive Director.)

Note that the members of the committee apparently made this recommendation solely on the basis of the consultant’s verbal report.  The written report, dated November 23 (the date of the meeting), unless it was circulated ahead of time, was apparently not scrutinized by the committee members.

Meeting posting and the Open Meetings Act

There has been a certain amount of comment lately in the press about the city’s notification successes and failures.  On the one hand, the city has instituted a number of notification systems to alert the public to meetings of public bodies.  This is in accordance both with the state Open Meetings Act and the council’s own Citizen Participation Ordinance.   It is possible to sign up for a number of automatic notifications by email.  I’m on a number of them, including RFP #743 (the Library Lot).  But in this case, the system failed.

The Ann Arbor Chronicle has been making something of a crusade over this issue, to the extent of a lawsuit against the city.  In a recent column, Dave Askin’s study of the problem of  “noticing” revealed that the City Clerk’s office is supposed to place the legally required notices in a glass-front case in City Hall – and this triggers the electronic notices.  Edward Vielmetti, the “Lead Blogger” for AnnArbor.com, has also been an advocate for open government and recently wrote a good summary of the systems the city has in place for noticing.  He noted that if items are placed (instead of in the glass case) on a “tack strip” nearby,  electronic notices are not triggered.

I have learned informally that the City Clerk (who has the electronic system in hand) is not the only person with a key to the glass case.  The City Administrator’s assistant also has one.  Apparently the notice for the RFP Advisory Committee meeting was placed into the glass case without telling anyone else.  Thus, transparency that was opaque to the rest of the (city) universe – unless you happened to be strolling through City Hall at an opportune moment.

Happy endings

The good news is, thanks to the intervention of CM Rapundalo, the message apparently got across and the minutes were finally posted on the city RFP page.  I’m hopeful that we will now see proper noticing of the anticipated February RFP advisory committee meeting.  According to CM Rapundalo, that will be the one where the committee reviews the draft letter of intent and discusses recommendations to the Council.  I’ll be there.

Reflections on the mixed signals and confused motives behind the City of Ann Arbor RFP process for city-owned lots

The ordinary and usual reason that cities and other units of government issue a Request for Proposal (RFP) is to solicit bidders for a complex project, service, or device that cannot be purchased through ordinary procurement practices.  (The related Request for Quotation, or RFQ, is focused more on the cost of large equipment or other easily specified items.)  As such, the RFP is usually a completely administrative matter that never rises to the level of the City Council, for example.

But in recent years the City of Ann Arbor has attempted to use the RFP as a method of disposing of its real estate while accomplishing a number of objectives, including making money.  This has led to a lot of frustration on many sides and is the background of the current proposal from the Downtown Development Authority for the City to turn over the responsibility for managing this process to the DDA.  We’ll review some of that history and reflect on what the future of such adventures should be.

I. The Library Lot RFP

In many ways, the life of RFP #743 was typical for such documents.  It began with a statement of purpose, this time from the City Council.   The resolution was proposed by CM Sandi Smith and CM Marcia Higgins and passed with amendments on July 6, 2009.  It contained these lines:

Whereas,  City Council believes it will benefit the community to partner with a developer to develop this site (the S. Fifth Avenue underground parking structure) in a manner that forwards the City’s  plans for the downtown and provides a financial return to the City;

RESOLVED, That City Council requests the City Administrator to create and issue a Request for Proposals (RFP) for the development of the S. Fifth Ave. parking structure site.

Council also told the City Administrator that they would like the RFP to be issued no later than August 14, and to close it to new proposals after 90 days.

This gave staff only 5 weeks to write a text and assemble all needed information.  The job of assembling the RFP was handed off to a contractor, Ginny Trocchio, who works for the Conservation Fund, usually as staff for the Greenbelt Advisory Commission.   And indeed, the RFP has an issue date of August 14, 2009.

So what are the parts of an RFP?  Typically, it includes a clear statement of what is wanted, a timeline for receiving proposals, qualifications required for bidders, contact information and forms for submitting the proposal, and any information that bidders will need to complete a proposal (in this case, for example, site information).  And those are in this RFP.

But this RFP also has what is referred to in Trocchio’s email to city staff as the “brochure”.  The preamble and much of the RFP itself reads strangely more like a marketing brochure than a factual outline of requirements.

Aside from the typos (the name of the city is Ann Arbor, not Arbor) and the garbled syntax (the UM helps to shape the identity of Ann Arbor… “but also the rhythm of the year and the outstanding museums and performing arts venues providing a crowded calendar of events”), this reads more like a business recruitment message than a request for proposals.  And what do home prices, quality of the school district, and the educational level of potential employees have to do with a development atop a parking structure?

Clearly some of this language relates to the additional signals that the Council sent in its resolution.

RESOLVED, That the City Administrator shall incorporate appropriate elements of the Downtown Plan for identifying desired community objectives for the site, including open space, active uses at street level, and clear public benefits, which should be addressed in site proposals.

In this, the Council indicated that there were multiple objectives at play, including that elusive “public benefits”.  But somewhere an economic development objective crept in.   Thus, of four pages in the section describing the scope of the project, nearly three pages are devoted to further boosterish descriptions of Ann Arbor (awards are mentioned more than once), culminating in a recommendation that proposers consult 5 people for more information, in this order:

1. Mike (sic) Finney, Ann Arbor Spark (sic – should be SPARK)
2. Mary Kerr, Ann Arbor Visitor and Convention Bureau (sic – should be Convention and Visitors’ Bureau)
3. Cynthia Wilbanks, Government Relations, University of Michigan
4. John Splitt, Chair, Ann Arbor Downtown Development Authority
5. John Hieftje, Mayor, City of Ann Arbor

Of course, we know why this limited number of people are listed as resources (not technical or administrative people, but heads of agencies).  This was really about a conference center, as in the Secret Plan.  But as we noted in an earlier post, CM Sandi Smith introduced the concept of an RFP in order to regularize discussion and bring it out into the open.  So while the Council’s resolution sought to put that proposal on an equal footing with other possibilities,  its existence shaped the expression of the RFP.

Meanwhile, many other worthy objectives were inserted by Council, like public participation, public use of the space, environmental benefits, and adherence to the planning principles expressed in the Downtown Plan (revised May 2009)  and the “A2D2” (Ann Arbor Discovering Downtown) zoning and parking amendments (approved November 16, 2009).

The RFP thus stated three objectives that proposers should meet:

• Beneficial use of the site (this includes the publicly available space)
• Environmental benefits (mostly LEED certification, energy efficiency being the flavor of the day)
• Financial return (“The proposal must provide a positive financial return to the City.”)

and provided a set of scoring criteria with percentages.

• Past involvement with similar projects (25%)
• Proposed work plan (how well it meets objectives) (40%)
• Financial capacity (25%)
• Cost proposals – lease return (10%)

In the next post of this series, we’ll look at how that worked out.

This is the last in a series of three posts on the economics of an Ann Arbor conference center.   Part I questioned whether a need had been demonstrated for additional hotel and conference capacity in the Ann Arbor area.  It summarized a number of studies that show a decline in the use of physical conference attendance and discussed the drop in hotel business generally.  It also pointed out the number of conference locations already available in the Ann Arbor, including at the University of Michigan. Part II discussed studies on the impact of publicly-funded conference centers on cities.  In particular, it quoted Steven Spickard’s excellent summary of the issues involved.  It then discussed some of the practical reasons why an Ann Arbor conference center might have difficulty in pulling enough conference business to make the conference center itself economically viable.

The first two posts were modified from a white paper prepared by a subcommittee of Public Land – Public Process, a citizen group concerned with the effect of developing a conference center on the Library Lot.   The group’s statement of purpose is on its blog, Public Land – Public Process.  The authors of the white paper are Vivienne Armentrout, Nancy Kaplan, Eric Lipson and Leslie Morris.  Nearly a year has passed since it was first composed, so this post contains a number of changes and updates.

III. Effects of a new downtown conference center on other businesses and the local economy

One of the reasons given for using City of Ann Arbor property and financial support to establish a conference center and hotel on the Library Lot has been a general claim of its being a boost to “economic development”.  The purpose of this post is to examine what that might consist of. Without conducting market studies, much of what can be said about the effect of a conference center is speculative, but some probable effects and claims can be listed and examined.

a. Effect on Area Hotels: An obvious effect would be that new hotel capacity would draw business from existing hotels, both downtown and elsewhere. As noted in Heywood Saunders’ 2007 testimony to Congress, “These cases of public hotel development and ownership present an intriguing case of public projects, making use of the low interest rates available with tax exempt bonds directly competing against privately-owned and operated competitors, often directly across the street.”   Since hotel occupancy in the region is already low, new beds would doubtless drive down both occupancy and ADR, possibly causing some hotels to fail. It has been claimed (by Valiant) that a conference center would bring in new business that would spill over into other hotels, but as noted in section 2, that is unlikely.

Recent news that another downtown hotel is being planned at 202 S. Division complicates this picture.  The new proposed hotel will be built without public financing of any kind and is likely to proceed quickly, if approved though planning and zoning processes.  Clearly this hotel would be a strong competitor for the one at the Library Lot.  It would also put considerable price pressure on the Valiant partners’ hotel.  (Don’t forget that the hotel is supposed to bear the cost of constructing the conference center.)

b. Increased Downtown Business. Given the nature of conference activities, this is likely to be limited to downtown restaurants. Most conference attendees don’t have time for retail shopping, which is now limited in the downtown in any event.  Here is what the Roxbury report (which gives very little space to explaining the claims for economic development) says:

• Downtown restaurant and bar owners would generally welcome the additional business a large scale conference center could attract, viewing it as a good way to address the otherwise cyclical nature of their business.

(Note that, other than the Chamber of Commerce, business operators were not interviewed by the Roxbury consultants.)   Ted Annis, who published an opinion piece opposing the project in December 2010,  puts it colorfully:  “A dead zone usually forms around such buildings.”  That is, the presence of the hotel and conference center are likely to discourage local customers.

c. What About the Jobs? While there would certainly be employment, it is not clear that most would be “quality jobs”. The hospitality industry is marked by relatively low pay levels.  As shown in the attached table, employees other than the top managers would be at incomes below the Ann Arbor area’s median income, and even below the “low income” level.  (Note: the spreadsheets within the Valiant proposal that support their claims of payroll tax payments essentially agree with this assessment.)  Since these workers would not be able to afford housing in Ann Arbor, they would add to the commuters coming into Ann Arbor, and since their work hours would often not fit into current bus schedules, they might add to parking pressure also.

d. Parking: If the conference center absorbs most of the new parking in the underground structure, downtown business will suffer because of the lack of parking for their employees and customers.  This assumes that, as claimed in the justification for building the structure, this new parking was truly a critical need for downtown.  As Annis says, it “will drive out regular and occasional downtown visitors because of reduced parking at random intervals. Good luck to light retail.”

e.The High-tech Sector: Clearly a major driving force behind this concept has been the perception that having a shining new facility will be helpful in bringing high-tech small meetings to Ann Arbor.  This is presumably where the claim of enhancing “knowledge-based industries” in the Valiant proposal come from.  Roxbury consultants interviewed SPARK officials and offered this assessment:

• A first-rate hotel conference center in downtown would serve as a meaningful business attraction and retention tool.
  • Ann Arbor is increasingly seen as an entrepreneurial, innovation-based community.  The ability to host business and technology conferences downtown would allow Ann Arbor to showcase its appeal as an attractive headquarters location for such companies.

Of course, there are non-economic benefits that might be realized, including increased availability of meeting space that the AADL could use, and the convenience of having a new facility for use in local business gatherings.

As Spickard says:

“Legitimate public purposes can be served by having civic auditoriums and community meeting halls, and because there is that demand for day-use meetings in every community, even heavily-subsidized civic facilities have the potential to make some revenue by renting space for meetings.”

“The point, however, is to be honest in the community’s objectives. It is a mistake to try to justify development of a civic center for your own residents’ use by claiming it will have great economic impacts. Civic centers are public precisely because they serve social purposes, yet are not sufficiently profitable to be provided by the private sector.”

————

This concludes the series.

Note to readers: a complete listing of posts on this subject can be found on the Library Lot Conference Center page.

A common approach to decision-making, particularly in a finance context, is to devise a “balance sheet” of pluses and minuses.  For a public entity like the City of Ann Arbor, these will not necessarily take the form of a traditional business balance sheet, but should include both dollars and cents items and policy goals.

With regard to the City’s search for a decision on the fate of the Library Lot (which has been extensively documented on this blog), there are several questions that need to be addressed.

Policy issues:

1. What is the importance of this site to the long-term health of our city (as a community and a business center) and what uses on the site would best support that?

2. Who should make that decision and what information do they need in order to make it?

3. What weight should be given to different types of benefit and to different groups to be benefited, and should that weight be placed mainly on economic considerations or are there more intangible benefits that are equally or more important?

Financial issues:

1. When we speak of financial benefits, are we speaking of specific financial gain for the City of Ann Arbor that will help our city government to balance its budget and to avoid further loss of services and/or increases in taxes and fees?

2. Or are we speaking of a predicted financial impact on economic development activity in the greater Ann Arbor area?

3. To what extent does #2 influence #1, that is, if the area’s economic activity increases, what is the effect on the specific revenue and expenditures of the City of Ann Arbor?

Risk and certainty:

1.  Should actions taken by our City government be based on a reasonable certainty of a positive financial outcome directly to the city coffers?   This would be for example, a contract, or a tax revenue stream that was secure.

2. Or should the City behave as a venture capitalist, leveraging future debt and city property against the hope of gains in the future?

Okay, those last two questions were loaded.  But what is your answer?

Getting down to the specific question, namely the Valiant proposal for building a hotel-retail-office-residential project that would then supposedly fund a conference center:

Strictly from a financial viewpoint, what is the advantage to the city of building a conference center?  How much risk should the city assume to make that happen, and at what cost?  In other words, is the main objective

a. To achieve a conference center; or

b. To get a substantial financial benefit to the City coffers directly?

Councilmember Stephen Rapundalo has been a major proponent of the development of the Library Lot and has also been a vocal worrier about the state of the city budget.  As chair of the RFP Advisory Committee,  he had a strong influence on the decision to dismiss the two open space proposals that were submitted and to focus on only two of the other proposals (Valiant and Acquest).

In a widely circulated email dated January 7, 2010, CM Rapundalo enunciated clearly how he regards the importance of a direct financial benefit to the City:

Any successful project has to pay for itself without the use of City funds. Furthermore,the project should be able to describe in some basic fashion how it will do that as a minimum to meeting the RFP requirements. … The fact is that there has to be some sort of payment to taxpayers either through land sale and property tax revenue, long-term lease payments, or some guaranteed revenue streams.

Taxpayers must be left intact at the time of build and for the future …Any economic benefits generated by a project must be disclosed and articulated in a balance sheet. That’s what we’re asking for when we say that a financial benefit must be demonstrated. It’s simple math. Of course, that does not exclude all the other elements that must be addressed, i.e., experience with actually building such a major infill project, a viable development team, physical concept and design, etc.

Bottom line – I’m happy to review and compare any project with any design concept so long as they can provide me with a full accounting, profit-loss, balance sheet and description of all other requested features.

So there you have an important opinion on what a “balance sheet” should be.  We’ll examine how the Valiant proposal stacks up against that in the next post.