Problems with the proposed City land purchase

There are several problems with the City’s proposed land purchase & leaseback on behalf of the Plamondon hotel downtown. City taxpayers are heavily disadvantaged by the deal.

1. It is a major departure from the terms of the competed procurement. Request for Proposal RFP 14-J issued Feb 19, 2014 stated in a special Note that: “the City will not provide City-owned land for the development project.” (p20) And the RFP emphasized that ‘site control’ meaning either ownership, or contractual arrangements to buy the land from the owner, would be required of the  developer. (p8, p13, p15, p20) Only four sites were designated as eligible, one of which the main post office was not available because for the foreseeable future the USPS has no intention of moving.  The third owned by Douglas Development had plans for office and retail. Only two were real options. Both of the responses to the RFP on those sites were based on private ownership of the land, though Plamondon did propose the City pay for its purchase of the land. Wormald the other proposer was proposing its hotel development on land it owned — the so-called Galleria site immediately opposite the FNP site on the Carroll Creek Park.

City purchase of the Frederick News Post site was negotiated after Plamondon had been chosen. Every change negotiated after the selection with the selected developer detracts from the fairness and legitimacy of the prior competitive procurement, especially ones that affect the financial terms.

2. The City land purchase & leaseback proposal as outlined in the City-Plamondon Memorandum of Understanding (MOU) is highly advantageous to Plamondon at the expense of City taxpayers. It involves the City spending $3.55m to buy the land with a 99 year leaseback to Plamondon  and a ground rent for the first 25 years based on 2.4% of the land cost. That’s about $85,000 a year ground rent for 25 years regardless of inflation or increases in land values. After 25 years the $85k land rent rises by 1.25% a year.

Hotels built on land they lease usually negotiate a ground rent in the range 3 percent to 5 percent of gross revenues. The Crossroads study of July 2012 estimated the DH&CC’s gross revenue in its ‘stabilized’ 4th year of operation as $10.7m so on that basis commercially negotiated ground rent  would be in the range $322,000 (3%) to $537,000 (5%). The City’s earlier Pinnacle study put stabilized year gross revenues at $16.2m for ground rents in the range $485,000 (3%) to $810,000 (5%).

In 25 years you’d normally expect hotel revenues to grow with inflation and the economy, and commercial terms would see ground rents rise roughly in proportion. By contrast the ground rent based on the land purchase price will steadily decline in real value to City taxpayers.

The proposed $85,000 ground rent is almost a giveaway compared to the normal range of commercial ground rents.

3. The land owner is normally liable for City and County property taxes based on the valuation of the property. City purchase of the land and leaseback seems to take the property off the tax books. Project manager Richard Griffin has stated however that the hotel operator will pay property taxes as if he owned the property, but this is not spelled out in any contract documents so far.

4. The land owner is liable for any hazardous materials clean-up costs, so the City purchase puts any such liabilities on City taxpayers. So far no serious contamination has been found but the search has been limited to a few sampling bores. The history of over a century with tanning operations using  arsenic and chromium solutions makes it quite possible more detailed surveys will turn up contaminant problems.

5. Land ownership adds another level of City responsibility for the property in case of financial failure, and will add to the leverage of the hotel operator in future years in seeking City ‘support’ to cover operating losses on the conference center.

P Sam 2016.07.20

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