City land purchase and leaseback for DH&CC is a ripoff of the public — the $-numbers

An apologist for the hotel boondoggle, Donald Burgess writes that it is a “complete fallacy”  that the land leaseback to the DH&CC developer is at a “heavy discount” on commercial terms — as I wrote. He doesn’t specify commercial terms, instead refers to an unnamed “standard” for Maryland landlords enacted in 1888.  That sounds like some kind of historic rent control regime for houses and apartments.

Here we are dealing with contemporary commercial terms for ground rent on hotels. Matt Seubert, a specialist in hotel financing who worked for Marriott for a number of years says that typical commercial terms for a ground rent are in the range between 3 and 5 percent of total hotel revenues.

The Crossroads study on which the project was launched estimates DH&CC revenues (p7) in the fourth ‘stabilized’ year as $10.73m. Taking a midrange 4% the hotelier would pay ($10.73 x 0.04) about $429k in ground lease rent in a normal commercial land lease. Negotiated at 4% the amount would rise with revenues.

The special terms granted to the developer here in downtown Frederick are laid out in the December 2015 MOU (p10.) The rent is to be the land acquisition price multiplied by a Hotel/Retail Utilization Factor of 40% multiplied by a Ground Lease Constant of 6% to determine the annual rent payment —a fixed amount for the first 25 years. In subsequent quarter centuries it is to increase by 1.25% a year.

Land cost to the City is put at $3.4m, so the rent is $3.4m x 0.4 x 0.06 = $81,600

That is a discount of $347k/year on a normal commercial ground lease we estimated of $429k, an 81 percent discount. To put it another way, the deal provides the land back to Plamondon at about one fifth of normal commercial terms.

And that is only the start. Normal commercial ground leases increase each year with increased revenues. This one is frozen for 25  years. The guaranteed and growing cost relief is sufficient to support another borrowing by the developer, reducing the amount of cash he needs to put down below the $3.4m not spent on buying land.

No good rationale has ever been advanced for this City land purchase and leaseback arrangement, which only surfaced after the selection of the present developer. After the supposed competed procurement.

We thank Mr Burgess for getting us to focus on yet another angle on this outrageous boondoggle that is so unfair to taxpayers and to competing hotels. The boondoggle is bound to tarnish this City’s reputation for fair and open competition, which is the basis for real economic development. The closed circle of city and county government intertwined with a  chamber of commerce and downtown partnership is a great big sign to the outside world: DON’T WASTE YOUR TIME LOOKING. THINGS ARE RIGGED HERE. PSam 2016.10.18

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