The Frederick News-Post (FNP) reports disagreements over financing details of proposed borrowings by the City of $5.7m and $6.3m by the County toward the $30.35m needed for the 24,000sf of meeting space ($16.25) onsite car parking with 200 to 300 parking spaces ($9.6m), land $3.4m, roadworks, utilities $1.1m of the downtown hotel and conference center (DH&CC). That is being called ‘public infrastructure.’ Fair enough in case of the parking and the roadworks and utilities or $10.7m of the $30.35.
Baloney for the remaining $19.65m of the $30.35m — the meeting space ($16.25m) and the land ($3.4m). The meeting space will be controlled by the hotelier who will book, and run the events and be entitled to the fees from events. All this after having designed the facility as an integral part of the hotel complex. That’s not infrastructure, that’s a business facility gifted to the hotelier by taxpayers.
Land bought by city government for use of a developer and leased to him at a heavy discount on commercial terms is another gift to the developer, not ‘infrastructure.’ If the City DED decided it wanted to support a new gas station downtown it too would be presented as ‘public infrastructure.’
Propagandistic language aside, the five party MOU financing is a vague affair, a reminder of how much remains to firmed up…
Propagandistic language aside, the five party MOU financing is a vague affair, a reminder of how much remains to firmed up. The capital funding table contains items like ‘City TIF bonds or similar financial mechanism’ and ‘County TIF bonds or similar financial mechanism.’ There are no similar financial mechanisms. TIFs are unique in using the addition or increment in tax revenue for servicing debt rather than going to government general funds for its normal uses.
The FNP reports project manager Richard Griffin as floating the idea of getting Maryland Department of Housing and Community Development (DHCD) bonds instead of TIFs via MEDCO.
Next step? Six party MOU?
Most problematic in the 5 party MOU is the introduction of the ill-starred state corporation MEDCO (assets $617m, liabilities $851m) as owner’s representative for three levels of government of the conference center portion of the proposed complex. MEDCO as a state entity isn’t liable for local taxes which makes it difficult to find a tax increment on which to do tax increment financing.
Never mind we’ll work something out in the next MOU.
The FNP: “The exact size of the bonds for the downtown hotel project — and final determinations about the assessability of the conference center — will be calculated by MuniCap Inc., a public finance consulting firm based in Columbia, said Richard Griffin, the city’s economic development director.”
Back in 2014 MuniCap ran financing scenarios for the project. In one scenario 30 year bonds to support $7m issued July 1, 2015 would have a coupon rate of 6%. The $7m would finance construction of a parking garage with 250 spaces for the hotel. They’d take the estimated property tax increment of the hotel as the City and County revenue stream to be used against debt service. The report called Bond Financing Projection #4A is dated September 2, 2014.
Assessed value of the hotel starts out at $24.7m generating $181k City tax and $230k county tax, $411k total property tax in FY2017. Assessed value is projected to increase 10% a year for three years, so that by FY2020 it would be due $240k in City tax and $305k county tax, total $545k. After that assessed value and taxes rise 2% a year. By halfway through the term of the loan the assessed value of the hotel would be $40m generating $292k City and $372k County tax for total of $664k.
Over the term of the loan $8.3m of City and $10.5m of County tax would be needed or $18.8m combined.
Hotel room tax revenues are also run by MuniCap rebating 2% of the 5% for debt service. That yield rises from $90k in FY2017 to $121k in FY2030, over the 30 year loan term $3.49m.
Property plus hotel tax revenues rise from $547k in FY2017 to $798k midway through the loan and total $22.3m over the loan term. That’s to service a bond of about $9.5m which after fees and reserves yields $7m for parking garage construction in 2015. Debt service coverage is negative in three ramp-up years and after that is at 104%, hopefully leaving a reserve surplus of $1.64m in FY2044 when the TIF bonds would be paid off.
The parking is now planned to be financed with City parking revenue funds, but the MuniCap calculations show the kind of deal that can be gotten with TIF.
County policy is to pledge a maximum of half the available tax increment from a project, whereas the MuniCap calculations were based on pledging about 95%. The City says it is following County policy on TIFs, so all these numbers would be smaller. But the latest hotel development incentive program takes the whole 5% hotel room tax for debt service with an 85% limit, so more would now be garnered from the hotel room tax than MuniCap calculated. The balance of property and hotel room taxes might be similar to MuniCap’s totals.
Based on project TIF not net county or net city TIF
Major weakness of tax increment financing (TIF) is its focus on the project tax increment rather than the net tax increment for the municipality. If, say, the DH&CC were to come on stream with 200 rooms at a time when overall hotel use were flat it would take most of its business away from other county hotels, so the tax increment at the DH&CC could be more or less matched by tax decrements (reductions) at Hampton Inn, Courtyard by Marriott, Holiday Inn etc as their valuations settled down under pressure of adverse financial results.
The DH&CC has been promoted as so unique and upscale it will bring a new class of big spenders to Frederick ($495/day spenders) who aren’t presently coming here. If that happy result came to pass everything would be hunky-dory with the TIF since the net county tax increment would be similar to the project tax increment. But if the DH&CC were forced to slash prices and go downmarket to keep rooms reasonably occupied the project tax increments would be smaller. Plus those project tax increments could well be offset, or more than offset by tax decrements at its competitors. The county could find it had zero tax increment, or a net reduction in tax revenue from hotels. Then local government would have the difficult choice — stiff the lenders, let the bonds default and lose bond rating, or bail them out.
All the base projections go back to a Crossroads consulting study in 2012 which assume a new breed of big-spenders attracted to Frederick by the new DH&CC facility. It may happen, but the whole thing’s a gamble.
Crossroads conclusions have been called “absurd” by Heywood Sanders, a leading researcher and writer on hotel economics who says this large a high-end hotel in Frederick is an extremely risky investment. He says the problem with consultants like Crossroads is that they are usually hired after a local politically connected group has decided what it wants. The consultant’s real job then is to provide a veneer of professional endorsement to the project rather than to provide an independent and objective assessment.