Maryland Stadium Authority officials wanted City to take ownership of conference center

msa70Maryland Stadium Authority (MSA) officials suggested as far back as June that the City of Frederick should take ownership of the Conference Center if it wanted state support.  In a list of MSA notes from a June 22 meeting on the City’s draft 4-party agreement or MOU the top item is “City ownership of conference center” (see nearby.)

Notes by MSA's Gary McGuigan

Notes by MSA’s Gary McGuigan

MSA-City communications have recently been released to me following an application under the state’s Public Information Act (PIA). They provide new insights into difficulties in the secretive City DED project. In none of the presentations to the Board of Aldermen or to County government in the fall or in the discussions did project manager Richard Griffin allude to state officials’ suggestion that the City take responsibility via ownership of the conference center.

MSA was also concerned about the procurement of the developer being done two years ago without any state oversight. [We have documented the irregularities in that procurement — limited sites, winning developer’s proposal submitted weeks before the RFP was even posted, competing proposal given cursory consideration as documented in timesheets, flagrant violation of City communications rules after RFP posted, biased scoring.]

On August 13 MSA’s Gary McGuigan emailed the City’s Richard Griffin

Gary McGuigan MSA

Gary McGuigan MSA

saying that “private ownership of both the publicly financed conference center and privately financed hotel is a major concern. This is a local initiative  and the city structured the deal and selected the developer without state participation. The legislation that passed this session that included MSA in this MOU process placed MSA in a difficulty situation, which we have tried work through in our negotiations. The private ownership of a publicly financed conference center is an item that MSA cannot endorse.”

Two days later Griffin thanked McGuigan for his candor, adding: “You have been clear about this point all along. I will discuss with the group.”

It may or may not have been discussed with “the group” — heads of the Chamber of Commerce, Downtown Partnership, Tourism Council and other special interests behind the hotel project. The ownership issue was not mentioned in any of the lengthy public hearings of the Mayor and Board of Aldermen or the County Council in September when Griffin was seeking endorsement of his 5-party MOU.

Griffin

Griffin

Only a few days after McGuigan’s email, on August 15 Griffin produced an internal presentation on Ownership Options that clearly led to the idea of MEDCO stepping in as ‘owner’ of the conference center. This was an attempt to keep MSA involved, even in a minor role. MSA’s signature on an MOU is a minimum requirement in the SB191 law for release of $1 million voted for the project in the final days of the general assembly’s last legislative session.

The options presentation says that the City and County have public involvement in the project limited “solely to capital design and construction investment” in land, the conference center, parking and off-site improvements “in order to minimize risk to local and state government.”

“This strategy was chosen largely to avoid real or perceived risk to public taxpayers for any operational sh outfalls once the facility is open,” it says alluding to the experience of money-losing and subsidized conference centers in Ocean City, Baltimore, Rocky Gap and Cambridge (Chesapeake.) “Under this ownership format, the City and the County have the understanding that the public investment in the facility can be protected through legal agreements requiring the developer to maintain and operate the conference center in perpetuity at its own cost…”  (see COMMENT 1.)

The city is defined as the “non-economic owner” with some “defined

Ownership Options presentation

Ownership Options presentation

oversight of the facility and limited financial risk and exposure,” while the developer has a longterm “leasehold interest” with a “claim or right to enjoy the exclusive possession and use of an asset or property for a stated definite period, as created by a written lease.” (see COMMENT 2.)

The presentation in the form of a matrix lays out five alternatives to the City’s long-proposed private ownership of the CC along with pros and cons listed.

Among the pros of the City’s original proposal are listed:

— reduces risk of public complaints about public owernship

— currently preferred by the Mayor and County Executive

— easy structure for private financing

The cons:

— MSA opposes private ownership

— concern by opposition that ‘gifting’ facility to PHP (developer Plamondon) may result in a windfall

— requires lease from PHP to city/county to provide leasehold interest

Option 1, the first alternative shown is Private Ownership with Lien. A listed ‘con’ is that such a lien may affect the ability of the developer to raise equity and debt.

Option 2 is Shared Public Private Ownership with the hotelier carrying all the operations risk. Stated cons are that “It requires significant public explanation…” and that more complex legal agreements are needed.

Option 3 is straight Public Ownership but leaves ‘unclear’ are the risks. The ‘pros’ include addressing strong ‘public security,’ simplicity, and addressing MSA and opposition concern. Cons are that it is a major departure from the present private ownership model, complex legal agreements are needed to transfer operational responsibility and risk to the hotelier, equity and debt  may be made more difficult for the hotelier to raise.

Option 4 is a multi-government Development Authority or MEDCO ownership of the conference center. Pros are that board representation would allow oversight, ownership would be one step removed from the City and County.

Cons are that it might require a new legal entity and might be subject to state approval, it is a major departure from the private model, and requires complex legal agreements.

Option 5, a City Development Authority owns the conference center and leases to the developer. Pros are that 1994 state legislation provides a framework, and there is clear authority to issue bonds. Cons are that a development authority has to be created, it is solely city in nature, a significant departure from the private ownership model agreed by the City and county, and complex legal agreements are needed to convey operational responsibility and risk to the developer.

Here is the undisclosed ownership options presentation by Richard Griffin and McGuigan’s notes from a meeting, a 4 page pdf: griffinprsntnoptions201608

COMMENT 1: Private Ownership with a Lien suggesting a private hotelier will carry longterm conference center losses is unserious except as political subterfuge. No private entity has the capacity to run losses indefinitely and no legal contract can force them to run such losses. We gave bankruptcy laws. Limited liability is built into our corporate structures.

Moreover when the CC gets into difficulty the politics of providing financial ’support’ will prove irresistible, given that the project was city-designed, the developer city-selected, the site city-chosen, located on city owned land. Always a city project that got tens of millions of City-garnered upfront dollars its performance will reflect on the city which will bear a responsibility for it whatever any legal fine print says.

After all the political hoopla of local politicians opening the facility and claiming credit for its construction the notion is far-fetched that they would not appropriate money to keep it open if the hotelier said he was being forced to close it.

COMMENT 2. A “non-economic owner” without a market priced lease is a sham or make-believe owner. A a real owner has exclusive possession and use of the property or has leased those rights to another party at a market price. A longterm lease at a ‘favorable’ or nominal price is effectively gifting the property.

This is legalese wrapping of a huge gift or handout. More political subterfuge.

COMMENT 3. Option 1 makes no sense. Liens are normally a property claim granted by a borrower to the lender as security for failure to service the debt. In this case the conference center debt is the responsibility of local governments not the developer. A lien against the conference center aimed to keep it open at the developer’s expense would be nonsense given that the last thing the City wants is to be deeded an empty failure of a conference center. This would limit the city’s flexibility in a failure situation.

COMMENT 4. Options 2, 4 and 5 are all absurdly complex. City ownership (Option 3) is potentially most straightforward so long as the City is prepared to carry the losses. Montgomery County has ownership of the Bethesda North Marriott conference enter. They were pretty sure it would cover its costs, which it has. But Frederick is not Bethesda and there is way less confidence a conference center here would cover its costs.

Griffin’s presentation acknowledges this but reiterates the happy talk about “catalytic impacts” from $26m of new spending supposedly forecast by the Maryland Stadium Authority itself. But that’s for a future report.

Indisputable is the fact that no one wants to own the conference center because it is a financial crock. The City won’t own it. Neither will the County. The Tourism Council, they’ve gone to ground, in case someone suggests they own it. MSA doesn’t want to own it. MEDCO is very suspicious of the City’s proposal it “own” the CC. The developer is happy to “own it” if taxpayers build it for them and gifts it to them, and if taxpayers also build them parking, redo City streets, forgive years of taxes, pay a share of hotel design costs etc.

With no one really wanting to own the project none of no ownership option makes sense.

2016.11.29

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