“The City and County believe that the Return on Investment (ROI) to the public sector (of $31m of taxpayer support for the hotel project) does not come through ownership of the conference center but rather through the robust catalytic economic impact of the project estimated by the Maryland Stadium Authority at $26 million annually, including 280 jobs, $1.5m in state taxes/fees generated annually, and $750,000 in city/county tax revenue… in combination with participation in (any) net cash flow.”
So writes hotel project director and head of the City’s Department of Economic Development (DED), Richard Griffin in a presentation on ‘Ownership Options’ produced mainly for the Maryland Stadium Authority (MSA). It is the major theme that has been used for several years now to gin up support for Frederick’s City sponsored Downtown Hotel and Conference Center (DH&CC).
Incidentally the Stadium Authority itself did not makes those estimates.
They were made by Susan Sieger of Crossroads Consulting. But it is true that Sieger was suggested for the job by MSA. And MSA senior staffers Michael Frenz and Garry McGuigan and the executive director of MEDCO too all see the Sieger ‘impact’ argument as a valid methodology. And despite their reservations about other aspects of the City project they see her work as plausible.
I’ll argue they are wrong.
First the numbers for Frederick are the product of extravagant arithmetic. The $26m/year spending from the DH&CC is supposedly $16m of direct spending and $10m is indirect or ‘trickle down’ spending.
$16m spending annually is $43,800/day. The hotel has 200 rooms and average occupancy 70% means 140 occupied. $43,800/140= $313.
Spending on the hotel and meals and other items must be $313 per
room per day. In a hotel market where room-nights run $50 to $120, and with federal rules limiting compensable stays at around $100 this is high-end spending!
Where are such high-end spenders coming from? It would be one thing to say there might be enough of these people to patronize a very exclusive 30 or 40 room place. But 200 such rooms in 70,000 population city with a hotel market of around 1,000 rooms total?
Heywood Sanders of University of Texas San Antonio, a nationally recognized authority on such projects has called Crossroads’ Frederick numbers “absurd.” Matt Seubert a local who worked for years valuing hotel projects at Marriott has also said the project makes no sense.
But second and much worse, the meaning of these Crossroads’ $-numbers is misrepresented repeatedly by people like Griffin who should know better. The spending, the jobs, and the new tax revenues generated are hoped-for numbers for the downtown Frederick hotel and conference center (DH&CC) complex itself. For the city, the county and the state these $-numbers are gross numbers — spending, jobs, revenues hoped to be generated at 200-208 East Patrick St.
Contrary to repeated claims by project boosters the gross numbers say absolutely nothing about the impact the project will have on city, county and state spending, on jobs or on tax revenues.
‘Economic development’ propaganda ignores offsets
That’s because a lot of the economic activity at the Frederick hotel complex
will represent activity lost to other businesses in the Frederick area. A wedding at the DH&CC will likely be one less wedding at Ceresville Mansion or Brewers Alley or one of the scores of event venues. A stay at the Marriott on Carroll Creek (the tentative name for the City proposed hotel) is in most cases likely to be one less stay at the Hampton Inn or the Hilton Garden or a B&B. A meal eaten at the Trolley House Grill inside the FH&CC will be one less meal eaten at the Wine Kitchen or The Tasting Room, or Volt, a block or two away.
To the extent that this project simply reorganizes the location of lodging, moves meals and events. it will not add a cent to overall spending, create not a single
new job, or add anything at all to government revenues. Tax ‘increments’ at the proposed DH&CC must be considered against tax ‘decrements’ (reductions) at competing businesses. Same with jobs created. They must be netted out against job losses at competing establishments.
The Crossroads study of 2012 from which these gross numbers are drawn makes no attempt to estimate net numbers — how much offset there will be by way of substitution of activity at the DH&CC for that of other local venues. Of course such an estimate is difficult to do, but the effort would at least be an attempt at an honest answer.
To cite the increased economic activity forecast at the DH&CC itself as a measure of city, county or state ‘impact’ is grossly misleading and hugely exaggerates what will be experienced by the local economy. Net ‘impacts’ will be only from visitors to Frederick who would not have come here except for the new downtown hotel facility, weddings that wouldn’t have occurred without the DH&CC, conferences staged only because of the new conference center, meals only eaten locally because of the new restaurants in the complex.
To the extent the DH&CC caters to local people and to people who would have come to Frederick anyway and patronized other local establishments it has no net impact on spending, creates no net new jobs, and provides no net addition to local government’s tax revenue. City, county and state agencies have no idea what the real net impact of the $84m project will have. No attempt has even been made to estimate it.
Commonsense basic economics is carefully avoided by City hotel project boosters in all their presentations, their propaganda handouts, and their posters.
Need productive development
None of this is to say a new establishment catering to locals cannot create value, and enhance our standard of living and quality of life. To do that however a new establishment must be productive. To add value it must, over time, earn from willing customers sufficient to cover its operating costs and earn a return on the capital embodied in it. It must be competitive.
The City’s downtown hotel project doesn’t come near to meeting that test. The Crossroads report, the second report done for the City shows it barely covering operating costs. The huge upfront subsidization of the project ($31 million at latest estimate) shows the City’s recognition of the fact that the project is designed with a heavy dead weight of unproductive capital.
Even more damning is the work of MuniCap, the city’s financial consultants. Their reports have never been published by the City, but we have got access to them, eventually after multiple requests.
The great bulk of these reports consist of year by year projections of longterm financing. Of interest here is their assessment of the value of the DH&CC project working back from likely net income. Real value is assessed by discounting to present value a plausible future earnings stream.
Bottom line, according to MuniCap, the total assessed value of the hotel complex (DH&CC) on opening is $29,139,982 (page 5 of their report on Tax increment Financing Projections Sept 2, 2014.) On this $84 million is proposed to be spent!
Let’s spell that out again. In order to create an asset whose value at opening is around $29m the City proposes the spending of $84m.
$55m of the $84m proposed to be spent is waste.
That is why this downtown Frederick hotel project is a disgraceful boondoggle.
NOTE: the quotation cited at the beginning comes from a presentation prepared for a private meeting to discuss the failed 5-party MOU. The presentation was provided to us by the state attorney-general’s office and the MSA under provisions of the state Public Information Act. We incurred some expense to obtain the materials because the Act allows the state to levy an hourly charge for PIA assembly work after a certain threshold. The City DED has clearly been keeping many of its hotel promotion activities secret from other city officials, aldermen and the public. Aldermen and county councillors voted on the 5-party MOU and it was debated in public hearings without a hint from the City project manager of the disagreements over the basic issue of ownership of the conference center revealed by the PIA documents. 2016.12.02