The City’s bogus “partnership” with the hotel developer for DH&CC

City officials and others promoting the downtown hotel project constantly call it a ‘partnership’ but is it? The latest ‘One-Pager’ from the City Department of Economic Development says that: “The City has entered into a partnership with the Developer (PHP) etc” (dated March 2017). In other places it is described as a ‘public-private partnership.’ The earlier One-Pager (Feb 2016) reads: “The City and PHP have approved a formal MOU to establish the framework for a public-private-partnership between The City of Frederick and Plamondon Hospitality Partners (Project Developer)…”

The dictionary definition of a partnership is “a contractual relationship between two or more persons carrying on a joint business venture with a view to profit, each incurring liability for losses and the right to share in the profits” (Collins English Dictionary.)

State law defines a partnership in similar terms.

Maryland law section 9A-101(i) of the Corporations & Associations Article defines a partnership as ‘an association of two or more persons to carry on as co-owners a business for profit.’ Section 9A-401(b) provides that unless otherwise agreed, “Each partner is entitled to an equal share of the partnership profits.”

A partnership involves a fair sharing of costs on one side of the ledger and a sharing of gains on the other side.

How does the downtown Frederick hotel project measure up to the commonly understood and legally defined meanings of the term partnership?

Under Agreement Terms and Conditions (p4) the MOU states: “1. The Developer will form a single purpose entity (“Project Owner”) to own and operate the Project.”

No City or other public involvement at all in project ownership or operation! That alone makes a mockery of the notion of it being a partnership.

Under Special Agreements the only returns to which the public sector (the City, County and State) will be entitled as a result of its financing of 37% ($31m of the $84m) estimated total project capital cost are:

— the Project Owner to pay the City 10% of Net Cash Flow from the Conference Center from the third year of operation (p5)

— the City to get the use of the conference center space free of charge six days a year (p9)

— ground lease payments in return for the City buying the land ($3.5m) and leasing back to the developer for 99 years calculated at 2.4%/year of the land cost at a flat rate for 25 years and escalated 1.25% annually thereafter (p9-11)

The Executive Summary accompanying the City-PHP MOU itself calls the arrangement a ‘public private partnership’ while also saying under the head Ownership and Responsibilities ‘Hotel – Private Ownership and Operation’ and ‘Conference Center – Private Ownership and Operation’ (capitalizations in the original.) Only land and car parking are described as City owned. (p7)

But let’s examine the value of the returns to the public ‘partner.’

10% of conference center net cash flow is 10% of nothing

Given that the public sector is fully paying the capital cost of the conference center (and a lot more) then according to notions of a true partnership it would be fair for it to get 100% of the conference center profits, not just 10%. But that’s a minor picky point.

The real issue is that conference centers usually struggle to make any money on their own because the business has been in oversupply for 20 years and more. Conference space is vastly overbuilt in an era when face-to-face conferencing is challenged by increasingly sophisticated internet based teleconferencing, and by the hassles of air travel.

Richard Griffin, director City Department of Economic Development

Loss leaders

Conference centers are usually operated as loss-leaders for the adjacent hotel, the conferences seen as a way to produce block bookings of hotel rooms. (A more accurate term for a project of this type is that it is a ‘conference center hotel’ or a hotel with a conference center, since ‘hotel & conference center’ suggests the two can operate as independent businesses.)

At such conference center hotels the condition of oversupply of conference space is such that the conference space is usually provided at a nominal charge or even given away.

None of the feasibility studies for the DH&CC forecast any separate revenue for the conference space. Not Pinnacle, not Crossroads, not Municap. So charges for the conference space are nominal and there is no prospect for any net cash flow as a source of more than trivial revenue, and that probably only in years of unusual visitor activity.

Rendering of proposed hotel complex, conference center portion at right under Marriott sign

In implicit acknowledgement of the lack of financial viability of the conference center on its own no separate accounts for the CC portion of the DH&CC are proposed in the City-PHP MOU. There is no specified provision to calculate cash flow attributable to the conference center in an operation in which joint costs (staff switched between hotel and CC, common HVAC etc) are a major factor.

In short: the City’s ballyhooed “ten percent” share is nothing. Because 10% of nothing is nothing!

Ground rent giveaway

The 2.4% ground rent or $85k/year specified in the MOU is a major giveaway too. Matt Seubert an accountant who has had a career working on hotel finances has called it “a giveaway lease.” He says the typical ground rent paid by hoteliers is between 3 and 5 percent of gross revenues. Based on forecast first year hotel revenue of $10.7m this ground rent would be between $320k and $540k — four to six times the $85k specified in the DH&CC contract.

The term ‘partnership’ to describe the proposed arrangements for the downtown hotel is a fraud. Those arrangements are a shameless giveaway of taxpayer-$s. Calling that taxpayer ripoff a ‘partnership’ is, as they say, putting lipstick on the pig.

2017.04.30

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