Financial studies of hotel too old to rely on for $31m public support — former hotel CPA

from Matt Seubert to HPC — Dear members of the City Historic Preservation Commission: I’m a retired CPA.  During my 20 year career I spent 5 years working for a publicly traded hotel REIT in the capacities of accounting manager and assistant controller.  The company I worked for owned upscale resorts, full service hotels, and boutique hotels.  Prior to this I worked for nearly three years with Marriott International in their now dissolved Senior Living Services Division.  I have experience in hotel valuations and purchase/sale transactions. I understand the HPC is going to consider the projected hotel operations from the 2008 Crossroads Consulting report as a basis for determining the project’s value.  The HPC should stop before it starts.  That information is simply too out of date to have any meaning whatsoever.  In private industry, these types of projections would have a very short shelf life of maybe 6 months to be considered viable. There’s not an executive or board member in the hotel industry on this planet that would even dare to make an investment decision based on data that is 9 years old.  I assure you that Mr. Plamondon is working internally with a fresh set of operations and cash flow projections to value the project and gauge his potential return on investment.  It’s standard practice for any company like his when they contemplate an investment. I don’t know if the HPC or other officials are privy to this information, but trust me it exists and you should demand it and disclose it to the public.

I reviewed both the Crossroads report and the 2012 Pinnacle report when I looked at this project over 2 years ago.  I commented to both City and County officials that the data was flawed and the project valuation was unreasonably high based on the cash flow assumptions in the reports. I also recall a significant discrepancy (@ 25%) between the 2 reports in the forecasted average daily room rate (ADR) which to my knowledge was never reconciled. ($140 vs $175 or 20% though some of the Pinnacle tables showed an assumed daily room rate over $200!) But at this point, all of this is moot as the data from both reports is long expired to be of any value.

I have always felt that the project is too large in scope and that the City would be better served by a smaller scale, boutique hotel of 80 or so rooms with around 10,000 sf of meeting space – and that’s also 100% privately funded. Unfortunately this was never contemplated by our officials.  Instead, they and Plamondon have been fixated on a dated concept for a stodgy, full service Marriott brand that doesn’t feel right for the trendy vibe and historic character of the City, isn’t affordable, and doesn’t even fit into the selected site.  So unless the City is willing to start again with a truly open and transparent RFP we’ll never know if there’s a better concept that affords the City an opportunity to preserve the tannery.

I also reviewed the MOU when I looked at the project a while ago.  I’m not sure what the current terms and conditions of it are since it was evolving back then, but it’s absolutely crucial for you to fully understand what the MOU and other agreements contemplate for a prospective sale in order to fully assess the project’s long term value.  Consideration must be given to scenarios under which a sale is allowable, how sales proceeds are allocated to the partners, and who retains residual ownership/liability for the separate public-private components of the project if a partner exits the deal or becomes insolvent.

Let me explain: Plamondon will ultimately assess his objective return on investment based upon anticipated sales proceeds at the end of a given holding period – say 10, 15, or perhaps even 20 years. One would assume he’s anticipating the hotel to perform well enough that it’s market value would steadily increase and he can make a go of it even with the reduced size.  But then again, he’s going into this deal $ millions to the good so his risk of losing money in the long run is hedged.  Make no mistake – while the justification for spending $31 million in public funds is premised on the City building a public parking facility, it serves as the foundation of the hotel and is as much a part of the project as the rooms and everything else.

I have to question the sincerity of labeling this free parking garage to Plamondon as “public” infrastructure when it’s primarily utilization will be for hotel guests.  How many exclusive public spaces will there be?  A similar false advertising ploy was attempted with the first concept labeling the conference center as public infrastructure, yet its exclusive public use was restricted to only a handful of days per year subject to blackout restrictions imposed by Plamondon.

If and when Plamondon sells, the market price will be determined by how well the hotel performed over it’s stabilized holding period, whatever that ends up being. Again, following standard industry practices, a prospective buyer would analyze market trends and use the historic cash flows to capitalize a value they’d be willing to pay.  The problem with this is the City is a truly unique and thus unknown market – I don’t think there’s a valid argument for a comparable hotel in the area – so it’s impossible to accurately predict how this hotel will perform and thus what it might be worth 10 – 20 years down the road.  So It’s obvious Mr. Plamondon is heavily relying on the $31 million public investment in the project to reduce his risk and guaranty himself a satisfactory ROI, and why wouldn’t he!?  He’s even publicly acknowledged he can’t make it work without a public investment to subsidize his operations.

In my opinion, Plamondon is looking down the road to cash out. He’s taking advantage of $31 million in public money to leverage his cash flow while building value into a capital asset that he can eventually dispose of and walk away with a nice chunk of change. So what happens then?  He is taking on risk by relying on the rosy predictions of a sudden expanded market demand to fill the hotel, but he’s got a nice built in cushion if the project becomes a loser like so many other similar deals.

At this stage, our officials are solely relying on what Plamondon is telling them about the hotel operations because as discussed, the public hasn’t been given any fresh data to evaluate the project.  Besides, from an elected official’s perspective this is purely an economic investment, not a capital asset investment. They have no personal risk for spending $31 million of public money, so they’re willing to gamble this thing will become the economic boon they’re advertising. And if memory serves, the City is only getting a tiny share of any cash flow so they’re really not relying on performance to finance the public investment.  However, one way or the other the taxpayers are ultimately the backstop for any losses if they’re wrong.

Thank you and sincerely, Matt Seubert, Frederick, Md

EDITORIAL NOTE: The Pinnacle/OPX report on the hotel project used 2008 data but was published  in 2010. The Crossroads/HGS study of 2012 was a reassessment and update of Pinnacle but apparently relied heavily on data collected by Pinnacle. So much of its calculations rely on data nearly a decade old. Crossroads reduced the assumed average room rate per day from $175 to $140, still a very high rate for Frederick. There was a second quite short Pinnacle report done for Plamondon in 2013 that went along with Crosroads reassessment on the hotel side but was skeptical about the likelihood of attracting much outside conference business to Frederick. It said a smaller conference center of 12,000sf would serve likely needs (The City RFP of 2014 required  “about 20,000sf” and that is the current size currently proposed for event space.)

Speaking at the last HPC workshop Pete Plamondon said that he had an updated financial study from Pinnacle that attests to the viability of the project. But that report has not been released. I say: a businessman seeking $31m of public funds for an $84m project who chooses to cite a new financial study as justifying that project in a public hearing on his project, that person has no right to withhold that study. And a Historic Preservation Commission which is passing judgment on whether this project is a ‘major improvement’ for the city and its citizens should be insisting on its release. Whenever reports and studies are withheld, but are cited, you can bet they don’t say quite what is being claimed of them. PSam 2017-09-14

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