Downtown hotel & conference center “will now be privately financed” – a baseless claim

Supporters of the City-sponsored downtown hotel make the misleading claim that public funds — taxpayer money — will only be used for associated ‘public infrastructure’ and that otherwise the project will be privately financed with no call on taxpayers. For example, the latest City ‘One-Pager’ project summary states:

“The multi-million construction cost of the full-service hotel and meeting space, along with amenities including the lobby, restaurants, and rooftop lounge, and renovated historic trolley building (Frederick Railroad Building) will be privately financed by the developer using private equity and bank financing — with no public funds. Once constructed the developer/hotel owner is fully responsible for all hotel and meeting space operations with no public support.” [1]

This no-public-funding theme was aggressively launched in the spring of 2017 by then-Mayor Randy McClement announcing he was “proud to be able to stand here and tell you that no public dollars will go into the construction or operation of the hotel or conference center.” Also: “No public dollars will be used in the construction, operation, or maintenance of the hotel or the conference center meeting space.”  [2]

Until then the conference center portion of the project was to be taxpayer financed. Now the developer, Plamondon would pay for it, City officials claimed from May 2017 onward.

But this new narrative of a fully investor-funded hotel and conference center falls apart on examination. 

  1. Where is the $13m saved on the CC?

Of the approximate $31m in upfront public money as outlined prior to the May 2017 announcement $13m was earmarked for the conference center. If Plamondon is now to take over financing of the conference center the upfront public money requirement should now be $31m minus $13m or $18m. It hasn’t happened. No City official has suggested that subsequent to the developer’s supposed assumption of responsibility for the conference center cost that less upfront public money will be needed.

  1. Where is the documentation of the revised deal?

Soon after the May 2017 announcement we requested under the Public Information Act (PIA) copies of all City emails, memos, records of conversation, notes or other documents on the new City deal with Plamondon.  What records were there of the terms of the revised deal under which Plamondon would take over from the City financing of the $13m conference center? Answer from the City Attorney: “Nothing.”

then-Mayor McClement

The City had no document or record memorializing the new financing arrangements, not even some $-numbers on a Starbucks napkin. So either the Mayor or project manager Griffin had an oral and handshake agreement with developer Plamondon. Or else the Mayor’s statement was pure fabrication, a political statement without any basis in fact. Either way there’s not much there beyond political propaganda.

  1. In absence of a new or amended MoU the controlling legal instrument of December 2015 keeps conference center costs the responsibility of public funding

Pending any revised or new Memorandum of Understanding (MoU) the controlling legal contract between the City and the developer is the MoU signed December 23, 2015. Until that is amended, or superseded, the only applicable contractual instrument provides for the City to finance the $13m conference center portion of the hotel complex as spelled out in Appendix C, Preliminary Project Costs and Sources and Uses of Funds. [3]   This provides for a basic project total of $63.7m split $44.1m investors, $19.6m public funds or a 69/31 percentage split. On the right side of the table there is a so-called ‘Project Enhancement’ — comprising an expanded site (a takeover of the adjacent Eagles property) for $3.2m and dedicated car parking (Parking Deck 6) for $15.5m. Adding this in the total project becomes $82.5m in the MoU. With all of the ‘enhancement’ cost assigned to state and local governments in the MoU it becomes a near even-handed $44.1m investors, $38.4m public funding, a 54/46 percent split. Nothing in the MoU provides for “no public dollars” for the hotel complex with its $13m conference center or meeting rooms. If Mayor McClement had been serious about Plamondon assuming responsibility for the cost of the conference center, he would have followed up with an amendment to the MoU. 

  1. Secret report by cost consultant said City understated cost by about a third — to cost $121m vs $83m

Within weeks of the City-Plamondon MoU’s signing Peter Forella, a northern Virginia-based construction costing expert finalized a then-secret report saying that the MoU drastically understated likely costs. For the enhanced project the total would be $120.8m rather than the MoU’s $82.5m.[4]  $27.7m of the $120.8m of Forella’s cost estimate was Parking Deck 6. That parking project next to County offices was quietly dumped by the City hotel project director Griffin and MSA (Maryland Stadium Authority) project officer McGuigan Feb 11, 2016 in what was called a Scope Reduction Effort. By cutting out the parking deck they brought the project cost down to $93.1m. That was way above the $63.7m in the MoU for the basic project — without extra land and the without the parking deck. A “Preliminary Revised Budget — Sources and Uses of Funds” put out by the City in February 2016 put the project total cost at $69.8m split the hotel developer $44.1m, public funding $25.7m, a 63/37 percentage split. (The Forella report and its numbers were secret until June 2016, when we obtained them by PIA from the Maryland Stadium Authority.)  Gradually the project managers moved their numbers up. A City ‘one-pager’ issued May 10, 2016 put the total project cost up $14m to $84m, the developer now putting up $53m, public financing $31m, maintaining the same 63/37 percentage split. Very similar numbers were repeated through to the spring of 2017. 

  1. Where is the new capital budget and matrix of sources and uses of funds?

Since the May 2017 announcement by Mayor McClement of the Plamondon assumption of responsibility for the conference center there has been no publication of any new project cost or split between public and private funding. The project is currently undefined and uncosted. A strange Public Project Budget Estimates table[5] shows $16.85m as going toward the aggregate of “land, public on-site parking, site preparation and related utilities, roadway, streetscape and creekscape improvements.” But this seems most unlikely to cover the costs of the basement parking garage now to be located under the complete footprint of the hotel. It is to be built in difficult filled, floodplain and designed to provide an engineered platform for the hotel complex above. And it fails to address any of the ‘soft’ costs of the project — the cost consultants, lobbyists, hotel experts, architects, historians, engineers, preservationists and archeologists. The Table concedes its incomplete coverage of public finance costs with a vague item Possible Future Funding put at $11m. This is the most the public has been given following the May 2017 announcement. It is unspecified, incomplete, and completely unsatisfactory as an account of where the project stands in terms of capital cost and the public/private dollar split. 

  1. Costing $80m+ but valued at $24.7m to $32.8m

MuniCap, the City’s lead financial consultant estimated that based on the average of hotels of this quality and size the downtown hotel in Frederick will have an assessed value of $24.7m in its opening year and $32.8m in its stabilized fourth year of operations.[6] To create this value they propose to spend some $80m plus!  This is a sure formula for a financial disaster of the kind Governor Hogan has noted that tends to be the way of so many government sponsored business ventures like this. Way too much is spent in order to build a facility the lobbyists and the politicians want, not what customers and visitors want. Meanwhile the only publicly available market analysis for the project goes back to 2012, and ten year old data. The developer claims to have an updated report which he won’t deign to share with taxpayers from whom he asks tens of millions of dollars.

  1. Taxpayers will be on the hook because the hotel will be on City land, the City specified the hotel, and the City chose the site and the developer.

The claim is made that the hotel developer will be fully responsible for any operating losses and that the taxpayers will not be “on the hook” after the hotel opens. That’s just not credible! Investors don’t go on throwing good money after bad.

Regardless of what any contract says about there being no city government liability to help a failing project, the fact is that the City will be on the hook politically. First, it will be located on City-owned real estate. Faced with an empty building a City government will soon cave in to requests for financial ’support.’ Those favoring a bail-out will emphasize that this was a City-sponsored project, the hotel was specified and designed by a City hotel advisory committee, which also chose eligible sites and managed a procurement. Plus, its location on top of a City parking garage business will make it more vulnerable to political pressure.

Not only will there be huge upfront taxpayer obligations for this hotel, but the political liability to provide annual ’support’ in case of financial failure is inherent in the project’s history.

CONCLUSION: There are major, if not fully specified, upfront public financings required for this project, and ongoing financial risks. The state, county and city obligation for upfront subsidy remains apparently around $30m. Labels on the accounting categories are apparently being changed, but the same overall obligations accepted.  It is simply false for project sponsors to claim the hotel complex is privately financed.

2018.02.10

[1] Downtown Hotel at Carroll Creek, September 15, 2017 see https://www.cityoffrederick.com/DocumentCenter/View/8945

[2] An event at the Delaplaine Center when new models of the proposed hotel complex were unveiled, May 18, 2017.

[3] p16 of the MoU

[4] “Programmatic Estimate of Probable Cost: Downtown Frederick Hotel & Conference Center & Parking Deck 6,” Forella Group LLC, January 7, 2016, Summary of Estimated Total Project Cost, Table p67

[5] City One-Pager July 3, 2017

[6] Downtown Frederick Hotel & Meeting Space, Bond Financing Projection #4-A,, MuniCap Public Finance, September 2, 2014, p15

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