New MOU raises many questions — submission to Mayor & Board

SUBMISSION TO MAYOR & BOARD OF ALDERMEN

New MOU looks an improvement, but raises many questions — you need to go deeper than the salesman’s spin

Mr Mayor, Aldermen: Attached is a submission urging you to ask difficult questions about this proposed new MOU with a view to taking a whole new look at the downtown hotel project and what has gone wrong. I hope you will conclude that it is time to abandon the project and devote City resources to higher priority, and more worthy purposes. City sponsorship of this one large hotel downtown, promised tens of millions of public dollars, has for more than eight years now casts a dark shadow over the lodging market such that self-financed lodging downtown is impossible. My investigations have made it crystal clear that the procurement was a corrupt fix. The site is a disaster. Project management has been inept to the point of farce, always an 18 months from detailed design and permitting and three or four years from an opening. A City government with limited resources should not be devoting them to a project aimed at an ‘upper upscale’ clientele as specified for this hotel. Our state capital Annapolis, similar in size to Frederick, is a standing example that private enterprise will build an array of successful self-financing hotels if City government isn’t exploiting its power to play favorites and entrench a crony as a monopolist.  Peter Samuel

SUBMISSION TO BOARD OF ALDERMEN v2

On its face the new Memorandum of Understanding (MOU2018) is a much improved deal for taxpayers. It apparently reduces the upfront public sector (state, county and city) cost to $17.5 million (m) from the $31m estimated in March 2017. (1) Overall cost of the hotel & conference center complex is now estimated to cost $80.4m so the public share of the cost is 22%. That is a dramatic decline from a year ago when the $31m estimated public cost represented 37% of the $84m project cost.

The original MOU in December 2015 (MOU2015) presented a basic $63.7m hotel & conference center with parking for 100 cars underneath, the public cost being $19.6m (31%.)

Also in MOU2015 was an “Expanded Project” costing $82.5m requiring $38.4m of public money or a 45% share. Major addition to this over the basic scheme was Parking Deck 6 (PD6), a 650 car garage next to the County Board of Education near South St. After County officials had bought in to the hotel project largely on the basis of PD6 it was quietly dropped in order to keep project costs manageable.

The public cost share has therefore oscillated wildly in just two and a half years since the first MOU was signed in December 2015. Overall project cost PD6-omitted has increased from $63.7m to $84m or 31% to May last year and according to the new MOU is now back down a little to $80.4m, 26% higher than MOU2015.

The developer’s costs have gone up quite spectacularly since December 2015’s MOU was signed: from $44m to $62m, a 40% increase. Inflation? Building costs nationwide have been rising steadily at about 5%/year and over 2.5 years are up nearly 12%. (2)

While taken at face value these numbers are reassuring to taxpayers, many questions arise.

How are the large differences to be accounted for? Oddly neither the Executive Summary nor the news release explain how the ‘good news’ of lower public cost estimates was achieved.

The hotel itself hasn’t changed much. The room count has gone from 207 to 199, a 3.8% reduction. Meeting space is not much changed either. The biggest change is underneath the hotel complex — the enlarged basement which allows on-site parking to go from 104 spaces to 160. That’s a 54% increase in size as measured by the parking space count. But the estimated cost has grown from $3.2m to $11.6m, a 3.6-fold growth. Per car-space costs have grown from $30,800 to $72,500, a 2.3-fold increase.

How much credibility do any of these cost numbers have when they change so drastically? Was all the error in the December 2015 numbers? Or are the most recent numbers in the new MOU uncertain also?

It seems unlikely there are hard numbers yet because detailed engineering design has not been done. Has any contractor provided quotes? Neither the Executive Summary nor the MOU describe any basis for the cost estimates. No independent professional cost estimator has been hired by the City since Forella in January 2016.(3) Required by the Maryland Stadium Authority then interested in supporting the hotel, the Forella report showed much higher costs than the City had revealed.

We have no idea how much confidence should be placed in the cost estimates in the MOUs. Not much, according to the track record of drastic changes made in the $-numbers.

Changed responsibility
There have been changes in the allocation of responsibility, most notably the developer agreeing to finance the conference center after several years of it being described as ‘infrastructure’ and hence worthy of public funds. Mayor McClement in May last year announced “proudly” that “no public dollars” would go into the conference center. Plamondon would be paying for it. (4)

Soon after the announcement we inquired and filed Public Information Act requests for details of the new deal. The City Attorney said that the City held no documents, emails or other records of any new arrangement with Plamondon to fund the conference center as announced by the Mayor. Any agreement, she implied, was oral. And probably just a ‘handshake’ agreement to have officials ‘work something out.’

The Executive Summary does not fully explain this major change in responsibility between MOU2015 and MOU2018: the developer’s assumption of responsibility for paying the full cost of the conference center which in MOU2015 was $13.2m.

The puzzling takeover of the conference center
The puzzle is: why would the Plamondon company agree to that? It was his position in their original proposal to the City and in their first agreement with the City (MOU2015) that the conference center was being built as a civic amenity, and Mr Pete Plamondon said bluntly of it: “There’s no money in it.” At best it would cover its operating expenses, but there was no return on capital to justify the 8-figure cost as a business investment. There are simply too many meeting spaces all around (City Hall, Delaplaine Center, Burr Artz Library, Weinberg Center, Brewers Alley, and many church halls) for a downtown conference center to command serious fees. Plamondon is not in this as a philanthropic endeavor. Why would Plamondon agree to take responsibility for $13.2m of extra investment promising no return-on-investment unless he received something equivalent in return. What might that something be?

Since the Executive Summary and new MOU2018 don’t tell us, we have to speculate. Maybe it is an offset for the City taking over responsibility for the street-level podium and everything below — all the site preparation, historic mitigation (archeology) demolition, excavation, shoring, soil disposal, and the pile foundations, columns, walls of the basement parking garage, plus the huge thick concrete ‘podium’ platform on top, needed to support the developer’s hotel/conference center complex. The City news release May 10th says: “The public money will finance land acquisition and public aspects of the project: Those include the garage and infrastructure improvements in the area. The garage will have a podium roof, the foundation of the hotel.”

Mention of the ‘podium roof’ and it being ‘the foundation of the hotel’ is new. The 2015 MOU had none of that. The new MOU states: “The construction and financial risk of completing, opening, operating, and maintaining the Public Podium/Garage shall be borne by the City .” (MOU2018 p3)

Taking on the risks of building in the muck, while giving away control
Under this 2018 MOU proposal to build the basement parking and the podium, the City is taking on the most difficult, riskiest aspect of construction in the whole project. The site is located in a flood plain on which centuries of crude industry operated, mostly without modern concern for hazardous wastes or suitable fill. Wastes just became land fill.

While taking the full financial risk here, the City will only deal with the design-build contractor at third hand. Interposed between the City and the builder will be Plamondon. MOU2018 provides for the City work to be managed by Plamondon because it will have a single contract to build the whole complex – the parts above and below the podium.

The MOU has the City assume the financial risk of the most difficult construction in the muck without having any direct control over the contractor. This arrangement is a recipe for financial disaster.

Misrepresents fiscal impact
The Executive Summary like so much promotional material for this project misrepresents its fiscal and other ‘impacts.’ Under the head Fiscal Impact it falsely claims: “The public funding sources for the project are incremental property taxes generated by the project, hotel taxes collected solely at this facility, along with State capital and departmental program grants which are supported from new state taxes and fees anticipated from the project.”  This would only be true if ALL of the business of the new hotel was new business, visitors who, without the DHCC, would never come to Frederick. All. To the extent the business of the DHCC arises from people who would stay somewhere else in Frederick, in its absence, there will be no net new tax revenues and there will be no net increments to revenue with which to support bonds. It is wrong for the Department of Economic Development to peddle this misleading something-for-nothing snake-oil. You should not endorse it.

Project viability
None of the good things promised by proponents of the DHCC project will come to pass if the hotel proves less than a viable business. Buildings themselves are just a container, a shell. Without a viable business in that building it becomes an empty shell, incipient blight. Given the amount of public money involved and the risks being taken in building the basement foundations, the public and City officials must insist on seeing Plamondon’s projections of revenues and expenditures. There should be transparency about the financial forecasts and prospects of the DHCC, including the details of how much of his ’skin’ is in the game.

Mark Gaver

Mayor McClement’s Hotel Advisory Committee (HAC) got off to a disastrous start in 2010 when the Mayor appointed a fly-by-night character Mark Gaver as his first Chairman. A wheeler-dealer in the world of government contracting his businesses mushroomed, then they all went broke. He disappeared to Florida, only to reappear in December 2017 arrested at BWI on ten federal bank fraud charges in connection with $50m of loans obtained by alleged fraud against Santander Bank. (5) It was hardly surprising that from its earliest days the HAC ignored the principles of transparency and the state’s open meetings law, doing all its real business behind closed doors. One of the big unknowns about the HAC is how it engineered the drastic change in the procurement from the open, competition-friendly format described in the executive summary to a BOA Workshop in July of 2013 to the highly restrictive RFP of February 2014 that only attracted one competitor.

This chart was distributed at a workshop of the Mayor & Board July 31, 2013. It was the last public meeting before the RFP was issued on February 19, 2014. It clearly shows a competition-friendly two-stage procurement. First shown in green the HAC on behalf of the City was to pursue a site starting in March and ending up with a site ‘controlled’ (purchased or contracted to purchase) by September 2013. The developer RFP would only start in October 2013 and as shown in the salmon color the selection of the developer would occur in March of 2014. By selecting the site first the City would deal directly with land owners and get the best value. And then with control of the site an unlimited number of developers would be eligible to bid/propose.

Behind closed doors this competition-friendly procedure was jettisoned and an insiders-only RFP was issued (RFP14J) February 19, 2014 with a short 6-week deadline for submissions. Plus proposers had to bring a site with them, and it had to be one of four sites (two really because one site was the post office, another Jamal’s committed to offices.)

The inside fix
It turns out Plamondon’s proposal was in the hands of the hotel team and being worked on by the City/HAC consultant JLL from November/December 2013 at the same time JLL was writing the RFP. The sole competitor Wormald’s proposal was almost completely ignored according to timesheets attached to invoices. Plamondon was chosen before the end of 2013 and the scoring of the two proposals is ridiculous. RFP14J conducted by the HAC — rather than the normal City Purchasing Office — was a complete sham, whose only rationale was to give the outward appearance of a competitive procurement. The bid was rigged.

One of Mayor O’Connor’s early acts was to accept the resignation of Gaver’s successor, Earl Robbins. The Mayor is apparently not appointing any replacement. So, hopefully we have seen the end of the HAC, transparency and more direct accountability for City officials.

However a Board of Aldermen concerned for the reputation of Frederick City government will launch an investigation into what happened behind closed doors to allow the two-stage competitive procurement procedure to be jettisoned in favor of the insider fix.

Publicly available studies of hotel project outdated
Publicly available studies of the project are now years out of date. (6) The most thorough by Pinnacle/OPX published January 21, 2010 (7) was based on 2009 market data. In July 2012 there was a ‘Critique/Update’ of the Pinnacle Study by Crossroads and Hospitality and Gaming Solutions (8) that tried to account for changes in the interim. It substantially downgraded the prospects but still found the hotel (without the conference center) viable. In October 2013 Pinnacle did its own update, looking anew at new hotels opened or planned, and the demand side. $160 or so average daily room rates are needed to make a downtown hotel viable.

A key question was, and is, whether enough visitors will pay the premium to stay downtown at an ‘upscale’ hotel when there are $80 to $120 rates at decent established hotels off the Interstates. The answer is something of a leap of faith.

The City’s financial consultant MuniCap (9) produced a report in which they valued components of the hotel on hotel industry averages. They valued the hotel itself on opening at $24.5m the conference center at $0, retail (Trolley building) $2.34m, 250 parking spaces $2.27m. Such valuations are usually conservative. Plus values have risen in the three years since Municap’s report. Inflate their valuations by a third and you get hotel about $33m, conference center $0, retail $3.1m, parking $3.0m.

But you can’t realistically get valuations anywhere near what is proposed to be spent on this project. Not in the same ballpark. When you spend significantly more on something than its value, you’re setting yourself up for financial failure.

The Pinnacle and Crossroads studies showed modest return on capital on the hotel portion. None showed any profit in the conference center as a business although it could help fill hotel rooms with block bookings in slack times.

Pinnacle, however thought most of the demand for meeting space would be local — with the larger meetings running 200 to 350 people, the smaller 30 to 50. It recommended a smaller meeting space; 12,000sf. That’s about half the size specified in the City RFP. Pinnacle also warned after consulting meeting planners for state associations: “the vast majority of state associations (are) rate sensitive and would not be willing to pay a high rate for an upscale downtown location. Additionally those associations that were willing to pay the high rate were typically looking for a resort location.”

Where’s the updated market analysis?
City officials have said that Plamondon has a 2017 update that supports the project. But this has not been released to the public. It should be released. The project would commit taxpayers to substantial upfront cost and risk in building the podium — $11m or more — plus $6m in other costs. Taxpayers deserve to know about the project’s prospects since the City is sponsoring it and putting a substantial if unknown amount of taxpayer money into it.

Being City-sponsored, City-specified, City-procured, located on City land and on a City-built podium the City will bear a heavy responsibility for the success or failure of the project regardless about any reassuring words for taxpayers written into legal documents. Legal disclaimers of any City responsibility for the hotel’s losses may not fly politically when the City is faced with the prospect of it becoming an empty edifice.

Parking garage
The economics of the City’s operating parking garages is presently based on roughly $20,000 per parking space in the five above-ground elevated structures. Parking Deck 6 is more likely $30,000/space. At the DHCC site the $11m cost for 160 parking spaces works out at close to $70,000 per space.

In the 2018 MOU’s Milestone Schedule (Appendix F) for target completion date there is an item “City makes decision on 2nd level of parking,”

So, more of this expensive underground City parking is being proposed. The underground parking space cannot be justified financially as parking! And it does not, as the Frederick News-Post claims “strengthen” City infrastructure. To the contrary, it weakens it financially by adding high cost uneconomic spaces to the City parking inventory.

Extra land needed?
Appendix F, p40 headed Milestone Schedule contains a terse item for June 30, 2018 ‘LOI for relevant additional parcels received.’ LOI stands for Letter of Intent and ‘parcels’ are land. What parcels are ‘relevant’? We aren’t told. Also Appendix B p35, the Project Budget has an item of project cost Land Acquisition – additional costs $526,825. So apparently there is a move to expand the hotel site by purchase of extra land. The City DED asks for BOA endorsement of these items without a word of explanation. And the MOU has no reference to how extra land purchase would be handled with Plamondon’s lease.

Unworkable site plan presented
The new MOU in Appendix A shows an unworkable plan for access to the basement level parking and service facilities. It starts with twin 2-way crossovers of the Patrick St sidewalk, located way too close to the signals of Carroll Street. The eastern pair proceeds down a slope between parked cars to two loading docks for trash and deliveries to the hotel. Cars accessing the parking garage have to avoid the loading dock, swing sharp left and then sharp right again to enter the garage. The trucks apparently have have to back down the ramp to their loading dock from Patrick St because there is no space to turn around.

Will they even use it? Easier for the driver to double park on Patrick or Carroll Street.

The City’s planning and engineering staff have raised these issues and many others — albeit in cautious official language — in a 25-point letter addressed to Plamondon’s Towson-based to Brandon Rowe at Bohler Engineering (2017/12/18) by Pam Reppert, City Planner after assembling comments she got from several relevant City officers in Planning, Engineering, Public Works etc.

The Reppert-Rowe 25 point letter needs a BOA Workshop
Five months has passed since City staff raised the many issues arising from the hotel site plan submitted last fall. Not a word has come back in response to that critique of the site plan. No amended plan. No discussion of any of the 25 points. No clarification where clarification was asked. No proposed changes. Nothing. Yet the project’s master salesman now has the chutzpah to ignore all that and present this old dysfunctional site plan to you for endorsement in the new MOU.

Perhaps he thinks that your endorsement will enable him to roll over Planning, Engineering, Traffic, Public Works — all the other departments of City government. Is it that he sees an advantage in saying quietly to other department heads who voice objections when it comes back in July or August: “Well that site plan is now part of the MOU and it is endorsed by the Mayor and Board of Aldermen.”

A site plan found unworkable by City staff should not be presented to you as part of a package to endorse.

Time to end the endless sales talk & hear from others
Over many years now the Board of Aldermen and the public have heard plenty of smooth sales talk for this project from the project’s master salesman, Richard Griffin of the Department of Economic Development (DED). Trouble is: that’s all you hear. It is all the public hears. Before you move forward on Griffin’s attempt to gain political legitimacy for the latest iteration of the DED/HAC proposal, you need to hear some other voices, from other City departments and from the developer. Why not schedule a Workshop on the 25-point Reppert-Rowe letter with officials of Engineering, Planning, Traffic, Public Works etc and with the ‘hotel team’s’ people Peter Fillat, Bates and Bohler to address to discuss the tough issues, rather than listening yet again to the salesman’s spin.

Conclusion
The revised MOU does little to clarify the hotel project, raising as many new questions as it answers. No confidence can be placed in many of its key $-numbers. The Appendix A site plan found by City permitting staff to be highly problematic in the Reppert-Rowe letter of December 2017 should not be endosed by the Board of Aldermen. With extra land being sought, and the site expanded for reasons unstated, the scope of the project is not yet fixed. The revised MOU is premature. Its endorsement by the BOA can only add to, and protract, the chaos that characterizes this project. It has has taken two four-year McClement administrations to get to this point, and there is still no clearly defined project. The City has more important uses for the resources proposed for funding this project. We need attention to City infrastructure. Improving our stormwater systems, roads, sidewalks, utilities and affordable housing should be a higher priority than car parking underneath an ‘upper upscale’ hotel.

As a City-sponsored monopoly hotel the DHCC project looms as a dark cloud of uncertainty over potential private investment in lodging places in downtown Frederick. Who can possibly compete with a hotel operator with tens of millions of public dollars, and City Hall’s endorsement, they think. Similar-sized Annapolis has an array of smaller hotels well-adapted for visitors to its historic downtown. They have achieved that without any city ‘support.’ Without a City government picking favorites an array of self-financed lodging places have developed that cater to different tastes and price points rather than merely to the DHCC’s ‘upper upscale’ styled clientele in $160+ suites. Once the threat of this City-supported monopoly hotel is lifted from downtown Frederick, we can look forward to a variety of self-financing private lodging places developing here. Already a 60-room hotel is being looked at for the Visitation Academy site on East Church St. That kind of development would be hugely encouraged if the City says firmly No to the grandiose Podium for Plamondon outlined in this MOU.

This City-sponsored is a crooked, wasteful, inequitable, destructive project. You Aldermen and the Mayor constitute a new City government. You should look at this project with new eyes.

Peter Samuel 2018.05.21

FOOTNOTES

(1) The $31m was in the City’s ‘One-Pager’ dated March 1, 2017.

(2)Turner construction cost index has gone from 959 in the last quarter of 2015 to 1071 in the first quarter of 2018, an 11.7% rise. see http://www.turnerconstruction.com/cost-index

(3) Programmatic Estimate of Probable Cost: Downtown Frederick Hotel & Conference Center, Parking Deck 6, Forella Group LLC, January 7, 2016. February 11, an additional Forella memo. The Forella reports though highly pertinent to the MOU2015 were never released by the City. We obtained them from the Maryland Stadium Authority, whose disillusionment with the City’s management of the project was apparently a factor in its board of directors’ decision to dump the Frederick hotel.

(4) McClement’s words were: “I am even more 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.”

(5) Frederick News-Post 2017/12/05 https://www.fredericknewspost.com/news/crime_and_justice/courts/former-frederick-businessman-charged-in-million-fraud-case/article_eb858b28-0554-559a-91b7-62312bf61852.html

(6) A former Marriott analyst of hotel properties Matt Seubert has argued that studies as old as these are worthless an misleaing. See

http://frederickhotelboondoggle.us/2017/09/financial-studies-of-hotel-too-old-to-rely-on-for-31m-public-support-former-hotel-cpa/

(7)Market Analysis, Cash Flow Projections, and Strategic Recommendations for a Proposed Downtown Hotel and Conference Center, Pinnacle Advisory Group with OPX, January 21, 2010

(8) Critique/Update the Market and Economic Analysis for a Proposed Full-Service Downtown Hotel in Frederick, Maryland, Crossroads Consulting Services, Hospitality & Gaming Solutions, Final Report, July 2012.

(9) Downtown Frederick Hotel & Meeting Space, Bond Financing Projection No. 4-A, MuniCap Public Finance, September 4, 2014

The letter on the site plan by City staff:

Reppert-Rowe25PointLtr20171218

2018.05.21

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