MuniCap, the City’s financial consultant has radically enhanced its assumptions about the financial viability of the downtown hotel project in reports delivered to the City dated October 25 and November 5. Net operating profitability, and hence market valuation — based on new data from the hotel developer Plamondon— at $43,776,000 is up 78% compared with the $24,535,000 of MuniCap’s valuation in 2014.
Second big news from the MuniCap documents is that $20 million of public funds is being sought and that MuniCap has only managed to figure out $11,700,000 of City and County borrowing, leaving the project $8.3m short. The MuniCap reports suggest the City might still be able to get $5 million in State funding. That is money which Governor Hogan has withheld.
The $20m of public funds being sought is an increase on the $17.5m public funds specified in the Amended and Restated MOU of July 2, 2018 which envisaged (Appendix B) state funds of $5.25m and city and county $12.25m. Without state funds and with the Plamondon ‘ask’ now up to $20m, local taxpayers are being asked for $7.75m more, 63% over the commitment expressed in the 2018 MOU.
We guessed in an earlier report that without state money Plamondon might trim the size of his hotel, cut costs and reduce his ‘ask.’ Dead wrong. He’s grown it. According to the October 28 and November 5 MuniCap numbers, the mass of the hotel has grown substantially — to 230 rooms and 777 square feet (sf) per room from 207 rooms and 652sf/room in 2014. Total square footage of the hotel, and hence the building’s mass is increased 32.6%, almost a third larger — nearly 179,000sf vs the 135,000sf in the 2014 MuniCap projections.
The MOU of 2018 has the hotel at 154,638sf. The RFP issued February 19, 2014 called for a hotel of “approximately 200 rooms” and according to the MOU provided for a building “ranging from 126,000sf to 141,000sf.” Contrary to the MOU there were no square footage numbers in the RFP, but that 126k to 141k was indeed the range suggested in studies in 2011, 2013 and 2014 which led up to the RFP. In applying for Level 1 approval by the Historic Preservation Commission in 2017 the developer’s applicant Fillat+ Architecture stated: “The hotel will have 183 guestrooms and suites.” (Letter by Peter Fillat to City’s Lisa Murphy, June 15, 2017.)
Formal certificate of HPC approval came through November 11, 2017 and says: “The approved building must be in accordance with the drawing set dated Oct 26. 2017.”
We visited HPC staff offices where they pulled the HPC17-491 file and checked the drawing set cited. It nowhere mentions the room total but the plans by floor show: Level 2: 60 rooms, Level 3: 65 rooms, Level 4: 58 rooms. That totals the 183 rooms cited by the architect Peter Fillat in his cover letter.
Pertinent here: the Fillat letter provides the rationale for reducing the room number from the earlier 207 rooms to 183: “As a response to concerns over the original proposal the main height and mass of the building has been shifted to the center of the site so as to minimize its impact on the surrounding historic fabric. The building was also lowered by a story as a reflection of the design team’s sensitivity to this concern.”
Since approval by the HPC the size of the hotel has been growing again . The July 2018 Amended MOU says 199 rooms (Appendix E,
230 rooms proposed now versus the 183 rooms in the building approved by the City HPC is a growth of 25.7 percent. The City HPC certificate approval letter states: “Any additions or changes to work must be approved by the HPC or for minor changes through either Administrative Approval or Staff Approval process.”
Changes of a quarter in room numbers and a third in floor space are hardly “minor changes.” This post-approval enlargement surely reopens with elected officials and the public the contentious issue of whether the hotel is too large in scale for its location. And it raises the question: How come the developer was able to pare back the hotel to 183 rooms for historic compatibility, but now wants 230?
Parking 115 spaces
The one thing pared back is parking. MuniCap says it’s now 115 car spaces versus 250 spaces in 2014. Further back it was once as high as 650 when the City’s Parking Deck 6 next to County offices was part of the project. In HPC Level 1 approval in July 2018 it was 172 spaces for cars and, in properly progressive mode it specified 13 bicycle spaces. Since the parking was envisaged underneath the hotel the numbers have yo-yo’d up and down depending on whether one underground level was in favor or two. As recently as the July 2018 MOU there were “approximately 250 parking spaces” (Appendix E) which meets City code of 1.25 spaces per guest room (250/199). Suddenly it’s apparently OK to dive from 1.25 to 0.5 spaces/room (115/230)?
11 stories — a troll?
The 230 room number and 178,710sf appear throughout the MuniCap reports and there’s a footnote: “Provided by Plamondon Hospitality Partners.” In just one place in the two reports there’s an even more amazing item: “11” under “Number of stories.”
The plans submitted to the Historic Preservation Commission and given their approval involved 5 stories — the high ceilinged main floor with reception and meeting rooms, three floors of guest rooms and a rooftop floor with indoor/outdoor space. Make that 6 levels if you count the parking floor and delivery/trash dock underneath. The prior scheme had an extra floor so was 6 stories, 7 levels.
11 stories has a footnote ‘Based on assumptions by MuniCap,’ and only gets a single mention in each report, so it probably shouldn’t be taken seriously.
Or are 230 rooms/11 stories just numbers for Wall St to help sell TIFs?
Then there’s a cynical read! The City and Plamondon may have no intention of stirring up the local hornets nest by trying to build 230 rooms, let alone 11 stories high. Maybe those numbers are for-Wall-St-only to boost hypothetical revenues and make the TIFs easier to sell. We’ll find out in due course.
Meanwhile MuniCap revenue projections and valuations need to be reduced by about a quarter if the hotel sticks to 183 rooms rather than the 230 rooms Municap uses. And costs should decline too.
It is important to note that MuniCap does projections based on assumptions specified by their clients and it is not part of this consultant’s work to verify or warranty the realism of the assumptions. So MuniCap is not making forecasts.
The old saw applies: Garbage in, garbage out.
Garbage assumptions produce garbage projections.
Operating profit assumption hiked 56%
The MuniCap projections of the hotel’s new-found profitability are based on:
— a projected average daily room charge of $178.90 (vs the assumed $170 in 2014)
— average room occupancy of 72% (up 9.1% on the 66% assumed in 2014)
Those base numbers produce gross income/room/year of $47,015 vs 2014’s $40,953, a 14.8% increase.
Then the increase in rooms (230 from 207 assumed in 2014) multiply the per-room revenues.
Much of the increase in net profitability comes from an assumption of virtually unchanged operating expenses per room ($29,478 now vs $29,691 in 2014). Figure that out? This at a time pay for low wage workers needed to do laundry and clean hotel rooms has been rising, and is likely to continue to rise with Maryland’s phase-in of a $15 minimum.
The new net operating income/room of $17,537 annually vs 2014’s $11,262. That 55.7% increase combined with the increased number of rooms (230 from 207) gives a 73% increase in the hotel’s net operating income $4,034,000 vs $2,331,000 a year in the 2014.
And there’s a new discount rate for income capitalization purposes.
78.4% hike in hotel value, $45.3m vs $26.1m
Bottom line: the market value of the proposed hotel is now put at $45,346,000 versus 2014’s $26,140,000 — a 78.4% increase.
Slightly offsetting the huge increases posited in the hotel’s financial potential is the downrating of the relatively small (7,733sf) retail enterprise associated with the rehab of the trolley building, and MuniCap’s write-off of parking in their recent projections. The retail is valued at $1,570,000 ($203/sf) but its cost, according to Plamondon, being nearly $700/sf totals to $5.4m.
MuniCap projections now put the whole project’s value (hotel, retail and parking) in the fifth year of operations, when it should be fully phased-in as $50,066,000 compared to $32,816,000 given in 2014, an increase of 52.6%.
(1) How realistic is the assumed year-round average room fee of $178/night? Competing hotels get $100 to $125. Are enough visitors going to pay a 50 percent premium to stay downtown rather than at one of places off the Interstate.
(2) Average room occupancy of 72% looks high. According to hotel people a more normal occupancy rate year round is in the high 60s.
(3) Capital cost of the hotel at $158,000/room or $36,340,000 (MuniCap quoting Plamondon) That’s way low, say hotel people. Hotel industry specialists HVS (see www.hvs.com) put the average capital cost of new Full Service hotels in 2017/18 as $318,200/room. At that rate a 230 room hotel should be costing, all-up, $73.2 million. Select-service hotels average $221,000/room capital cost at which 230 rooms would run to $50.8 million. Not long ago the cost of the Plamondon hotel was put at around $60m.
Plamondon’s downtown hotel has always been presented as a 5-star, full-service hotel. How then can he report the capital cost of the hotel at about half the average cost per room of that class of hotel around the country?
Answer: Only if (1) contrary to commitments to a classy ‘full service’ hotel he is planning to go down-market. We know one of the City-required frills of a full service hotel has quietly been dropped — the indoor swimming pool. Maybe others?
or (2) he is counting on the City and the County to carry about half his costs.
Taxpayers to pay a big fraction of Plamondon’s costs
It seems likely that the major reason Plamondon is able to build for $158,000/room rather than the national average of $318,200 for a full service hotel is that his costs reflect the fact that City and County taxpayers are paying for the land, site preparation and cleanup, archeology, the foundations and the engineered podium, landscaping, street and utility work, car-parking, plus many of the ‘soft costs.’
So what MuniCap calls the costs of the hotel must be merely Plamondon’s costs, not the full hotel costs. MuniCap implies this by giving the parking element of the project $0 value. The last available hotel ‘public infrastructure budget’ of January 22, 2019 put the then proposed 234 space, 2-level underground parking and ‘podium’ atop as costing $16,151,057 or just under $70,000 per parking space. In their 2014 report MuniCap assumed parking was in Deck #6, an elevated structure costing $21,900/space.
Parking at the hotel dwindles — down to 0.5/guestroom
MuniCap in their October 2019 report put the parking at 115 spaces but don’t identify a specific parking construction cost, perhaps because it is not part of the hotel business and they assign it zero value. Assuming no diseconomies of smaller scale in going from 230 to 115 spaces 115x$70,000 = $8,050,000 is the new cost of the hotel’s parking. Other aspects of what the City and County are being asked to pay as part of the underground structure are major fixed costs — land, podium, ramps, archeology, hazmat etc. So it is not surprising that when these costs are put on local taxpayers that the remaining costs for Plamondon are so far below the national average.
MuniCap #7A projections of City, County TIFs & hotel tax for $20 million for Plamondon hotel
The City financial consultant produces two city and county bond financing projections each assuming that $20 million of public money is needed to support construction of a 230 room Plamondon hotel downtown. The first report called #7A dated October 28, 2019 finances $11.9 million of the hotel project with the issue of 20 year bonds at 3.91% interest. Agent costs are substantial: a ‘premium’ of $585,000, issuance costs $491,000. Along with lawyers and consultant fees over $1.1m is to be spent simply to sell the bonds. Debt service is $735,000 in the first full year and goes up each year.
Based on projections of assessed project value the tax increments on which the City and County bonds are to be offered for sale are estimated at City taxes of $326,000 and County taxes of $420,000 for a total of $746,000 in in 2024, the first year stabilized after five years of ramp-up and phasing in. Also for that year hotel revenues are put at $11.94m and hotel tax revenues of $597,000. Ground lease payments due tro the City from Plamondon are put at nearly $83,000. Total; tax increment is put at $1,426,000. Allowing a little margin for undershooting the projections (6.5% of the City and County taxes and 15% of the hotel taxes) total tax increment available is put at $1,336,000. That easily covers the $796,000 of debt service for that year if the assumptions of hotel revenues turn out to be sound.
But MuniCap 7A signals problems in this plan in the first years of construction. Two bracketed numbers in red stand out in the table of grey type. There are shortfalls in funding there of half a $-million, three-quarters of a $-million in years 1 and 2. Year 3 is nearly a wash. But MuniCap has a note in red type at the bottom of the page” “Additional information need(ed) to confirm source of funds to cover shortfall during construction period.” (p23)
So, according to MuniCap #7A projection the hotel taxes and the City and County TIFs will raise only $11.9m of the upfront $20m needed. Plus significant annual funding will be needed during the construction to service the proposed City and County debt before revenues from the hotel flow to local government. “Other sources of funds” are needed says MuniCap which reminds Frederick officials that by-passing the regular appropriations process a couple of the politicians finagled $5 million from the state General Assembly, they thought. But Senator Michael Hough and Governor Hogan seem to have successfully thwarted the effort to get Plamondon $5m of state funds.
Then Projection #8
A week after #7A, November 5, MuniCap ran another set of projections numbered #8. These defer debt service for three years until the hotel taxes and property tax increments hopefully start flowing — so they avoid the problem of servicing debt before the dedicated revenues flow. But three years of capitalized interest and a higher (5% interest rate) for this kinds of loan mean they go $9.34m into debt but only raise $6.52m of the $20m Plamondon wants by way of taxpayer support at the outset. That leaves $13.48m to be raised elsewhere!
Talk about high borrowing costs! The latest scheme manages to drum up $6,520,000 for construction (called ‘improvements’) but to do that it has to borrow $9,345,000 (rounding to the nearest thousand.) The money borrowed has to pay insurance costs of $400,000, underwriter’s discount of $186,000, establish a reserve fund $825,000. But the really big drain is capitalized interest on deferred debt service: $1,413,000. Fully 30% of the borrowed money is siphoned off by the finance people, leaving only 70% for actual building.
Projection #8 omits ground lease revenues. Apparently under this scenario Plamondon would buy and own the land, and not be liable for ‘ground lease’ payments to the City as in scenario #7A, and earlier projections.
Conclusion — still no financing plan
The City and Plamondon are still struggling over how to finance this hotel. Even its size is not yet determined. Normally when there’s difficulty raising the money, people look to ways to scale back their project to reduce the cost. But here, apart from the parking, they are looking at making it larger, suggesting once again what a weird project this is.
Comment on TIFs: tax increment financing is a deeply flawed funding method. A tax increment is a slippery concept and prone to huge error in forecasting. Its advocates pitch it as a costless, risk-free way for government to subsidize building that investors and their bankers won’t fund. Looked at with any rigor it becomes clear that the tax increment as an addition to local government revenue that is free to be used to service project debt is an illusion.
For starters, much of the clientele the downtown Plamondon hotel will consist of people who would have otherwise stayed at the Hampton Inn, the Clarion, Visitation Hotel, Hill House or other lodging in the area. So the hotel tax increments of the Plamondon hotel will be largely offset by hotel tax decrements (decreases) elsewhere in the City. Only to the extent the Plamondon Hotel gets clients who otherwise would not have come to Frederick at all is there really any addition to local tax revenues. Large group visits that had a choice of cities and wanted a historic downtown are probably the main source of visitors who but-for-Plamondon’s-hotel would not come to Frederick.
That net tax increment is a very speculative and is certainly a whole lot smaller than the gross tax increment that the MuniCaps of this shady financial world treat as a reliable revenue stream to support project finance.
Not only tax increments, but City/County spending increments
There’s a further problem with tax increment financing. New businesses like Plamondon’s downtown hotel generate not only tax increments but government spending increments. Sure, they pay some new tax but they also add to demand for local government services. They add to trash collection, they use water and sewer capacity, they beat up on local streets and constitute another establishment to be covered by police and emergency services.
A concrete example: It is quite plausible that the Plamondon hotel might use its political influence to get a stronger police presence at the front of the hotel in Carroll Creek Linear Park to counter the growing presence of street people hanging out there. One or two more cops on the City payroll and, puff, the Plamondon tax increment is spent. It’s simply not there to service project debt, as the pitch for TIF says.
Any extra tax revenue is needed for the extra demands placed on local government services. So tax increments as a net positive for local government budgets, as a free revenue stream to pay down project debt are an illusion.
And financing a project on an illusion is both unethical and imprudent.
TIFs don’t even boost development
Studies show that adoption of TIFs is associated with slower economic growth. Researchers Dye and Merriman in The Effects of Tax Increment Financing on Economic Development: “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not.” This is apparently because TIFs tend to divert capital to less productive investments and push up local costs. Plus they put projects under the control of businessmen better at pulling political strings than at managing a business efficiently. Such businessmen tend to be more focused on cultivating their political friends than on their customers.
BACKGROUND on MuniCap: based in Columbia MD, MuniCap is the go-to consultant for boondoggle financing. They phrase it more elegantly: “MuniCap, Inc. is a public finance consulting firm that specializes in developing and implementing creative approaches to funding public infrastructure, facilities, and services for real estate development. MuniCap has helped our clients successfully close on more than 294 public funding programs that have provided over $6.5 billion of public investment in development projects.”