Hotel parking a big money loser for City — projected revenues don’t come close to servicing needed debt

The City has projections from consultants of the possible revenues and operating costs of a single level and a two-level parking garage under the proposed City-sponsored Plamondon hotel. Projected operating income is so small relative to the capital expense that with either of the subterranean, sub-hotel garages the debt service will be a major drain on future City budgets. 

The single level 160 parking space Option 1 gets base year gross income (revenue) of $352,000, but based on other City parking garage history will run up operating expenses of $242,000, so net income is $110,000 (we’re rounding to the nearest thousand-$s.) 

Option 2 of two levels with 236 spaces has revenue of $479,000 and operating costs the same as the single level design which leaves $237,000 as net operating income. COMMENT: The same operating costs is a bit strange, and needs explanation. Going from one level to two levels doesn’t double parking capacity, apparently because of extra space taken up in ramps in the two level version.

What’s better?

Operating profit per parking space Option 2 ($237,000/236=$1,004) looks better than Option 1 ($110,000/160 = $559) 

At $70,000/space construction cost ($# from previous project budgets) Option 1 at an annual net operating profit of $669 yields just under one percent (0.96%) return on capital cost while the two-level garage yielding $1,004/space produces a return on capital of 1.4%. Those kinds of yields make no sense given that money can only be borrowed at 3 to 5 percent, depending on whether the parking revenues alone or the full assets of the City are pledged as security. Also on a 20 year loan an average 5% of the principal has to be repaid each year. 

The City Parking Fund only works because costs of the above-ground decks has been in the region of $20,000/space versus the $70,000 underground at the Carroll Creek site. And the decked garages have been larger and there are economies of scale.

Another problem: the parking revenues under the hotel would be be heavily dependent on hotel guest numbers. Although proposed as a City operated public garage the pro-forma projections assumes  the hotel will need 120 spaces (110 for hotel guests and 10 for senior hotel staff.)  In the single level garage only 40 spaces are assumed occupied by daily public patrons. The hotel guests and staff provide $295,000 or 80% of the projected total revenue. 

The two-level garage gives the general public a bit more of a shot —116 spaces or about half the total. But the hotel guests and staff are expected to pay 58% of total revenue, the general public 42%. If the hotel struggles to attract clientele City parking revenues are down.

Meanwhile, the City’s financial consultant MuniCap, struggling to find a way to finance the $20 million of taxpayer funds for the whole hotel project has reduced the parking to 115 spaces — consigning all the parking to the hotel. 

No pro-forma for that. Or at least none they will release.

We have a project in motion again, bits and pieces changing so that consultants are working at cross-purposes, each modeling something that the work of another consultant has already rendered obsolete. The various consultant’s models don’t fit together. So stuff has to get done over.

SOURCE: The two documents called the “Downtown Hotel and Conference Center Parking Garage Pro Forma” has no date or author. They were provided by the City in response to a Public Information Act (PIA) request for access to any estimates it had of the expected financial performance of the garage in 2019. ‘Pro forma’ is defined a financial projection based on assumptions, and usually “refers to a statement of income and balance sheets that exclude non-recurring items.” (https://financial-dictionary.thefreedictionary.com/pro+forma)

A major shortcoming of a pro-forma is precisely that it excludes from consideration upfront capital cost

and servicing the debt and getting a return on capital. It also omits amortization of capital over the life of a project. It assumes the capital side of financing is dealt with separately, when in point of fact no business venture is possible without the raising of capital and provision of a return on capital. 

Plamondon’s take on parking — the more the merrier

Pete Plamondon sees the City’s parking decision this way: “In order to develop the best project, building as much on-site parking as possible is simply the right thing to do.” (His email of 2019.07.18 to Amy Rohrer of the Hotel & Lodging Association)  

Well. If we’re after “as much as possible” why not 500 spaces by building four levels under his hotel. And why not 625 by going down 5 levels. Chicago and New York have scores of underground parking garages like that. In terms of engineering and construction it is perfectly possible. 

Why wouldn’t that be simply the right thing to do?

Because local government is not, as Plamondon would have us think, a piggy-bank of unlimited funds for him to draw on. Because: (1) Frederick City parking has always operated on the principle that the system of parking garages should self-financing, and for that to be sustained it has to be discipline etc to invest in parking projects with the prospect of covering all their costs including, over time, their capital costs. And because (2) to the extent City parking isn’t managed in business-like fashion and cover its costs with parking revenues the City will have to find the revenues elsewhere in its budget. It will have to reduce other services to save on them, or it will have to impose extra taxes to fill the Plamondon parking piggy-bank.

Pete Plamondon

What’s clear from the Proforma projections is that however it is going to be financed the sub-Plamondon hotel parking at $70,000/space is bound to be a major drain on City resources. If the City Parking Fund is used exclusively for the Plamondon Parking piggy-bank then the City’s ability to develop other parking for the public will be seriously curtailed. Forget the discussed  (1) a northern deck at the Carmack-Jay site between W3rd and W4th streets, (2) rebuild of the old central Church St deck and (3) Parking Deck #6 next to the County Board of Ed offices by the southern gateway to downtown. 

Spending $10m to $15m to build Plamondon’s underground parking is $10m to $15m not available for other City needs, whether they are new City parking decks, or stormwater, roads, police, whatever. Surely Plamondon sees that. He insults the intelligence of elected officials and voters with airy claims that “as much as possible” is “simply the right thing to do.”

20191204

ADDITIONAL Dec 5

One reader disputes the 5% interest rate we initially assumed for a parking revenue borrowing for the Plamondon Hotel facility. We edited that to “3% to 5%” after looking at the matter more closely. Much would depend on the terms of any such borrowing. Would the City pledge as security only the Plamondon site parking revenues or all parking revenues, or the “full faith” of the City and its assets? The latest City financial reports show the City Parking system including five decks currently has outstanding bond debt of $13.7 million on which $477k interest was paid last year — an interest rate of 3.47%.

With only one level of parking and 115 to 160 parking spaces, realistically that’s parking for the hotel only. Its parking revenues would be closely linked to hotel revenues, and its risk would be similar to the hotel’s risk.

Regardless, the onus should be on the City to fully explain the financing proposed for their Plamondon hotel parking deck. Profit and loss ‘pro forma’ without a date, without an author and without any discussion of the assumptions is pathetically inadequate. As with the hotel itself, the expensive underground parking has to service capital. A ‘proforma’ projecting operating results tells you little about the overall financial viability of the project by itself. 2019.12.05

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