On Tuesday, March 8, 2011, a committee appointed by the Ann Arbor city council and charged with reviewing proposals for future use of the Library Lot – the top of the Fifth Avenue underground parking structure – met for the first time since November. The expected result of Tuesday’s meeting had been that the committee would move a proposed hotel/conference center project forward to the city council.
And that’s what the committee voted to do – specifically, to recommend to the city council that a letter of intent (LOI) be signed with Valiant, the developer, which could eventually lead to a development agreement. The city council will receive a presentation on the letter of intent at a work session on Monday, March 14 at 7 p.m. at the Washtenaw County Board room at 220 N. Main St.
In the draft of the LOI unveiled at Tuesday’s committee meeting, the city and Valiant would try to strike a development agreement no later than four months after the signing of the LOI, with construction to start 15 months after the signing of the development agreement.
Attending the committee meeting on Tuesday was David Di Rita of The Roxbury Group, which has served as a consultant to the committee. In November, Di Rita had delivered a report to the committee recommending Valiant’s proposal over a similar project proposed by another developer – Acquest.
The majority of Tuesday’s meeting time was taken up with Di Rita delivering introductory remarks – a self-described “soliloquy” – and walking the committee through the main points of the draft LOI, or responding to committee member questions.
In his introductory remarks, Di Rita distinguished between the idea of analyzing the financial viability of a specific proposal – which he stressed that The Roxbury Group had not done – and the overall economic validity of a concept.
Key points in the draft LOI are the idea that Valiant would pay for the acquisition of development rights on the property, but could use part of that payment for the design and financing of the conference center. The city of Ann Arbor would own the conference center, and would not be held liable for its maintenance and operation costs, unless Valiant were to cease holding the management agreement. The city’s ownership could, according to the draft LOI, possibly implicate payments by Valiant to the city in lieu of taxes. The draft LOI also calls for reserving no fewer than 350 daytime parking spaces in the underground parking garage, currently under construction, for the hotel/conference center.
In addition to committee members, more than 20 people attended the meeting, filling the fourth floor conference room of city hall. Attendees in the audience included Ward 1 councilmember Sabra Briere; Ann Arbor District Library director Josie Parker; and AADL board member Nancy Kaplan. Several people who attended have expressed objections to the hotel/conference center project, based on either the substance of the proposal itself or the decision-making process.
Related to complaints about the decision process, the meeting began with an adamant request from local attorney Tom Wieder to be allowed to address the committee, which was denied by the committee’s chair, Stephen Rapundalo.
Rapundalo’s refusal to allow Wieder to address the committee was supported by city administrator Roger Fraser, who also attended the meeting, and who raised the specter of asking Wieder to leave. At that point Wieder ended his persistent requests, and was allowed to stay.
Wieder based his request to verbally address the committee on the city of Ann Arbor’s policy of handling all committee meetings under the requirements of the state’s Open Meetings Act – a policy that does appear to afford members of the public at least the reasonable expectation of being able to address committees during meetings like the one on Tuesday.
On Nov. 5, 2009, the city council first appointed a five-member committee to review proposals in response to the city’s RFP for use of the top of the Fifth Avenue underground parking garage – the so-called Library Lot. The city-owned Library Lot is located north of the downtown library, between Division Street and Fifth Avenue. The garage, currently under construction, is a project of the Ann Arbor Downtown Development Authority.
That committee consists of: Stephen Rapundalo (Ward 2 city council member), who chairs the committee; Margie Teall (Ward 4 city councilmember); John Splitt (DDA board member); Eric Mahler (planning commissioner); and Sam Offen (member at large). Offen also serves on the Ann Arbor park advisory commission.
The city received six proposals in response to its RFP. Of those, the committee eventually selected two for final consideration – both were for hotel/conference center-type concepts. [See Chronicle coverage: "Hotel/Conference Ideas Go Forward"] Not included in the final mix were either of the two proposals that envisioned the lot as primarily open space. Alan Haber, who had worked with a group to advance a community commons proposal, also attended Tuesday’s meeting.
The Roxbury Group was hired to assist with the evaluation of the finalist proposals – from Valiant and Acquest. On Nov. 23, 2010, The Roxbury Group delivered a report to the committee recommending the proposal from Valiant as the stronger of the two. [.pdf of The Roxbury Group report]
The RFQ (request for qualifications) issued by the city of Ann Arbor, which led to the engagement of The Roxbury Group’s services, stated that the consultant should be able to “determine if the projects submitted to the City are economically viable and make financial sense in the Ann Arbor marketplace.” [.pdf of consulting RFQ].
However, Roxbury’s report indicates that it “does not include and is not intended to serve as a feasibility study for the concepts included in the two proposals … it is generally assumed that the overall concepts included in the uses for the Library Lot contained in each proposal are valid and supportable from a market and demand standpoint.”
Economic Feasibility: Committee Discussion
During his introductory remarks, Di Rita stressed that The Roxbury Group was charged with the responsibility of taking the two proposals, from Acquest and Valiant, and making a recommendation about whether to proceed with one, the other, or neither proposal.
Di Rita stressed that Roxbury had not been charged with the responsibility of evaluating the feasibility of a hotel/conference center. Later, in response to a question from committee member Sam Offen, who said he thought that feasibility was a part of the charge, Stephen Rapundalo read aloud from the RFQ for consultation services what was expected:
- Determine if the projects submitted to the City are economically viable and make financial sense in the Ann Arbor marketplace
- Determine if respondents are financially stable and have the capacity to complete their projects as proposed
- Determine what the likely timing for each proposed project might be following selection by Ann Arbor City Council, including design development, securing financing, and construction
- Help the City determine which project will provide the maximum financial return to the City
- Assist the City in working with each developer to improve their proposals and provide the City with competitive options that optimize desired features
- Help develop criteria for review, implementation and performance of proposals before and after recommendation for award
- Help the City determine which project will provide the greatest community benefits
- Help the City create a public process that encourages community input and involvement
- Provide information on the impact of similarly scaled projects in similarly sized communities
- Assist the City as needed in negotiations with the selected project team
- Attend, in an observatory role, the project interviews scheduled for January 19-20, 2010 and the evening open house scheduled for January 20, 2010
Offen allowed that the list did not specifically call out a “feasibility study,” but said he felt that Roxbury could have done more investigation to assess that the economic assumptions behind the proposals were valid and correct, instead of taking the word of the proposers. Earlier in his presentation, Di Rita had called the conversations with the developers the “beating heart” of Roxbury’s analysis.
Responding to Offen, Di Rita said that the first thing to look at was the overall economic viability before asking the feasibility question. He said if the city were interested in the financial feasibility, absent a specific development deal, then there are people far more qualified to assess that than Roxbury. They wouldn’t know what to study, until they knew specifically what the details of the project are.
Roxbury had spent a lot of time on the stakeholder interviews, including meeting with representatives from the Ann Arbor District Library, the University of Michigan and Ann Arbor SPARK, Di Rita said. And there was unanimity of opinion among the stakeholders that yes, that facility would get used. What would make it a “game changing” facility would not be just that it could host a plenary session with 500-600 people, but that it could do so in the center of the city.
Rapundalo noted that the university’s conference needs are decentralized – perhaps even down to the individual faculty member. Di Rita responded to Rapundalo by saying that this potential user of the center – the university – doesn’t know its own demand or supply for conferencing services.
Di Rita concluded that the “ultimate feasibility study” is the ability of the developer to draw financing for the project. If the development agreement results in a financed project from lenders, then “the feasibility comes along for the ride,” he said.
Economic Feasibility: External Views
In the last few weeks, a November 2010 report written by Chuck Skelton, who is president of Hospitality Advisors Consulting Group, has circulated throughout the Ann Arbor community – it was conveyed to the city council at the end of January. Skelton concludes that Valiant’s conference center proposal would not be successful – based on estimated revenues of $42 per square foot against estimated operating expenses of $58 per square foot, which would lead to around a $0.5 million annual shortfall. Skelton calculates an additional $0.5 million shortfall due to debt service.
Skelton’s report has received considerable interest from Public Land-Public Process, a group opposed to the conference center proposal – opposition based partly on the grounds that they contend a conference center is not economically feasible. In a post on her blog “Local in Ann Arbor,” Vivienne Armentrout calls Skelton’s report an authoritative study.
An earlier national study from 2005 by Heywood Sanders, a professor of public administration at University of Texas at San Antonio, has also made the local rounds. [.pdf of "Space Available: The Realities of Convention Centers as Economic Development Strategy"] In Sanders’ paper, which is one of several he’s written on the topic of convention centers, he concludes that “if taxing, spending, and building have been successful, the performance and results of that investment have been decidedly less so. Existing convention centers have seen their business evaporate, while new centers and expansions are delivering remarkably little in terms of attendance and activity.”
Letter of Intent: Highlights
David Di Rita walked the committee through the 15 points of the draft letter of intent.
LOI Highlights: Project Description
Highlights included a description of the project:
(i) Core elements:
- 150 hotels units – 87,000 sq. ft.
- Conference center – 26,000 sq. ft.
- Restaurant/Retail – 6,000 sq. ft.
- Public space/Plaza
(ii) Additional elements
- Office space – up to 48,000 sq. ft.
- Residential condos – up to 22,000 sq. ft.
Given the lack of a square-footage number attached to the public plaza space, Sam Offen wondered what would guarantee that the project would have a significantly-sized plaza area. Di Rita responded by saying that the “stake in the ground” is the letter of intent, with the apparent implication that from there the two parties could eventually pin down the plaza size with more precision.
During his presentation, Di Rita had introduced the idea that the letter of intent would establish the “four corners” of the deal – the what, where, when and how. Margie Teall stated that the developer understood that the project “goes nowhere” without a significant plaza area. John Splitt noted that the underground structure design depends on a plaza area, and that if one is not included, then the underground structure would need to be redesigned. [Construction is already well underway, and such a redesign would result in significant expense and delay.]
LOI Highlights: Payments, Liabilities of Ownership
One kind of payment described in the LOI is some equivalent of property taxes to be paid to the city on the conference center, even though property taxes would not apply, given that the city of Ann Arbor would have ownership of the conference center.
In the committee discussion of payments in lieu of taxes, Offen said he thought that the University of Michigan had a payment in lieu of taxes program, to which city administrator Roger Fraser quipped, “To whom?” Fraser followed up by saying that even though UM does not currently have such a program, he thought that perhaps as late as the 1950s there was some kind of program like that in place. He noted that the idea is not to have Valiant duck taxes by having the city own the conference center.
In addition to some payment in lieu of taxes program, there would be some kind of payment made by Valiant to the city in consideration of the conveyance of the development rights – either to the city or a 501(c)(3) nonprofit designated by the city. But that payment could be used by Valiant to help create the conference center [emphasis added]: “The Developer will be solely responsible for the design, financing and development of the Conference Center utilizing both the consideration it will provide to the City as set forth in Section 3 and to the extent required its own funds, as set forth in the Development Agreement.”
In light of the ownership by the city of the conference center, the LOI includes language meant to address the city’s potential liability [emphasis added]: “Notwithstanding the ownership of the Conference Center, neither the City nor the 501(c)(3) will be liable in any way for any costs relating to the design, financing, development, operation or maintenance of the Conference Center so long as the Developer holds the Management Agreement.” The LOI does not address eventualities where the developer ceases to hold the management agreement.
Eric Mahler, an attorney by profession, expressed reservations about the idea of city ownership of the conference center, saying that he was leery of it – because you could not write an agreement that would cover all of the city’s liability. He made his support for the recommendation to sign the letter of intent contingent on the possibility of negotiating the ownership piece.
LOI Highlights: Timeframe, Reimbursement of City Costs, Approvals
The letter of intent sets forth a four-month timeframe from the signing of the letter of intent to the completion of a development agreement. City administrator Roger Fraser allowed that this was clearly an aggressive timeline. In order for the city to allocate the necessary time and resources to get to a development agreement within that timeframe, the letter of intent provides for a payment of up to $75,000 to the city for costs related to consultants and legal counsel. However, the letter of intent also states that the developer would not be liable for the $75,000 payment, if it fails to secure construction financing.
The letter of intent includes language to the effect that the various standard approvals required of the project would be those in effect on March 8, 2011, which was coincidentally the date of the committee meeting. That was an artifact of a previous expectation that the city council would have already acted, at its meeting on March 7, to authorize signing the letter of intent. Mahler insisted that the date would need to be changed – he assured his committee colleagues that as chair of the planning commission, he could say that several things in the city’s set of development requirements might change in the future. As a specific example, he cited the introduction of the new design guidelines for new downtown buildings, which the planning commission’s ordinance review committee is now working on.
The letter of intent also mentions a “dedicated representative” of the city to help coordinate the approval process. Mahler got clarification that this essentially followed the usual practice of assigning someone on the planning staff to shepherd the project through the process. Mahler joked that he just wanted to make sure it was not the city administrator who would be the dedicated representative.
LOI Highlights: Parking Space Reservation, Other Legal Issues
The letter of intent calls for 350 daytime spaces and 250 nighttime spaces to be reserved in the new underground parking garage in support of the hotel/conference center project. Offen wanted to know how many total spaces the underground garage would offer. Susan Pollay, executive director of the Downtown Development Authority, told the committee that the new garage would have roughly 650 spaces.
The number of spaces allocated to the hotel/conference center is relevant to the financing of the underground parking garage. Why? The nearly $50 million in bonds used to finance the parking garage were federal Build America Bonds. In an April 14, 2010 letter to the city council, Noah Hall, then executive director of the Great Lakes Environmental Law Center, outlined federal restrictions on how the bond proceeds can be used. Those restrictions could have an impact on the city’s ability to allocate more than a small percentage of spaces to a non-public use.
Other possible legal issues are outlined in a March 8, 2011 letter to the RFP review committee from Susan Morrison, an attorney for Ann Arbor resident Mary Hathaway. Those issues include a possible argument that Valiant’s desired subordination of rent payments to Valiant’s construction mortgage could violate the Michigan Constitution. A second possible argument is the idea that the arrangement with Valiant would constitute a “business enterprise” under Michigan’s Home Rule City Act, which would require voter approval before proceeding.
Next Step: City Council Work Session
Near the conclusion of the meeting, Rapundalo raised the question of whether the committee needed to take any formal action. Fraser told him it would be helpful to have a recommendation from the committee for the city council to consider the draft letter of intent – if the council recommends changes, they can be made as appropriate. Teall concurred with that sentiment.
Offen said he’d like to see somewhere a brief description of the financial benefit to the city, given that the tangible financial benefits were a major criterion for selection of the proposals.
It was Splitt who made the recommendation that the city sign the letter of intent with appropriate amendments. During the brief discussion, Offen said he’d support the motion, but only because the previous request by Valiant that the city issue bonds to support the project had been removed. Mahler wanted to make sure that the ownership of the conference center by the city was something that could be negotiated. Rapundalo expressed his support by saying that the letter of intent resets further dialogue under a framework. He allowed that financial feasibility would become a question.
Outcome: The committee voted unanimously to recommend that the the city council consider the letter of intent.
There will be a city council work session on Monday, March 14, 2011 at the Community Television Network (CTN) studios, 2805 S. Industrial Highway Washtenaw County board room at 220 N. Main St., dedicated to the topic of Valiant’s letter of intent.