A2Politico: Ann Arbor Politics Grilled To Perfection

The previous Ann Arbor City Council majority (Second Ward’s Stephen Rapundalo and ex-Council member Joan Lowenstein, Third Ward’s ex-Council member Leigh Greden, Fourth Ward’s Marcia Higgins and Margie Teall, Fifth Ward’s ex-Council member and now judge, Christopher Easthope, and Mayor John Hieftje) brought us the concept of Ann Arbor development projects propped up by taxpayer subsidies (so-called public/private partnerships), dubbed in a May 2009 article in the Atlantic Monthly as “crony capitalism” by Simon Johnson, a professor at MIT’s Sloan School of Management, and the former chief economist at the International Monetary Fund during 2007 and 2008. 

Here in A2 no outlandish redevelopment project backed up by fantasy financials fails to excite a Council majority and Hizzoner, the Mayor. First there are kisses, then Council member Marcia Higgins does her dance of the special TIF zone, then, before you know it, the crony capitalism project is stalled, bankrupted and/or both. Need some examples?

First there was the First Ward Lower Town re-development project (now stalled for over half a dozen years). Next the previous Council majority brought us the Fourth Ward Georgetown Mall redevelopment project (bankrupt in less than 12 months after approval). Then, they “redeveloped” the Fifth Avenue former YMCA site, opposite the Main Library (once 100 units of affordable housing, and now a parking lot). The new Council majority (First Ward’s Sandi Smith, Second Ward’s Rapundalo and Tony Derezinski, Third Ward’s Christopher Taylor, Fourth Ward’s Marcia Higgins and Margie Teall and Fifth Ward’s Carsten Hohnke), are just as enthusiastic about crony capitalism (evidence their undying love and support of Ann Arbor SPARK and the LDFA). They  have schemed for 18 months to set the stage to give away another of the city’s golden eggs—the land atop the as-yet-unbuilt $55 million dollar underground parking necropolis, to be built next to the Main Library on Fifth.

As per crony capitalism etiquette, they’re also going to ask you to sign for the loan for the project so their developer friends are in no danger of losing money thanks to their land speculation. We can’t have that in Ann Arbor; it’s too politically important to have “redevelopment” projects. No matter that the projects end up in acres and acres of blighted land dotting the neighborhoods around town. 

At the moment, there are technically six projects under consideration for the library lot site, but before you get your bets down on the table meine Damen und Herren, let me tell you something— life’s a Cabaret my friends and the fix was in at the beginning of January of 2009. That was when City Administrator Roger Fraser brought the proposed design of one of those six development projects to the City Council retreat and pitched Council about “a little convention center.” Public present at the retreat were refused access to the plan presented. 

The cards were marked and the dice weighted—a “committee” was formed to “evaluate” the six proposals submitted. It’s probable that up to six of these people had already seen the proposal pitched by Fraser to Council 12-18 months before the sealed bid envelopes were ever slit open:

Margie Teall – Council Member, Ward 4
Stephen Rapundalo – Council Member, Ward 2
Eric Mahler – Planning Commission
John Splitt – DDA
Sam Offen – Resident & PAC Member
Roger Fraser – City Administrator
Jayne Miller – City Staff
Matt Kulhanek – Manager, Ann Arbor Airport
Susan Pollay – DDA

The committee met on December 4th, and will recommend to City Council which of the six projects should be built atop the Library lot. Go ahead. Toss the dice as many times as you like, and watch a recommendation for a hotel/convention center come up.

The preferred crony capitalism strategy in Ann Arbor is for a small group of Council and staff to keep the details under wraps until just before the City Council vote. However, that standard operating procedure was disrupted by the leak of the secret convention center plan presented to Council last January—a development plan that has been in the works since before the city’s official issued the Request for Proposals—a Request for Proposals brought to us by Marcia Higgins and Sandi Smith that was strangely tailored to the details of the Valiant group’s conference center/hotel plan.

Once the proposals were in, city officials refused to release the information to the public. While AnnArbor.com filed its FOIA, which city officials duly delayed, on November 20th A2Politico was the first site to post the PDF summary of the library lot proposals, thanks to a Whisper by an A2 politico. That summary included a proposal from the Valiant group, whose backers have had regular email contact with members of the DDA (including one person on the evaluation committee) and City Council members (as revealed in FOIAed Council emails).

Public pressure has now forced more of the details into the open.

The City recently published the project cost proposals on its web site. They make for some interesting reading, especially if you get excited by fantasies and bondage. The proposals with the most answers about funding and who would pay are The Dahlmann proposal for a park, and the convention center proposals from Valiant and Acquest.

Local developer Dennis Dahlmann’s proposal is simple:

He’ll write a check to the city for $2.5 million dollars or more to build the planned park he has proposed. The City would be responsible for operating costs, but the site could generate revenue from skate rentals, the proposed restaurant, and possibly other retail activities. 

The hotel/convention center proposals read like the Lower Town and Georgetown redevelopment scripts which were both based on that great 1991 movie with Danny DeVito, “Other People’s Money.” The conference center developers want taxpayers to pony up. The Acquest group writes that they “anticipate funding for the hotel will involve some type of public/private partnership.” The conference center mooches also don’t want to pay for the land until the city (well, taxpayers, actually) pays to builds them a conference center to subsidize the proposed hotel.

Since the Valiant group has an 18 month head start, their taxpayer subsidy proposals are more specific. While claiming they can get conventional financing for their hotel and condos, they prefer getting subsidized loans. The four Princes Valiant also have a detailed plan to finance the 37,000 square foot conference center. It’s really simple; you’ll love it. Taxpayers take all the financial risk, and the Princes Valiant get all the profits. How? The city will borrow the money by issuing bonds, backed by our property taxes. As explained in the Valiant proposal, it’s unreasonable to ask the developer to pay for the conference center because “Conference Centers rarely generate enough revenue to cover debt.”

That’s also why the conference center will be owned by the city or a non-profit controlled by the city. Surely, no one expects the developers to be responsible for the money losing dog they propose. That would be a financial risk for the developer. As First Ward Council member Sandi Smith has been quoted as saying, “mitigating the risk” for developers is why the Good Lord placed taxpayers on this Green Earth.

Valiant’s land purchase proposal gets an A+ for making a frog look like a prince through creative accounting and fantasy projections. Their proposed land purchase price is based on a combination of the sales price of the 12 luxury condos ($750,000 to $1,250,000 a pop) they’ll build, coupled with the amount of profit the hotel is projected to make when it is fully operational. They claim that formula will result in a minimum purchase price of the public-owned land of $5,259,796 dollars. The amount is bolded in the proposal so readers don’t miss it (It’s just scary to envision Stephen Rapundalo drooling).

Absent from the proposal is a discussion of what happens if the luxury condos can’t be sold for a big price, or even for the outstanding loan balance. You see, the city (i.e. you and me) doesn’t get one thin dime for the land until those ridiculously-priced condos are all sold. Most of the pretend $5.3 million dollar land sale price comes from a formula based on the operating profits from the hotel in year three, when it is assumed to be fully operational. Here’s where the Princes Valiant get really, well, creative. The Valiant developers predict a rosy future of 76 percent hotel occupancy. (They predict world peace and an end to world hunger, as well.)

Those know-it-alls at PricewaterhouseCoopers, who have been tracking hotel occupancy rates over the past 50 years, predict this about future hotel occupancy:

“According to the PwC forecast, 2008 RevPAR will decrease by 0.8 percent, primarily due to a 3.7 percent decrease in occupancy, the highest annual decrease in occupancy since 2001. In 2009, demand is forecast to decrease by 2.0 percent, which, when coupled with a 1.6 percent increase in supply, is expected to further reduce occupancy to 58.6 percent, the lowest since 1971.”

“The deteriorating outlook for the economy is impacting travel habits and spending, and hotels are expected to experience reduced occupancy levels, and to a lesser degree, some room rate erosion through 2009,” said Scott Berman, principal and U.S. Leader of PricewaterhouseCoopers’ Hospitality and Leisure practice.”

Of course, if the projected hotel profits in year three are less than those projected, the city gets less for the land. If the hotel is losing money in year three, the city gets zip, zilch, nada for the land. Valiant pays taxpayers for our land only if their hotel is profitable. Valiant also wants a 20-year payment plan, and wants the city to subordinate the land payments to the construction loans. Worried yet? Relax. The developer’s spreadsheet with the big profits looks so alluring, sexy even, how could this project lose money? Besides, a rosy economy for Michigan, and especially Ann Arbor, is just around the corner, right?  (The mental image of Margie Teall drooling over this S & M financial fantasy is even scarier).

The most interesting aspect of the Valiant profit projection is comparing it to the Acquest profit projection. Acquest proposes a bigger building (180,000 square feet, compared to 143,000 square feet) and more hotel rooms (190 compared to 150), but the Acquest group projects less profit when fully up and running ($2.4 million compared to $3.5 million). Valiant is more profitable even though it’s sales and administrative costs are $1 million more than Acquest’s. Valiant’s more profitable bottom line is because it expects a higher occupancy (76 percent compared to Acquest’s 67 percent). The Valiant group expects to charge more for its rooms ($209 average daily rental compared to $149). Valiant’s daily average room rental rate fantasy  is on par with that of hotels in Chicago and Boston.

Again, according to those know-it-alls at PricewaterhouseCoopers, “Only the Budget category of U.S. hotels will see increases in both occupancy and average daily room rates.” Apparently Valiant expects to rake in the dough from all those folks attending conferences at the taxpayer-subsidized convention center. Of course, in my experience, conference attendees have the annoying habit of shopping around for hotel rooms, and expecting more than one hotel choice.

The politicos and city staff (City Administrator Roger Fraser) preparing to cram the convention center boondoggle down the throat’s of unsuspecting taxpayers, claim a conference center will add to the tax base. Of course, they also claimed not to have known Michigan’s economy was in the toilet before authorizing $80 million dollars in taxpayer-backed bonds for the police-court facility and the underground parking garage. First Ward Council member Sabra Briere and Marcia Higgins have both told constituents that the current fiscal crisis facing Ann Arbor was the result of a sudden change in economic conditions that could not have been anticipated. 

Alas, the shrinking tax base will not be fattened up by either Acquest or Valiant. Neither appear to be planning to pay much in real property taxes. The Valiant group projects less than $200,000 in taxes paid per year, even though the project should generate $1.4 million in taxes if it were assessed at the $43 million they claim it is worth. Acquest projects paying about $310,000 in taxes, even though they claim the development project will will cost close to $30 million. Interestingly, both developers appear to have included generous tax breaks in their projections. 

Usually, it’s polite to ask for a discount, but this convention center is not about good manners. It’s about a small group of people who want to impose their “vision” of how public land should be developed come hell, high water, fairness,or honesty. Here’s where Ann Arbor taxpayers bend over and plan to ask for another, Ma’am: 

Read slowly—Valiant’s projected property taxes will not cover the taxpayer-backed bonds they want issued to cover the cost of their project. 

So what’s it gonna be? A downtown city park and skate rink fully financed by the developer, or a risky convention center and hotel development project paid for by the taxpayers, and backed up with financial projections that read like the latest fiction best-seller? The game was rigged by Council and Roger Fraser 18 months ago. The outcome was assured. Until now.

The public was never supposed to have the proposed plans or the financial projections before the committee made its recommendation to Council. It took a leak, a Whisper, and a FOIA to blast open the game.

Mayor Hieftje, Roger Fraser, former Chamber of Commerce Chair Jesse Bernstein, members of the board of Downtown Development Authority, and City Council majority members Margie Teall, Marcia Higgins, Stephen Rapundalo, Tony Derezinski, Sandi Smith, Carsten Hohnke and Christopher Taylor have all been big rollers with our tax money. They’ve been using their loaded dice, and cheating ways of misleading the public, and hiding information from the public.

That’s changed now; we’re all insiders and players is this crooked downtown development game now. It’s time to switch out the dice, and for Ann Arbor taxpayers to take charge of the croupier’s stick. It’s the only way our public land will be developed in the best interests of the people who own it.

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