For those who know me and have worked with me, many are aware that I love to crunch numbers and create spreadsheets. Projections, forecasting and deal analysis is one of my things. Many a client has come to me over the years with proposals from real estate developers in hand with one question: “Is this a good deal for me?”

Of course, my typical answer is: “Well it depends … what is it that you want to accomplish by making this transaction?”

After a lot of listening and research, it’s time to sharpen the pencil. Not so much a pencil anymore, but there were times that pressing the graphite to those big green ledger papers consumed me. Computers and Microsoft Excel has made life a lot easier, but the downside is that it gives “inquiring minds” more time to dig deeper into the minutiae of an infinite number of what if scenarios!

Now, I am not a CPA, nor do I have an advanced degree in financial analysis, but after 42 years in business, I know enough to understand that if one invests a dollar in a real estate development project and only gets fifty cents in return, that is not a good deal.  On the other hand, if one invests a dollar and gets a return of fifty cents every year thereafter for say 20 years … well, that is one heck of a good deal.

Whether that investor is a private individual or business … or public entity the rules are the same. In the case of the latter, a local government for instance, there is often an element of making an investment for the “public good,” such as building public parks or roads. Most government entities nowadays try to extract the costs of building for the public good out of developers in exchange for the right to privately develop a nearby tract of land. Some would say a smart move on the part of government, as it finds way to preserve taxpayer dollars without raising taxes.

Sometimes the returns on such investments don’t come directly from the developer on the front end of the deal, but over time from the users of the new development in the form of new sales and property tax revenues that otherwise would likely never have come about … if that initial investment was not made by the government.

This is known as Economic Development.

Case in point: The City of Frederick’s Carroll Creek Linear Park.

For those of you who were not living in Frederick County, Maryland in June of 1972, you may not appreciate the fact that Hurricane Agnes created a flood throughout the county that took out any number of bridges and destroyed countless buildings with water levels that exceeded 30 feet above the norm. The greatest devastation hit the core of downtown Frederick along the (once thought) lazily flowing Carroll Creek.

It was the vision of then Mayor (now State Senator) Ron Young, who pledged to solve the problem of future flooding and add a bonus of a linear park on top of what has undeniably turned into the center piece and spark of an economic development boom for Downtown Frederick.

That $60 million investment for the “public good” laid the ground work for hundreds of thousands of square feet of new and redeveloped real estate projects in the downtown area which otherwise would likely never have happened. In return the private redevelopment of all this real estate has created a property tax base that is several hundred times more than what is was prior to the creation of the linear park. On top of that business and residential activity has flourished in the area, as well as a boom in tourism, all of which has generated job growth, increased sales tax and other revenue sources for the city and county coffers.

Not too many would say that Ron Young’s vision hasn’t tuned out to be a worthy economic development investment that continues to reap sustainable rewards.

Now let’s shift focus: Downtown Frederick’s Proposed Hotel and Conference Center.

So much has been written about this project in every possible print and web-based publication known to mankind that has anything to do with Frederick County over the last decade.

Before I go further, I want all readers to know that neither my business nor I have any financial stake in this project. I am offering my opinion here simply as one who cares about the welfare of Frederick County, Maryland where I have resided and earned a living for well over four decades.

In a nutshell, several years back the city and county governments in conjunction with the Frederick County Chamber of Commerce, the Major Employers Group (MEG), which includes Fort Detrick as the largest employer in Frederick County, all came together and decided that a hotel and conference center is needed in the heart of downtown Frederick. Studies were done that verified their belief that it would be of great benefit to the stakeholders (and taxpayers) within the greater Frederick community. It would attract and retain business, as well as assist in expanding employment (create jobs!). It would also increase tourism and generate increased tax revenue across the board (aka Economic Development)

Clearly, neither the city nor the county wanted to develop, own and operate a hotel/conference center; so the search began for a developer who would participate in public/private partnership of sorts to make the dream a reality.

Over the last several years as our community has slowly recovered from the impact of the “Great Recession,” the city took the lead through a series of starts and restarts to find the right partner.

It was in November of last year that the Mayor and Board of Aldermen unanimously approved a memorandum of understanding with the Plamondon Hospitality Partners (a 35 year old Frederick County based hotel and restaurant business) to develop a Marriott hotel on the former site of the Frederick News Post at 200/212 E Patrick Street. It is an ideal site with frontage along the Carroll Creek Linear Park.

All-in the project includes:

1. 207 room hotel
2. 23,459 square feet conference & meeting facilities
3. 104 on-site parking spaces (with overflow in All Saints Street City Deck 5)
4. Two Restaurants & two Lounges including a rooftop lounge & terrace dining
5. Indoor Pool
6. Green Design (LEED Certified)
7. Construction of the 650 space City Parking Deck 6 at Commerce and East Street
8. Other parking enhancements

What does it cost?

The total estimated costs reach $82.45 million. The City will own the land upon which the hotel will be built and lease it back to Plamondon, who will build both structures and associated onsite amenities.

In addition the City will build the much needed Parking Deck 6, which will ignite future private development: the 2.5 plus acres of Sites D and F located at All Saints and East Street. The two sites could add up to 200,000 additional square feet of residential, office and retail development (but that is a later chapter in this story). In other words, this will spur economic development.

In the end Plamondon will own the hotel and the City will own the conference center, both of which will be operated by Plamondon.

The onsite project costs will total $63.70 million, of which the developer will provide $44.00 million in private equity and funding. The City for its onsite contribution will contribute $19.70 million.

Offsite costs associated with the construction of Public Parking Deck 6 as well as expanding the site for additional parking spaces and other amenities will total $18.75 million.

So the City will be on the hook for $38.45 million … WOW! So the question arises: “Is it worth it, and where will the money come from?”

I will not dwell on all the details here, but the 33 page Executive Summary and Memorandum of Understanding that was approved by the Mayor and board of Aldermen in December of last year gives you all you’ll ever want to know … except a summary of how the cash will flow over the coming years.

The executive summary makes the very strong case that the impact on city and county taxpayers will be ZERO (NIL, ZIP, NONE). As a matter of fact a case could be made that the net positive revenues from this deal may warrant a real estate tax reduction for city and county property owners in the future … but I digress.

The sources of the funding for the $19.70 million will not come from any new taxes or assessments (ZERO, NIL, ZIP, NONE), but from the Maryland Stadium Authority (MSA), the state’s Smart Growth Impact Fund Grant (SGIF), the City’s self-sustaining parking fund, hotel tax revenues, ground rent, tax incremental financing and a profit sharing agreement between Plamondon and the City on net revenues from the conference center. In my estimation over the first 20 years of the life of the project this will total nearly $29 million, and that is after a 3 year period to reach stabilization with a modest 2.0% annual increase thereafter.

On the front of the deal the City will have to come up with about $555,000 to reimburse Plamondon for sunk land acquisition, design and project management expenses, as well as contribution toward the site development costs for the conference center. It is likely that very little “real cash” will come from the City coffers, as much of it will come from the MSA and SGFI grant funds.

As far as on-going obligations, yes, both Plamondon and the City will be on the hook to pay back their shares of the MSA funding. While the exact details of the $14.8 million of funds have not been finalized as yet, Plamondon will be responsible for repaying $9.3 million and the City will owe another $5.5 million.

The former will be paid back using tax incremental financing dollars (the difference between the current property tax revenues on the East Patrick Street site and those of the once completed project).  Any negative balance on the annual payments will be made up by Plamondon. It is anticipated that the annual tax incremental revenue will fall between $700,000 and $750,000, which will increase as assessments climb over time. My guess is that Plamondon’s annual debt service on the $9.3 million will fall between $630,000 and $820,000 which will depend upon the interest rate charged and the payback term of the obligation.

The City will very likely cover most of the cost of its MSA obligation (my guess is between $400,000 and $490,000 annually depending upon the interest rate charged and the payback term of the obligation) from the revenue generated for its lucrative and sustainable parking fund (fees from deck leases and parking meters). But if there is a gap, well it can look to one of its new revenue streams from the project or the 3% hotel tax, local personal income taxes, ground rent and conference center profit sharing. My best guess is that the first year that figure will be about $250,000 and will quickly grow to $450,000 once stabilized in the 4^th year of operations.

It appears to me that the new hotel and conference center project will generate plenty of revenue to cover the terms of the required payback obligations.

But that is just a summary of the project and new Public Parking Deck 6, and some may say these are not enough to justify going forward.

So I ask, what makes this a good monetary deal for the public?

Yeah, most residents of Frederick County are all excited about the fact that the City will have a core downtown meeting location for business and family gatherings, new restaurants and a new parking deck, and we know that it will be a big attraction that will grow tourism … but I want this deal to Show Me The Money!

So, today the former Frederick News Post site is valued by the tax assessment office at $1.64 million and generates an annual total of just under $30,000 in state, county and city tax revenue. As noted earlier that figure will jump by a factor of at least 23! Unlikely that any other purely private project will be able to match that anytime soon …. if ever.

When we look at all governmental revenue charges that will be generated from the public/private partnership, my guess is that the Plamondon development project will pay out about $1.75 million in the first year of operation (before stabilization). And over a 20 year period at a modest annual growth rate of 2%, my number crunching projects over $55 million in gross revenues to the various governmental entities … without any tax increases to Frederick County residents or businesses!

Not a bad return on a $14.8 million loan from the MSA!

Additionally (Yes, there is more!), the City estimates that the project will have a total of a $26 million annual impact on the overall community and 280 total direct and indirect jobs, which will add $11.9 million to private sector payrolls.

To review the Frederick Downtown Hotel and Conference Center cashflow projection analysis, click below.

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