Wednesday, March 9, 2011
Our firm represents Mary Hathaway, a resident of Ann Arbor. This letter presents to the Committee certain concerns on behalf of our client regarding the Committee's anticipated consideration on March 8, 2011 of a proposed Letter of Intent for redevelopment ofthe Library Lot with Valiant Partners LLC ("Valiant"), the City of Ann Arbor and Ann Arbor DDA as signatories. The proposed Letter of Intent is based on a recommendation of The Roxbury Group, a consultant hired by the DDA, which issued its report dated November 23,2010 ("Roxbury Report").
On behalf of our client, and for reasons which include those addressed in this letter, we request that the Committee recommend that the City reject the proposal submitted by Valiant Partners in response to RFP #743.
According to the Roxbury Report, Valiant amended its initial submission, although the exact financing details are not provided. Valiant now proposes a conference center to be owned by the City on the lower three floors of a building to be constructed by Valiant, with Valiant obtaining a ground lease for the rest of the 14 story building consisting primarily of a hotel above the conference center, plus retail space, office space and luxury condominiums. Valiant apparently proposes obtaining EDC bonds in the amount of$6.9 million to finance construction of the conference center, to be operated by a 501(c)(3) entity, with payment of the bonds to come from revenue from the private hotel/ retail/office/ luxury condominium development. The portions of the structure other than the conference center are to be privately financed. Valiant's Proposal dated January 28,2010 states at page 33: "In order to assure financability [sic] of the hotel the purchase price and/or Ground Rent will be subordinated to the first mortgage financing, which will be no more than 65% of Project Costs."[emphasis added]
A. The Valiant Proposal to Subordinate the City's Lease Payments to its Private Construction Mortgage Would Violate Article 7. Section 26 of the Michigan Constitution.
Article 7, Sec. 26 of the Michigan Constitution provides:
"Except as otherwise provided in this constitution, no city or village shall have the power to loan its credit for any private purpose or, except as provided by law, for any public purpose".
What constitutes a "loan of credit" can take different forms. For example, in the case of Skutt v. City of Grand Rapids, 275 Mich. 258, 266 (1936), the Michigan Supreme Court found that "[c ]ontracts involving use of public money to further private enterprise are void." In the case of Kaplan v. City of Huntington Woods, 357 Mich. 612 (1959), the Court found that a City entering into an agreement with other property owners to restrict the use of certain city lots to single dwelling purposes, which disposed ofa valuable property right of the City without consideration, violated the constitutional provision forbidding a City to loan its credit to private parties.
A situation similar to that proposed in the present matter was discussed in an opinion of the Office of the Florida Attorney General, Op. Att'y Gen. Fla. 1992-71. That opinion addressed the question of whether a Florida constitutional provision) comparable to Article 7, Sec. 26 of the Michigan constitution quoted above would preclude a Florida municipality from subordinating its mortgage (securing the payment of the balance of the purchase price for surplus property) to the construction mortgage of the private for-profit corporate buyer of the property. The Florida Attorney General opined:
"Your inquiry, however, concerns not only the granting of a mortgage but the subordination of that mortgage to the lien of any mortgage obtained by the buyer for the construction of improvements on the property. As you note, the municipality is not directly liable on the construction loan. [citation omitted]. However, in the event of a default on such loan, the municipality would be forced to assume the debt of the purchaser in order to prevent the loss of the property. Thus, the arrangement would appear to place the municipality's interests in the property in jeopardy and would appear to be an indirect obligation on the part of the municipality to payoff the construction loan in order to protect its interest in the property. [citation omitted]. Such subordination, therefore, would appear to implicate the provisions of s. 10, Art. VII, State Const. . . . . . . . .
Therefore, while a municipality is not precluded from taking back a mortgage on the surplus property it sells, I am of the opinion that the subordination of that mortgage to that of a private lender where the primarily [sic] beneficiary of such an arrangement is the private for profit corporation purchasing the property is impermissible".
Since the Michigan constitution provision precluding the loaning of credit to a private entity is substantially similar to the Florida provision, comparable reasoning would apply to the present situation.
Thus, the Valiant proposal to subordinate the City's right to receive rent payments to the developer's construction mortgage is not only a financial risk, but also would be impermissible under Article 7, Sec. 26 of the Michigan Constitution.
B. The Private Development Portion of the Valiant Proposal Would Cause the City to be Engaged in a "Business Enterprise" Requiring Voter Approval Under the Home Rule City Act.
The Home Rule City Act includes the following prohibition on city powers at MCL
117.5(e): "117.5 Prohibited powers. A city does not have power:
* * * * *
(e). . . to engage in a business enterprise requiring an investment of money in excess of 10 cents per capita. . . . unless approved by a majority of the electors voting on the question at a general or special election ....."
The definition of the term "business enterprise" is set forth in the case of Gregory Marina. Inc. v. City of Detroit, 378 Mich 364 (1966) as follows:
"'Business Enterprise: Investment of capital, labor or management in an undertaking for profit;. . . . '"
The Gregory Marina case held that the operation of a marina, "a parking facility for boats," was not a "business enterprise" requiring voter approval within the meaning of MCL 117.5(e) --the City was simply "discharging its obligation to provide adequate, safe recreational facilities for its population." Id. at 402 -403.
However, in contrast to the public recreational purpose being pursued by the City of Detroit in the Gregory Marina case, the major portion of the 14-story development proposed by Valiant for the Library Lot is for non-public hotel, retail, office and luxury condo uses. Valiant includes as part of the proposal that the City share in the speculative risk of developing luxury condos, with the City receiving a percentage of the sale price only when those condos sell (which might not occur). This venture also will necessarily require the City to undertake the function of being a commercial landlord and managing the ground lease on its property, as well as other aspects of the joint project. Whether performed by City staff or contract labor, the City's managing of the property and lease as a commercial landlord for the private (non-conference center) portion of the Valiant project can be considered a "business enterprise" within the meaning of MCL 117.5(e). At a minimum, the City will be investing costs in labor in this undertaking. The City anticipates a profit from this venture (indeed the RFP itself requires at page 4 that "[t]he proposal must provide a positive financial return to the City"). The anticipated cost of the labor alone to be invested by the City over the years in managing the ground lease as a commercial landlord would almost certainly exceed the ten cents per capita threshold in MCL 117.5(e) (With a population of approximately 114,000, ten cents per capita would be the sum of $11,400).
Under MCL 117.5(e), approval by Ann Arbor voters of this proposed "business enterprise" at a general or special election would be needed before the City entered into an agreement with the developer.
On behalf of our client, and for the reasons stated above, we respectfully request that the Committee recommend that the City reject the proposal of Valiant Partners LLC submitted in response to RFP No. 743.
Sunday, March 6, 2011
The following is a statement that a member of our group, Thomas F. Wieder, had prepared to present to the committee. It has not been edited or amended in any way. (Mr. Wieder is an Ann Arbor attorney.)
The Library Lot is a major community asset of the City of Ann Arbor. The use to which that asset is eventually put must be something that is desired and supported by the community. Unless the process used to make that determination is legitimate, sound and transparent, any resulting decision will not, and should not, have the support of the community. Unfortunately, it is becoming increasingly clear that the process that has been used to date meets none of those tests.
This Committee is, apparently, preparing to recommend to the Ann Arbor City Council that it proceed with a hotel-conference center project proposed by Valiant Partners. The decision to do so is primarily based opon a hurried, almost secret and perfunctory review of a report prepared by The Roxbury Group, the consultants hired to advise the committee.
Unfortunately, The Roxbury Group has, according to all available information, absolutely no experience in evaluating projects of this type – absolutely none. Moreover, The Roxbury Group was less than forthright when it made its proposal to the city for the consulting contract.
The City’s Request for Proposal, or RFP, required each proposal to “[i]nclude information regarding any pending or recent lawsuits against the organization, its officers or employees.” In its submission, Roxbury stated: “Neither the Roxbury Group nor its principals (or employees) have ever been the subject of any lawsuit.”
That statement is false. One of Roxbury’s two principals, David Di Rita, was named as a Defendant in the case of Haggerty and Kowal et al v Alexander Hamilton Life Insurance Co., AHLIC Investment Holdings Corporation, Household Finance International, Mark M. McMurtrie, and David Di Rita, Oakland County Circuit Court Case No. 99-012101-CZ. The Plaintiffs in that
case alleged that the Wixom Airport, which they purchased from some of the Defendants, suffered a substantial loss in value because those Defendants failed to properly clean up some environmental contamination, as required by law. The Plaintiffs alleged that Di Rita made false statements about contamination remediation efforts. The case was eventually settled, with some or all of the Defendants paying $700,000 to the Plaintiffs. It is not known what Di Rita’s participation in the settlement was, if any.
Of greater significance is Roxbury’s participation, as both a consultant and a principal, in a major infill redevelopment project in the City of Detroit, a project which was a total failure. In its proposal to the City, Roxbury touted its “Prior Experience with Large Downtown Infill Projects” and cited, as its primary example, the Capitol Park Redevelopment in Detroit. It identified its role in the project as “Development Advisor.”
What Roxbury failed to mention was its role as a co-developer, with the Detroit DDA, of “The Griswold,” an 80-unit residential condominium project to be built on top of the parking deck being constructed for the refurbished Book Cadillac Hotel and condominiums. In March, 2007, the other Roxbury principal, Stacy Fox, predicted that demand for condos in downtown Detroit would “outstrip supply for the near future.” (Crain’s Detroit Business, March 18, 2007.) By December of that year, The Griswold project was shut down. The developers had failed to secure the 20 condo pre-sales necessary to secure financing for the project. Unfortunately for Roxbury, and the Detroit DDA, cancellation of the project was costly. Roxbury and the DDA had to share responsibility for more than $1.1 million in construction material costs that had to be paid. In addition, the City of Detroit was reported to have incurred a cost of $700,000 to build the parking structure to accommodate the condominium project on top of the structure. Oddly, Roxbury still displays The Griswold project on its website, www.roxburygroup.com, touting it as “a dramatic mixed-use development which is already re-defining the Capitol Park district.”
Roxbury identifies no involvement in any proposal or project to develop a hotel, conference center or similar facility. How, then, was Roxbury selected to advise the City of Ann Arbor on a hotel – conference center project?
Although the intent of the drafters cannot be determined with available information, the RFP gives the appearance of having been written with Roxbury in mind, and to exclude at least one far more qualified potential consultant. The RFP calls for a consultant with experience in providing “advisory services to municipalities and other public bodies for large infill downtown multi-use projects.” This description seems tailored to fit Roxbury’s role as a “development advisor” on the Capitol Park project, although it ignores its role in the disastrous Griswold project. No information has been located verifying Roxbury’s participation as an advisor, or as a principal, in any other project of a municipality or related government agency.
The RFP also contained the provision that “the City will only consider submittals from professionals that have no operations based within Washtenaw County…” This was supposedly included to “avoid any perception of influence or conflict on the part of the consultant.” This is a most curious requirement. The task of the consultant was to evaluate two competing proposals, the proposal of Valiant Partners, LLC, located in New York City, and the proposal of Acquest Realty Advisors, Inc., located in Bloomfield Hills, Michigan. There is no logical reason to exclude locally-based consultants from evaluating out-of-town developers. Moreover, the city has standard requirements precluding participation by any consultant with any actual or potential conflict of interest.
Perhaps the exclusion of local consultants can be explained by the following facts. As the committee is aware, Ann Arbor is home to Hospitality Advisors Consulting Group, headed by Charles Skelton. Mr. Skelton has had literally hundreds of consulting engagements regarding hotel and conference center facilities and proposals. These engagements have included projects in 21 states and for 20 government agencies, including 16 in Michigan. Unfortunately, before the RFP was prepared, it became known to certain individuals involved in this process that Mr. Skelton maintained the view that a hotel – conference center of the type and size under consideration is probably not viable in Ann Arbor. This fact raises the concern that the RFP may have been designed to exclude Mr. Skelton, and his healthy skepticism, from the process.
The handling of Roxbury’s eventual report also raises serious questions. David Di Rita presented his report, dated November 23, 2010, to a meeting of the Committee on the same date. When Mr. Rapundalo provided notice of the meeting about a week beforehand, Committee member and Planning Commissioner Eric Mahler, and Committee member and public representative Samuel Offen both informed Mr. Rapundalo that, because of existing professional and personal commitments, they could not attend a meeting on that date. Mr. Rapundalo decided to proceed with the meeting, anyway. Mr. Offen reports that, while he was in Ann Arbor until the morning of November 23, he was not provided with a copy of the Roxbury report, and he has no indication that it was available for review prior to the meeting.
Mr. Di Rita made an oral presentation of his report, which is 30 pages long, to the three members of the Committee who were present. They promptly accepted the report and moved immediately to direct city staff to prepare a proposed Letter of Intent between the city and Valiant Partners. According to the Committee’s minutes, this was accomplished in one hour and eight minutes. It seems doubtful that the three present members of the Committee even had time to read the report before acting upon it. There was, of course, no opportunity for the two absent members of the Committee, or any member of the public to even read and review the report, let alone provide any input to the Committee, before it proceeded to the next crucial stage of the process.
Every aspect of this process has been problematic. It should not be the basis for going forward with a project of such importance to this community.
Saturday, March 5, 2011
PLPP requested an opportunity to present this statement verbally to the group, but we were refused. We are now making the statement public.
You are meeting today to discuss a letter of intent between Valiant Partners LLC and the City. This is based on the recommendation of a consultant, The Roxbury Group. Though the 11/23/10 minutes stated “the Valiant proposal ...presented the better option for long-term viability”, the report itself said “this report does not include and is not intended to serve as a feasibility study... it is generally assumed that the overall concepts...are valid and supportable from a market and demand standpoint.” But an unsolicited, independent analysis from nationally recognized hotel expert Chuck Skelton provides a strong case with extensive data that the proposed hotel and conference center are not financially viable.
We urge you to recommend that the City withdraw RFP #743 and notify all proposers that no award will be made. We base this request on the following:
1. Neither of the two remaining proposals (Valiant, Acquest) actually meets all the stated objectives of the RFP.
2. The entire process of deciding how downtown city property is to be developed is being reconsidered. We believe that disposal of any public land should begin with a full community discussion of the desired outcome. The Library Lot is one of the most valuable downtown city-owned vacant parcels. It would be best to set aside this present effort and to begin again.
3. The Valiant proposal contains many likely costs and risks to the City. Complete details are too lengthy to include but the crucial points are these:
· The success of the entire enterprise hinges on a successful hotel operation. But current data show that projected room rates and occupancy are wildly unrealistic. The hotel will almost certainly operate at a loss.
· Payments for the City (used for bonds) are predicated on a high rate of return from the hotel and made only after the primary mortgage holder is paid and after profitable operation.
· Construction of the conference center would be financed by privately financed bonds. Again, lease payments (dependent on hotel income) to the City would be used to pay this debt. If the bonds go into default, the conference center is at risk.
· Operation of the conference center would be the complete responsibility of the city and no funding is provided from this proposal. As documented by Skelton and others, conference centers everywhere are operating at a loss.
· Valiant financial statements do not indicate that the City will receive property tax payments by leasing the land and air rights to the hotel and conference center. Thus, the City will receive no direct revenue from the project.
4. Thus, the Valiant proposal does not fulfill Site Objective #3 of the RFP:
Financial return. The proposal must provide a positive financial return to the City. In the absence of other considerations, the City has a fiduciary responsibility to obtain fair market value upon the sale of City assets. Long-term lease or other property arrangements will be considered, but must meet this financial return criterion.
This financial return requirement was repeatedly stressed by your committee and by its chairman in justifying the elimination of other proposals submitted under the RFP. Since this proposal also does not provide a financial return to the city, it should not be accepted.
Thursday, February 24, 2011
Mary Hathaway interviewed him on February 23, 2011. Here is Mary's account:
Mr. Skelton told me that the idea of doing this study was born during the interview with Sabra Briere and Peter Allen, which we have all read in AnnArbor.Com (January 2010).
This kind of study is the specialty of his firm, which is located in Ann Arbor. He saw the city heading down the path to a serious mistake and decided to help by supplying information. (Information which, curiously, was not being demanded by the decision-makers.) He assigned a couple of people on his staff to do research on the subject. He himself talked with a few people to whom he had access. The result is the report which recently landed in Council mailboxes.
I told Mr. Skelton that his report had come as a huge relief to the people whom I knew who have been concerned about this subject for a long time. "Did you realize how timely your action has been?" I asked.
No, he answered. He was surprised when I told him that City Council may be asked to vote on March 7 for a Letter of Intent which has already been drafted and would commit the City to work with the Valiant partners. He had not been aware that a decision was so close. "I don't follow the politics," he said. "I don't know who is for this and who is against." He does not plan to attend the Council meeting.
He said that other Midwestern cities--often college towns--have been similarly misled into building conference centers. Someone comes in and persuades them what a great idea it is. The right questions are not asked. He said that private investors would be quick to act if there were a real market or need for a hotel or conference center. He would have no argument with that. But when a developer asks for public investment or subsidy, the answer should be "no." What is proposed for Ann Arbor would not bring in new business; it would simply draw business away from existing hotels--who lack the advantage of a taxpayer subsidy. This would be unfair. And this would happen in a context where conventions are used less and less frequently.
He said he will be attentive to Council's action on this proposal.
Wednesday, February 23, 2011
Mr. Skelton evidently was concerned on hearing some of the plans afoot for a hotel and conference center in his own community and applied his skills and resources to produce a report on the likely financial outcomes of such a plan. It has been reviewed on the Local in Ann Arbor blog, and a scanned copy of the report is here.
Monday, January 31, 2011
Due to weather, the Planning Commission meeting was postponed to February 8, at 7 pm, 220 N. Main St. Agenda will include review of the PROS plan.
Wednesday, April 28, 2010
TEXT OF LETTER
April 14, 2010
Mayor John Hieftje and City Council Members
City of Ann Arbor
Guy C. Larcom, Jr. Municipal Building
100 N. Fifth Avenue
Ann Arbor, MI 48104
CC: Susan Pollay, Ann Arbor Downtown Development Authority
Re: Restrictions on Use of Build America Bonds Relating to S. Fifth Avenue Parking Structure Project
Dear Mayor and City Council:
The Great Lakes Environmental Law Center offers the following information regarding restrictions on use of Build America Bonds relating to the S. Fifth Avenue parking structure project. Given our prior litigation and settlement with the city, we wish to make explicitly clear that we do not intend to pursue any further legal action on this matter, either as a party or as attorneys for another party. We are simply providing this information to assist the city in avoiding any potential liabilities resulting from violations of the terms and restrictions of Build America Bonds. As stated in the bond offering, failure to comply with the Build America Bond requirements “may cause loss of the Refundable Credit to be retroactive to the date of issuance of the Bonds.”
In February and July of 2009, the city of Ann Arbor approved a total of $49,420,000 worth of Capital Improvement Bonds to construct a 677 space, 4 story, underground parking structure in the city. The bonds are general obligation bonds and were designated as “Build America Bonds” under section 54AA of the Internal Revenue Code. More specifically, the bonds are classified as Direct Payment Build America Bonds. There are three types of Build America Bonds and the particular type issued for the parking structure provides the issuer, in this case the city, with a Federal subsidy through a tax credit paid by the Treasury Department and the Internal Revenue Service (“IRS”) in an amount equal to 35 percent of the total coupon interest payable to investors in these taxable bonds.1 Direct Payment Build America Bonds “may be issued to finance governmental purposes for which tax-exempt governmental bonds (excluding private activity bonds under §141) could be issued under §103” of the Internal Revenue Code.2 Therefore, sections 103 and 141 of the Internal Revenue Code govern the use of proceeds from Build America Bonds. If the bonds issued for the parking structure would be considered “private activity bonds” under §141, then that particular use for the bonds is impermissible. Just like tax-exempt bonds, proceeds from Build America Bonds must be used for public and not private use.
A bond is a private activity bond if it meets the (A) private business use test and (B) private security or payment test. These are known as the private business tests. If the Build America Bonds are used to finance parking for a private facility such as a hotel, as the city may be considering, there is a risk that the terms of the Build America Bonds will be violated and the City will lose millions of dollars in federal subsidy.
The purpose of the private activity bond tests of section 141 is to “limit the volume of tax-exempt bonds that finance the activities of nongovernmental persons, without regard to whether a financing actually transfers benefits of tax-exempt financing to a nongovernmental person.”3 According to the IRS regulations regarding section 141, that section “may not be applied in a manner that is inconsistent with these purposes.”4 Additionally, these tests may be met even if at the exact time of issuance of the bonds the proceeds were planned to be used for not more than 10% private use. If the issuer of the bonds “reasonably expects,” as of the issue date, that the issue will meet either of the private activity bonds tests of section 141, then those bonds are private activity bonds.5 Further, if the issuer takes any “deliberate action, subsequent to the issue date, that causes the conditions of either” of the tests to be met, those bonds are also classified as private activity bonds.6 A deliberate action is any action that is within the issuer’s control.7 Intent to violate section 141 is not necessary for an action to be considered deliberate.8 The only reason an action would not be considered deliberate is if it is an involuntary or compulsory conversion or it is taken in response to a directive action made by the federal government.9
An issue meets the private business use test if more than 10% of the proceeds are to be used for any private business use.10 Presumably, the parking structure does not itself cause this test to be met, although there is still some uncertainty regarding the amount of bond proceeds being used to support future private development at the site rather than construction of public parking spaces. However, if the parking spaces are used for private facility parking in the future, that could cause the bonds to be classified as private activity bonds. If more than 10% of the proceeds of an issue are used in a business of a nongovernmental person or a combination of nongovernmental persons then the private business use test is met.11 Generally, the private use test is met if a nongovernmental person has special legal entitlements to use the financed property under an arrangement with the issuer.12 However, a special economic benefit to a private party may also be sufficient.13 There are many arrangements that would cause the private use test to be met. For example, if the infrastructure built with the proceeds of the Build America Bonds (such as the parking spaces) are contracted to a private person or entity or if that private person or entity has a special entitlement or priority to use the spaces, rather than being solely available for use by the public, the private use test will be met. It does not matter if this arrangement is fashioned after the issuance of the bonds, or even after construction of the structure. Entering into an arrangement that would provide a special entitlement to a person in a private business, or more simply, to a nongovernmental person, would no doubt be a deliberate action within the control of the city and therefore the bonds would become classified as private activity bonds.
The second private use test is met if the payment of the principal (or the interest on the principal) of more than 10 percent of the proceeds of the issue is either:
(A) secured by any interest in
(i) property used or to be used for a private business use, or
(ii) payments in respect of such property, or
(B) to be derived from payments (whether or not to the issuer) in respect of property, or borrowed money, used or to be used for a private business use.14
The payment of, or security for, debt service is determined from both the terms of the bond documents and any underlying arrangements.15 Underlying arrangements may be the result of separate agreements between parties or may be determined by all the facts and circumstances surrounding the issuance of the bonds.16
If a nongovernmental person engaged in a private trade or business makes a payment to the city, directly or indirectly, for use of parking spaces in the new structure, that would be a private payment for use under section 141.17 Whether a private payment for use of property is made under an arrangement that is entered into in connection with the issuance of an issue is determined on the basis of all of the facts and circumstances, but is treated as such if: (A) the issuer enters into an arrangement during the three year period beginning 18 months before the issue date; and (B) the amount of payments reflects all or a portion of debt service on the issue.18 If the City enters into an arrangement within 18 months of the issue date whereby the private owners of a future facility will pay the city an amount at least equal to 10 percent of the proceeds from the bonds used to finance the parking structure, the private payment test will be met. If the arrangement is made after 18 months have passed, all of the facts and circumstances will be considered to determine if the arrangement was entered into in connection with the issuance of the bonds.
As described above, there is a legal risk that the bonds used to construct the parking structure and other infrastructure at the site will violate the private activity test, risking millions of dollars in federal subsidy for the City, if the parking structure spaces are contracted to or if special parking entitlements are provided to a private facility. Further, given statements made by the Downtown Development Authority regarding the significant portion of bond proceeds being used for site infrastructure to benefit a future developer including the private development’s share of costs for Library Lane, the service alley, the 12” water main, site work, and building structural support (which appears to solely benefit the private building), even a limited allocation of parking spaces for a private hotel could put the city at risk of losing millions of dollars in federal subsidies. We urge the City to consider these risks in making decisions about future development arrangements at this site.
2 Id. at 4.
3 26 CFR 1.141-2(a).
5 26 CFR 1.141-2(d)(1).
7 26 CFR 1.14102(d)(3).
9 26 CFR 1.141-2(d)(3)(i).
11 26 CFR 1.141-3(a)(1).
12 26 CFR 1.141-3(b).
13 26 CFR 1.141-3(b)(7)(ii).
14 26 U.S.C. § 141.
15 26 CFR 1.141-4(a)(3).
17 26 CFR 1.131-4(c)(2)(i)(A).
18 26 CFR 1.141-4(c)(3)(iv).