Saturday, January 23, 2010

An Interview with Chuck Skelton

Chuck Skelton is the President of Hospitality Advisors Group of Ann Arbor. As such, he is an authority on hotel business, especially in Michigan. He was quoted at length in an article in Ann Arbor Area Business Monthly. Here is a quote from that article, originally published in 2006:

"Hotel occupancy rates averaged about 67 percent for 2005, up 4.5 percent from the previous year. The average daily rate was $89.00, says Charles Skelton. President of Hospitality Advisors Group of Ann Arbor. The city's hotels achieved an occupancy rate eight points higher than the Southeast Michigan area as a whole (59 percent), and an ADR of one dollar higher. "

The following is an account of an interview a member of our group, Leslie Morris, conducted with Chuck Skelton on January 22, 2010. ("I" refers to Leslie.) Her account is presented verbatim with minor editing for typography.


I asked if it would be normal in the hotel feasibility business for RFP's to exclude any firm with a local office, as it seemed to me that local experience would be valuable. He said he had had experience only in responding to RFP's, and not in writing them, but that he had not seen such an exclusion before. I said it seemed strange to me that only a week was allowed to respond to the RFP. He said it was an indication that the RFP was "wired". His firm would be unable to turn around to respond in such a short time, and he thought others would have difficulty also.

(Ed. note: Leslie and Chuck are evidently referring here to the RFQ that the City of Ann Arbor issued for a financial consultant to help evaluate proposals from the RFP for the Library Lot.)

He recounted an experience he had about twenty years ago. He was asked to serve on a citizen committee, which was formed to react to a study that the city (Ann Arbor) had commissioned to assess feasibility of a convention center. The study was done by a nationally known firm, but was so poorly executed, and included so many erroneous assumptions, that he refused to sign off on it. As an example, he said that the producers of the study had assembled a list of all the groups that meet at large midwestern conference centers, including McCormick Center in Chicago and other convention centers in cities like Cleveland (I didn't get down all the names). He said they then claimed that an Ann Arbor convention center would have access to 100% of these groups. He said his opinion was that Ann Arbor would be lucky to have access to 1% of the groups that meet at the McCormick Center, which is very large, and can accommodate big trade shows. He thought that Ann Arbor might have access to 10% of the groups that meet at the other larger midwestern convention centers. He thinks that this poorly-done study is the one that Jesse Bernstein is carrying around and citing currently.

He brought up the Valiant proposal, which he said he was familiar with. He said the ADR (average daily rate) in Ann Arbor is about $100, that we are not a "high end" market. He had noticed that the Valiant proposal had indicated an ADR that was $80 above the Ann Arbor average, and that they had projected an 80% occupancy rate. He thinks this is unrealistic and impossible to achieve. He had talked earlier with some of the Valiant proposers, as indicated in Sabra Briere's memo on her meeting with him. They thought it was very difficult to get a room in Ann Arbor, and that the rate was $200 a night. He asked when they had this experience, and they said "homecoming and graduation". He said those were among the highest occupancy and highest rates of the entire year, and that the winter business was nothing like that. They did not believe him.

I asked Chuck to react to the Acquest hotel proposal, which projected a $135 ADR, rising to $150 by 2016, with occupancy to begin at 55% and rising to 67%. He answered that this is noticeably above the $100 ADR of other Ann Arbor hotels. Faced with this competition, local hotels like Weber's would be likely to cut their rates to keep up their own occupancy, and that the new hotel would not be able to reach its projected occupancy figures.

He described the Ann Arbor hotel season: May, June, July, August, September, and weekends in October. This is less than half the year, and hotels have to survive through the very meager and long Michigan winter. Another local problem is the University of Michigan's insistence on its $85 per night rate, which it can demand because it is the "gorilla". Much of the winter hotel occupancy is generated by the UM. They have refused to back any of the current proposals, and based on past history would refuse to pay the projected rates.

(Ed. note: some individuals from the UM have written supportive letters attached to proposals, but according to Jim Kosteva, the UM's public spokesperson, the UM as an institution does not back any proposal.)

He said another problem with the Valiant convention center is that it is too small. It is similar in size to other private or University-owned meeting spaces, and would not bring in new business in the form of larger groups, but would essentially move existing business around, causing other facilities to be under-utilized. The conundrum is that small conference facilities won't bring in much new business, and larger convention centers (60,000-80,000 sq. ft.) would be empty much of the year, during the long, unpleasant Michigan winter.

Convention business across the country is down not only because of the poor economy, but because of the increasing popularity of video conferencing. This trend is expected to continue. All Michigan convention centers are subsidized. The Grand Rapids convention center could not survive without the generous private support from the Van Andel family.

As a citizen, Chuck has major problems with the proposition that the city government should aid one commercial business venture at the expense of other existing businesses. In his view, this is simply not fair. And as a citizen, he does not want to have the city (and its taxpayers) involved in a risky, speculative business. The hotel and conference business is extraordinarily risky right now. The proposers could not do their projects without city aid.

Chuck thinks anybody who wants to build a hotel on the library lot should get their own financing, buy or lease the land from the city at a fair price to the city, and take all the risk themselves. If this is not possible now, the city should wait until it is possible. In the meantime, the land could be a nice park, or even a surface parking lot, as it is now.

Friday, January 22, 2010

Cities Should not be in the Hotel Business

We'll accumulate a series of links in this post about the experience of cities in funding local convention centers and hotels. It gives you an idea of what Ann Arbor might experience with the Valiant proposal, and probably the Acquest.

Governing Magazine, December 2009

"Critics, though, don’t merely say that hotel ownership is beyond the proper scope of government. They argue that cities have placed bets on a declining stream of revenue based on impossibly rosy forecasts. And, there is reason for caution. Some publicly funded convention-center hotels have been solid successes, but others have been colossal failures."

Brookings Institute 2005

"The overall convention marketplace is declining in a manner that suggests that a recovery or turnaround is unlikely to yield much increased business for any given community, contrary to repeated industry projections. Moreover this decline began prior to the disruptions of 9-11 and is exacerbated by advances in communications technology. Currently, overall attendance at the 200 largest tradeshow events languishes at 1993 levels."

Domestic Policy Subcommitee (U.S. Congress)

"The public justification for public financing, including construction financing with tax exempt bonds, is that this is an investment that brings jobs and consumers to a city’s downtown. Academic research on the value to economic development, however, has universally concluded that sports stadiums, convention centers and hotels do not increase economic activity in downtown areas."

Testimony - Domestic Policy Subcommittee (March 2007)

"These cases of public hotel development and ownership present an intriguing case of public projects, making use of the low interest rates available with tax exempt bonds directly competing against privately-owned and operated competitors, often directly across the street."

Economic Impact of Convention and Conference Centers (Steven Spickard, 1998)

"What if you build it, and they do not come? For one thing, the community is stuck with debt service that continues for 15 to 25 years. You may very well achieve negative economic impacts."

Monday, January 18, 2010

Statement of Principles

· When land that is owned by the public (the citizens of Ann Arbor) is being considered for a project or change in use, the process should be fully open. This includes an opportunity for public discussion of its purpose or use, publication of all documents involved in the process, and meetings that are open to the public at all stages. The public discussion should occur before any RFP is issued, and the RFP objectives and requirements should incorporate or acknowledge points brought forth by the public.

· The public process is different from that with a privately owned piece of land, where a developer might have private discussions with staff and city officials in the course of working out details of the development. When public land is to be used, the public record should include preliminary discussions with potential developers. The public process should not be limited to public hearings after the presentation of a site plan as is customary with private developments. It should not be not limited to adherence to existing zoning regulations.

· The use of public land should be considered in the broadest possible context. For example, area planning should be employed to determine the effect on the immediate area (adjacent streets and neighborhood) of a particular use. In addition, long-term value to the entire community should also be considered, incorporating environmental, financial, aesthetic and functional impacts of any change in use.

· When estimating the value to the community of the land and of a changed use, discussion should not be limited to extracting the top dollar value from the project. The city should not be acting as a venture capitalist or a dealer in real estate. Rather, broader public benefits must be considered. These would include enhanced services, enhanced local environment, and enhanced vitality of the area for residents and businesses.

· The public process should include a full analysis of financial and economic factors bearing on the decision. This might include benefits, risks, market conditions, and other factors. A change in use should not create a financial burden to taxpayers, beyond the ordinary use of taxes to provide services as directed by city program budgets and public millage and referendum votes.