Wednesday, March 9, 2011

It's the Law: Letter from Susan Morrison

The following is a letter from Susan Morrison of Rentrop and Morrison, which was distributed to the RFP Advisory Committee at their March 8, 2011 meeting. Note that this letter responds to the previous Valiant proposal, and some changes to the proposal as presented at the March 8 meeting may invalidate parts of this argument. In particular, the lease concept seems to have been downplayed in the most recent proposal.

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

Tom Wieder's Statement Concerning the Roxbury Group

As explained in our previous post, the RFP Advisory Committee for the Library Lot postponed its March 3, 2011 meeting to March 8, 2011. Our group had asked to speak but was refused.

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,, 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

An Open Letter to the RFP Advisory Committee

The following is a statement prepared for the March 3, 2011 meeting of the RFP #743 (the Ann Arbor Library Lot) advisory committee. The meeting has since been postponed to March 8.

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.