Ann Arbor Library Lot: A closer look at the proposal that rose to the top

The fact that Valiant had a head start and meetings with city officials before they solicited requests for proposals to develop the site has led some to say the fix was in for Valiant’s proposal from the start.

A committee of city leaders decided last week to give further consideration to that proposal and another proposal for a hotel and conference center by Acquest Realty Advisors of Bloomfield Hills. The committee will make a recommendation to the Ann Arbor City Council in March.

Both proposals ask the city to front millions of dollars to develop a publicly owned conference center that will drive the success of a new hotel.

That factor alone could place both ideas in jeopardy since they come at a time when the city is struggling financially, and officials are unwilling to take many risks.

Michael Bailkin, who is representing Valiant Partners, said a lot of work has gone in to creating the vision for Valiant's towering hotel building with an attached conference center.

"We've been at this two years," Bailkin said. "We've discussed this with every aspect of the community - with the city administration, with the key institutions, with the business community, with broader interest groups, with groups throughout the community, and our product is an effort of what I would call a very close collaboration. We believe that the market is there and we believe that this is the right project."

The Valiant proposal was the clear favorite of the two in committee discussions, but is still not widely accepted by City Council members.

Proponents say the project will draw thousands of new visitors to the city and help ensure the future success of the downtown economy.

Others worry it could fail and become a sore reminder of a bad investment - one that would leave the city footing the bill on an empty conference center for the next 20 years.

When polled by AnnArbor.com this week, a majority of the 11 City Council members acknowledged hesitations about the city financing a $9 million conference center. Several even say they're adamantly opposed to it.

"I never have been and am not willing to put the city at risk for a conference center," said Mayor John Hieftje.

"I will not support authorizing the city to be the bank - i.e., the lending institution - for a development on the Library Lot," said Council Member Stephen Kunselman, D-3rd Ward.

Council Members Sabra Briere, D-1st Ward, Carsten Hohnke, D-5th Ward, and Mike Anglin, D-5th Ward, also said they’re opposed to it.

"Any kind of financial risk there - whether that's floating bonds for a conference center or anything else - I think is not something that we need to absorb," Hohnke said. "That lot is a jewel, and I think that it doesn't require us to take on any significant risk, and this certainly isn't the time for that."

A closer look at the Valiant proposal

Valiant has drafted a vision for a project called Ann Arbor Town Plaza Hotel and Conference Center. It tentatively includes plans for a 150-room hotel, 32,000-square-foot conference center, 12 two-bedroom condos, restaurants and retail shops - all on the Library Lot.

Acquest's project - called the @ Hotel and Retail Center - is different. It includes a potentially 190-room hotel with meeting spaces, restaurants and retail aspects. Acquest is asking the city to partner on the project by building a 40,000-square-foot conference center on the former YMCA site across the street.

Bailkin says public financing of the conference center contained in Valiant's proposal is crucial to the overall project's success.

"I'm very familiar with conference centers or convention centers that are built by the public sector - they're built that way because the private market simply can't support them," he said. "Our life and blood, and the success of the hotel, depends on us building that conference center."

Bailkin says the total project would cost $54 million - $40 million for the hotel and retail aspects, $5 million for the condos and $9 million for the conference center. Valiant is asking the city to issue $8 million worth of tax-exempt bonds to be paid back over 20 years from hotel proceeds. At the end, the city would own the conference center debt-free.

"This has to be a collaborative process with the developer, the city, and the broader community," Bailkin said.

The developer proposes the difference between the $9 million price of the conference center and the $8 million in bonds be made up for in the land purchase. Valiant is guaranteeing the city at least $900,000 up front - and possibly more depending on condo sales.

"That, in fact, is going to be our equity into the conference center, so when we go out and put up the building - the conference center - simultaneously with the rest of the project, we're going to need both the city bond proceeds and our $900,000 to $1 million," Bailkin said. "The other payments to the city - which will be either the ground rent or the purchase money mortgage - will be paid on an annual basis."

The developer also proposes investing $700,000 to $800,000 - and perhaps more - into creating an active public plaza space on the site. Bailkin said he envisions the area becoming "a kind of local Rockefeller Center" for downtown Ann Arbor.

Bailkin said Valiant is willing to make the city a guarantee it won’t be on the hook financially if the hotel isn’t successful.

"We will have a mechanism to guarantee against operating losses," he said. "No. 1, (the city) won't be responsible for the debt service because that's coming from the income flow from the hotel. And No. 2, the operating losses, we as the manager will be responsible for that. So the only issue will really be whether we will be able to produce the economic and community benefits by having a lot of conferences here."

Sweating the details

Karen Sidney, a certified public accountant in Ann Arbor and local political activist, is one of several residents who have pleaded with city officials not to put the city at risk by partnering on a hotel and conference center project.

Sidney has crunched the numbers and believes Valiant's assumptions - based on a 75.8 percent occupancy rate - are too optimistic.

"During my career as a CPA, I've analyzed many real estate investment proposals. Some make sense and others don't,” she said. “If a client came to me with the Valiant proposal, I'd recommend they not invest because the numbers don't work. Bottom line is that, even with rosy occupancy assumptions, this project will not generate enough cash to pay the city for its land or pay the investors a return on their investment. Without the land payments, the city will not have enough money to pay the bonds. Since the bonds are backed by our taxes, we have to make the payments. That means more cuts to general fund services."

Valiant is asking the city to issue bonds backed by the full faith and credit of the city. But the developer is promising the hotel's "guaranteed income streams" will cover the debt service payments of $675,000 a year.

"We would pay the debt service by, No. 1, allocating our ground rent, which is actually going to be $375,000 if we do the purchase option, and, No. 2, by allocating a portion of what the real estate taxes would be to cover this," Bailkin said. "It's almost like a tax-increment financing type of approach. We believe the taxes that can be feasibly carried by this project are in the range of $600,000."

Of those tax revenues, Bailkin said $325,000 annually would go toward a portion of the debt service, while the remainder would be distributed at the normal ratio to local taxing jurisdictions.

"We believe that this project will produce not only the best revenue stream directly to the city but the best overall benefits," Bailkin said, citing 264 temporary construction jobs and 150 permanent jobs that would result from the project.

The need for a conference center

Valiant representatives acknowledge they're coming to the city with a proposal that hasn't been fully fleshed out. But for now, they're banking on what they're hearing from the community.

"It's what the business community in Ann Arbor is telling us that they think is needed to stimulate development," Bailkin said. "The people in Ann Arbor that are responsible for economic development - the Convention and Visitors Bureau, the Chamber of Commerce, all the people whose job it is to act in the public interest in that way - are saying this is an important project."

Fritz Seyferth, an Ann Arbor business consultant who is representing Valiant Partners locally, said 289 state or regional associations meet regularly in Michigan.

"The question is: How many of them would like to come to Ann Arbor?" Seyferth said, suggesting an equal number of associations affiliated with the University of Michigan faculty might use the conference center as well.

Seyferth called Valiant's proposal "conservative."

"It's not as big a conference center as the Ann Arbor Convention and Visitors Bureau would like to have us put up," he said. "They'd like to have a bigger one. But the reality is that this is a conservative middle-of-the-ground, and this a low risk at this time."

Seyferth also addressed some residents’ charges that the fix is in for a hotel and conference center and the RFP process is a sham. He said Valiant Partners hasn't been promised anything by the city.

Seyferth said Valiant has spent the last two years forming the right team. That includes partnerships with Utah-based Gemstone Hotel & Resorts, which specializes in development of unique one-of-a-kind hotels, and internationally known architect Enrique Norten. Also on Valiant's team is Ann Arbor architect Carl Luckenbach, whose firm designed the underground parking garage being built on the Library Lot.

For decades, Luckenbach said, he’s heard people in Ann Arbor talk about the need for three things: A conference center, a fine hotel, and some sort of town square downtown.

"Our proposal incorporates all three of those plus a restaurant on the street frontage, some retail and 12 two-bedroom condominiums," he said. "This project will be good for the city, and it will be especially good for downtown."

Bailkin admits it's difficult to finance anything in today's market, but said his team's financial consultant, New York-based Roosevelt & Cross, feels confident about the project.

"If this were a free-standing hotel, I don't think we could finance it," Bailkin said. "The hotel in connection with, No. 1, its downtown location, but perhaps more importantly the conference center, we believe, will get us the financing at least up to 65 percent loan to value."

But it still needs support from the City Council.

At this point, even if the Valiant proposal is recommended to the City Council, it likely won't move forward.

Hohnke said the 1.2-acre city-owned site on South Fifth Avenue - adjacent to the downtown public library - is prime real estate and should bring income without any risk to the city. He said he'd prefer to wait for a proposal that offers that.

"If we don't have that in the current batch, then that's OK," he said. "We need to continue to look at the best way to find the proposals that work with us as a community. We're not under any obligation to accept one of the proposals that are before us. We are under obligation to consider them deeply and thoroughly, but we're not under any obligation to accept one."

Anglin echoed those sentiments.

"For the city at this time to invest any of the taxpayers' money - or to sell any of its land in conjunction with a developer - would not be very appropriate, particularly because we have so many things that need to be done in town and we're stressing the taxpayer in many, many different ways," he said. "It's very important that we maintain services. That's what makes a great community, not a fancy hotel."

Ryan J. Stanton covers government for AnnArbor.com. Reach him at ryanstanton@annarbor.com or 734-623-2529.