Judge Doyle Square Full Speed Ahead – To where? Why?

What’s the plan? Picking a developer but starting all over? Confused? You should be. This is goofy. What are we trying to accomplish?

Alder Ahrens sends a memo to his colleagues – they get a briefing and will expected to vote tomorrow night:

To: Common Council

From: David Ahrens

Date: Feb. 22, 2014

RE: A Brief Addendum to Common Council JDS Briefing Book

At our Feb. 25, 2014 meeting we will be asked to vote on a resolution authorizing negotiations for a city-subsidized hotel/parking and office/residential complex.

After more than $1 million in consultant fees, thousands of hours of work-time of the City’s senior staff, 15 meetings of an Ad-hoc Committee and thousands of pages of reports, the substantive text that is the basis of the negotiation is a one-page memo of “guidance” by Ald. Verveer. (See Section 9, Minutes of JDS Committee, 2/3/14, pp. 9-10) If not for his memo, there would be no direction.

This resolution indicates that none of the three proposals (Journeyman, JDS 1, JDS 2) were judged consistent with the city’s requirements either as indicated in the RFQ or in subsequent discussions with the developers. Nonetheless, the Committee selected JDS as the single developer with which to negotiate. Some would argue that it would be more a more advantageous position for the city to negotiate with both developers.

Given the lack of a specific or even substantive proposal, the process is essentially starting over with a blank slate. What are the size parameters and proposed subsidies? Is the City still proposing to subsidize office and luxury residential construction? Given the record of failed RFQs and RFPs is this (hotel) something that we really need?

The Briefing Book provides numerous documents on the proposals that were rejected by the Committee in addition to a series of analyses on their financial outlook. Missing from the book is a compelling reason for the city to finance a hotel/parking/office/ residential complex. There is no viable rationale for this extraordinary risk that is entailed with the investment of this massive dedication of city funds.

The (anonymous) editors of the Briefing Book assert as a “given” that 1) Monona Terrace Conference and Convention Center (MTCC) “needs a headquarters hotel” and that 2) it is the appropriate role of the City to build it.

       1)      The Need: Aside from the “studies” paid for by the MTCC, there is no evidence to support the claim that a hotel adjacent to it would change its use in any significant fashion. In a study conducted by the Greater Madison Convention and Visitors Bureau (GMCVB) it was found that only a small fraction of “lost business” was due to the lack of a “headquarters hotel.” Our weather, limited air service and very limited meeting space at MTCC were the most significant factors. (See graph 1) Although the proponents of the hotel describe these factors as “non-controllable” and are thus, not discussed in their review, our long winters, poor airport connections and lack of meeting rooms were by far, the majority of reasons for not booking MTCC.  

The GMCVB study found that in 2013 only three events declined to use MTCC due to the lack of a headquarters hotel and in 2014 only five events were missed. Further, they estimated that if every person who attended those five conferences stayed 2-3 nights at a ‘new” hotel, it would account for only about 10,000 room nights. This leaves the problem of filling the hotel for the remaining 120,000 available nights.

The first study (Hundeen, 2009) commissioned by Monona Terrace claimed that MTCC needed a 400-room hotel. Another study was commissioned in 2012 and a third last year. (All were conducted by the principal or former associates of the same firm.) The fundamental flaw shared by all of the studies is that they only studied the Madison hotel market as it existed in 2009 which had a little more than 1,000 rooms downtown.

None of the studies, including the most recent by HVS (conducted by yet another former associate of Johnson Consulting) considered the following changes in the hotel market as part of their analysis:

Nov. 2013:  Hampton Inn: 197 rooms

Nov. 2013: Fluno Center: 100 rooms (now open to the public)

Summer 2014: Edgewater: 250 rooms (increase of 100 rooms)

Summer 2014: Holiday Inn Express- John Nolan Dr: 115 rooms

Summer 2015: “Pahl Tire” Site Hotel: 150+ rooms

These 665 additional rooms will increase the downtown hotel supply by more than 60%. Instead of waiting for a few years to determine whether the market can absorb this big increase in supply, the City is committed to increasing the supply by yet another 30% in 2017. With a fairly constant occupancy rate of 70% downtown and 60% elsewhere in the city, there is no indication of a major unmet demand for hotel rooms- let alone a doubling of demand in two or three years. The MTCC-funded consultants speculate that rather than taking guests from the existing hotels, this new hotel will somehow attract thousands of guests who would not otherwise visit Madison. They offer no evidence  to support this claim. Will Madison, like many cities, find ourselves supporting big, empty downtown hotels built for convention centers?

Most of these cities with over-capacity hotels were constructed for large and medium convention centers. Monona Terrace, however, is a small conference center that was built for state and regional events. (Monona Terrace Feasibility Study, 1991) Since its construction, other conference/convention centers in the state such as La Crosse, Green Bay and Milwaukee are now multiples of the size of MTCC. This is consistent with US trends where convention space has increased by 50% since 2000 while attendance has been flat. As a result, the MTCC convention business continues to decline with 32 events in 2013 to 27 in 2014.

However, given its small size, it already has many more hotel rooms for a facility its size than other similar facilities. Indeed, in a report to Des Moines by Johnson Consulting, they noted that MTCC has, by far, the greatest room capacity of any convention center in the Midwest. (See graph 2) After the opening of the Hampton and other hotels, that ratio has only grown.

        2)      Is hotel construction an appropriate role for the City?

The City’s proposal to provide a major subsidy to a private hotel corporation is an unusual and risky intervention in the growing and highly competitive local hotel market. Market intervention by a municipal government is unusual. The city might intervene where the on-going market has failed to provide a needed service such as low-income housing. It might also force the market’s choices in the event of discrimination where there is a purchase or contract requirement.

However, in this instance, there is well-operating, vibrant and competitive market. There are a wide-range of hotel prices and types both downtown and throughout the city. There has recently been new construction and more is being planned. Other than the case of the Hilton Hotel (which failed to meet its expected increase in value), none of the new hotels required or asked for a city subsidy of any kind.

The city’s determination to bring in a new entry into this market puts at risk the viability of the non-subsidized hotels. In our zeal to re-fashion the market to our perceived needs for MTCC will we destroy one or more of its private market competitors? How will the whole city, not just the government, be advantaged if we “unlocked value” on Block 88 but wind up with a 10-story empty hotel on Dayton St? This is not wild speculation but a real potential outcome.

The resolution statement anticipates that the new hotel well likely harm the existing hotel market. In the narrative section it states, “The new hotel should minimize any negative impact on the existing downtown hotels during the absorption of the new hotel rooms into the marketplace.” (Emphasis added) Notice that this directive does not require that there be a minimal impact, but only that the impact (though potentially catastrophic) be minimized. In practice, the impact of the city’s hotel could be the loss of one major hotel but by “minimizing” impact, two were not closed.

What does the city plan to do if it causes a hotel(s) to fail as a result of this venture? What if the hotels collectively lose 50,000 room nights? Will the city pay them for these damages? Or should the new subsidized hotel be responsible for these loses?

3) Are we “unlocking” or losing value?

Hotel proponents use the phrase, “unlocking of value” as if the proposal was a magical undertaking. It’s not. In fact, the proposed strategy has the exact opposite effect: it’s the loss of value in Block 88 (behind the MMB).

All of the proposals received by the city begin with a simple premise: The City will give (that is, for free) the two parcels behind the MMB to a developer. In May, 2008- at the near bottom of the collapse of the commercial real estate market- those two parcels were appraised by a consultant as worth $7.4 million. Surely, since we’ve climbed out of the real estate debacle, the property has appreciated substantially.

Nonetheless, the city contends that it is unlocking value by giving away this valuable real estate. As a matter of record, the City has never attempted to sell this property. Only give it away. And not only give it away but provide financing at nearly 200% of the increment. This seems to be a poor strategy for increasing the city’s finances. If the property was sold for $10 million, we would increase our revenue at a rate equivalent to taxing a $100 million property for more than 10 years. This would require virtually no-risk to the city and to the existing market, while the option proposed by the hotel proponents is highly risky and has a lower return. The question is: Why doesn’t the City try to sell the property before attempting to give it away?

The loss of value as a result of the property give-away plus the near-certain loss of value in existing hotel properties is a not a convincing strategy for “unlocking value.” These are a few of the most significant questions that remain unaddressed in the Briefing Book and the entire lead-up to this resolution. Other questions are, what are the effects of this major project on social and economic inequality in our community? What are the impacts on the ability of the parking utility to finance future projects? Why is the city constructing office space in the face of a 17% surplus of such space? And on and on.

If these questions (and others) are not thoroughly researched and debated now, they will not be debated when the negotiations are completed. Do you have any doubt that the project will be presented weeks before the budget and that the Council will be told that “it must be done now”, “no time for delays”, “interest rates will rise”, “best deal we could get” and so on? The hype and pressure from developers, staff and their lobbyists and consultants will be tremendous. We can only hope that if we can’t maintain a rational course of action then the citizens of the city will.