Area hotels complain about Edgewater, but get many facts wrong

OK, I thought I had just one more hotel post left in me, but then came the letter on Friday from a group of Madison hotel general managers. To read it and a few paragraph summary, I refer you to the Cap Times story or Dane 101’s coverage, because they both actually include the letter.  (The WSJ covered it too, with the nicest summary, but didn’t give the actual letter. I wish the WSJ would join the 21st century and remember that the web version of stories aren’t physically constrained by column inches, or at least can link to primary sources). I may still get to my “final” hotel blog post, but not anytime soon.

This post will look like a wall of text, but let’s dig into the letter a bit.

Dear Alders,

We are writing to provide you with some additional information on the Edgewater and Fiore Library/Hotel development proposals. Many statements have been made and statistics quoted that we feel have been misleading. As hotel managers, we wish to clarify this information with our hotel operational experience. The new hotel development proposals would put Madison hotels at a major competitive disadvantage and put many hotel employees’ jobs at significant risk. Mayor Cielewicz [sic] has not done proper due diligence and has not used the information presented to him in the hotel studies he commissioned before including both projects in his capital budget.

It’s worth noting that the Fiore hotel project may or may not, by the end of the project, actually be a hotel. They can’t start building there until the new library is built and the old library is deconstructed. That’s probably three years away, and the market may be very different by then. I don’t think the Mayor is putting the Fiore hotel in the budget so much as he is putting the new library in the budget. And you can’t blame the Mayor for not using information from the hotel studies when the hotel studies, particularly the second study, didn’t have any information. (OK, The first study wasn’t so bad)

A recent study listed the Edgewater as a blighted structure. The major reason that the property is in its current condition is the lack of capital investment and profits being invested back into the hotel. National Guardian Life, a company with over $2 billion in asset owns 30% of the Edgewater and did not properly maintain the hotel, allowing it to age with minimal improvements and reinvestment. Now they will likely make a significant amount of money pending the sale of the Edgewater to the Hammes Company, which is completely dependent on the $16 million TIF Hammes is requesting. To remain competitive, hotels must continually update their properties by reinvesting operating funds, not by asking the city of Madison for subsidies.

Amusingly, the argument the business community is making against National Guardian Life is the same argument that many preservationists make when they testify against tearing down older homes. Also, they may not be right about the requirement for TIF money. I don’t believe Hammes has said one way or the other that they would walk without TIF. And to be fair, Hammes has always claimed the TIF was for the public plaza. Personally, I’m open to the idea of TIF here. Yes, we should have gotten real access in the 1970s when we paid for it the first time, but better public access isn’t magically going to appear. If we’re not getting what we are legally entitled to, it’s time to sue. If we’re getting what we agreed to, it’s time to stop sulking. We got screwed the first time, so this time we need learn our lesson and do a better job in ensuring that we don’t get screwed out of it again. That lesson might be costly. Ideally, Parks would own the new terrace.

There has been speculation about the amount of increased room tax that the new Edgewater project would generate. We feel it is essential to use actual data instead of estimated numbers. Bob Dunn has stated that the hotel would command a $200 per night price tag which we feel is unlikely in this market. The average price for a room in Madison based on Smith Travel Research reports, a professional hotel research company, is as follows: the 2009 average daily rate for a Madison hotel room is $89.28 and the 2009 occupancy is 54%. Adding 107 rooms to the Downtown market on top of the existing 143 rooms at the Edgewater would only give the city an annual hotel room tax increase of $57,457, which is a far cry from the $16 million gift the city is offering. In addition, the revenue from hotel room tax would decline as the occupancy rate in the existing hotels would decrease with the increased competition.

I can’t decide if this paragraph is intellectually lazy or just dishonest. First, I simply don’t follow their math. 107 rooms times 365 nights a year times 54% gives 21,089 hotel roomnights a year. Assume $89 a night room rate, with a 9% tax, or $8.01 a night tax, that comes out to $168,922 a year. Perhaps they’re counting the room tax in some screwy way. The room tax gets split all over the place – most if it (61.8 %) goes to the Monona Terrace. The numbers about work out if they take the non-Monona Terrace portion of the room tax increment. That’s just dumb, since if we didn’t fund the Monona Terrace out of the room tax it would come from somewhere else.

It’s also dumb because it makes some ridiculous assumptions:
  • First, using the city-wide average room rate is not actual data. We don’t know exactly what the average Edgewater guest will pay, but it’s certainly not going to be $89 a night. It’s not competing with the Super-8 and Travel Lodges along the Interstate.
  • You can’t use the city-wide average occupancy rate of 54%. As I argued earlier, we need some unbiased professionals to give us an estimate. If the Edgewater is really going to be a destination hotel, its occupancy rate should be somewhat independent of the citywide average. It’s probably even independent of the “Competitive Hotels”, which the Hunden report put at 67.8 for 2007. (Obviously, the economy over the past year has pushed that number down)
  • You can’t complain about $16 Million in TIF and then only mention the room tax revenue. TIF money comes from the property tax. If this had been a $100 million condo project with a $16M TIF, the room tax would bring in $0 but Madison would still take in $1.6 million a year in taxes, or an increment of $1.5 million a year (I’m using a $19.47 mill rate, which looks like what was in effect in 2008. I’m assuming the building is worth $84 million in this case. Add another $300k a year to the taxes if the TIF money gets included in the valuation of the building. (EDIT, years later: commercial real estate valuation is trickier than residential, as you have to figure the revenue-generating potential of the building. This gets into time value of money, discount rates, future revenue growth, and what gets counted by investors and what gets counted by tax assessors, etc etc etc. The original point still stands: you can’t complain about financing from future property taxes and then only count room taxes)
  • The hotel room tax revenue won’t decrease with more available hotel rooms. If the occupancy rate goes down at one hotel because of increased competition, it goes up at the other hotel(s).  The only way the revenue goes down is if people stop coming to Madison and the number of rooms rented a night across all hotels goes down, not the per hotel percentage. Having more hotel rooms available isn’t going to stop people from coming to Madison. The revenue would go down if more cheap rooms were available, but I don’t think that’s the case with the Edgewater. Property tax rates might go down if the a hotel is less valuable, but that’s a way trailing indicator regardless.

Bob Dunn is claiming that the new Edgewater development will add 500 jobs and mayor Cielewicz [sic] recently stated that the project would add 1,000 new jobs to downtown. The fact is that a 250 room hotel will support only between 125 to 175 employees of which only 50% would be fulltime. The Edgewater currently employees 100 people which means the new development would only increase employment by 25-75 people. Many of these employees may come from a pool of employees laid off from other hotels when occupancies decline due to the new city financed hotel development.

This is most useful part of the letter. Clearly, the hotel itself isn’t going to employ 400 new people. What Dunn and Mayor Dave are probably getting at is the “multiplier effect”, that is, how many jobs are created in the local economy beyond the jobs directly created by the hotel project, or who’s going to be the butcher, the baker, and the candlestick maker to the hotel clerks the Edgewater employs, and to the guests that the Edgewater draws to Madison. This is worth arguing about, because I’ve always thought the multipliers were the most dismal part of the dismal science. Where did 500 come from? Why is it not 600, or 200? The 1000 job figure the Mayor mentions is from construction jobs, which admittedly sounds a little high. Perhaps once you start totaling up the construction guys on site, the workers at the cement factory, the officeworkers at the dumptruck shop, etc, maybe it all adds up to 1000 jobs. They may also have a point about laid-off employees. The room tax revenue will remain stable, regardless of how many new hotel rooms open in town, but if there are too many hotels then some may not be able to make it on the lower occupancy rates, or won’t be able to make it without cutting operational expenses.

The developer states they need the $16 million for the proposed public space. Complete open access to this public space will create serious operational difficulties for the hotel. Monona Terrace has experienced many of these operational issues with the rooftop terrace public space and they now close this space to the public when events are taking place. As an Innkeeper, it is your responsibility to provide security for your guests and allowing the public open access could create security concerns. Many national hotel chains may not be willing to put their flag on a property with this type of public space. The public space is only proposed so the developer can receive the $16 million up front, but what will happen when these operational difficulties present themselves?

It’s a concern, but it’s a non-starter to consider any other options. Madison should settle for nothing less than full open access to the public space, or at least any occasional private access is managed by the city, not the hotel.  The lake access is too important to give up. If it doesn’t work with a hotel on the site, we find something else to put there. I suspect a good hotel management company can make it work. (The hotel could, I don’t know, close their door? It’s not like the outdoor terrace is actually inside the hotel.) If I were a hotel operator, for that location I’d certainly try and make it work.

In order to gain clarity on the need for additional hotel rooms, the Mayor hired the Hunden Strategic Partners Company to complete a downtown Madison hotel feasibility study. In the original study dated December 2008, it stated that the city should concentrate its efforts on developing a 400-room hotel attached to Monona Terrace at the Madison Municipal building location site. The city was in negotiation with Marcus Hotels and Resorts until recently when Marcus pulled back due to the economy. Subsequently, three other projects emerged onto the scene – the Apex project, Edgewater project, and the Fiore Library/Hotel project. The Mayor again hired Hunden to perform a follow-up study to determine which project the city should invest in. The report, released August 27th 2009, states that the Edgewater is worthy of priority amongst the projects listed above, but the most important project should be the convention hotel proposed by Marcus. The study also concluded that the Library project hotel portion should not be a city priority at this time. It also states the city has to carefully choose the projects to include and the timing of those projects. The library project should fall below a true convention hotel, the Edgewater project, and a larger full-service project in terms of priority for the city. A few days after the last report was completed, the Mayor decided once again to back the library/hotel project, not following the recommendation from the professionals he hired. In total, the city has paid $50,000 to Hunden for this research which is a waste of taxpayer’s money if the information is not utilized.

True, the report said all of that. But the report also said that the Marcus/convention project wasn’t going to happen, so go after the Edgewater proposal now. To quote the August 27th report:

As a result, the City should advance the Edgewater project immediately, work to expand its future options for convention hotel development over the next 18 – 24 months, and suggest to the other two projects that they should adjust their hotel plans and wait until the other projects have been absorbed into the market. At such time the projects will be reconsidered  for city investment and/or priority.

Now, I’m all for ignoring the August 27th report because it was a waste of taxpayer’s money, but that’s a different argument. In this case, the Mayor is following the report. And again, I don’t think he’s advancing the Fiore hotel project, I think he’s advancing the library project.

The study also points out that the Apex project is probably not feasible because Apex has no experience in developing and operating a hotel. Bob Dunn has made it clear that Hammes will own and manage the Edgewater Hotel. The study does not point out that Hammes also has no experience developing and operating hotels. It is very risky for the city to invest in a developer that has no hotel experience.

Good points. However, even if the Edgewater completely fails, we get our money back from property taxes in fairly short order, and a different hotel company gets a chance to pick up a lakefront hotel from the Hammes bankruptcy for cheap. The city’s not taking an ownership stake in the Edgewater, so the use of the word “risky” here is odd. At worst, the TIF money that was used to build the public terrace is written off, but we still get a public terrace and better access to the lake.

This year has been one of the worst years on record for the hotel industry and many luxury hotels are currently in bankruptcy or facing bankruptcy due to the change in corporate and consumer buying habits. Many hotels are choosing to drop their star ranking because of the expense to operate 4 and 5 star hotels. In most areas of the country it will take 5-10 years for average rates to recover to 2008 levels. A hotel which will require a $200 average rate to remain financially feasible is not possible in this market and is a very risky investment for the city of Madison.

Again, good points, but how does the city lose if the Edgewater goes bankrupt? What do they mean by “very risky investment?” They’re making a case that it’s a risky investment for Hammes, not the city.

We ask that you look at the facts and join us in our fight against Madison putting the average business owner at a competitive disadvantage.

I’m about to unfairly blow up at the these letter writers, but I swear to God I hate this cliche line. “Why is Madison anti-business?” It’s like Goodwin’s Law, but for Madison development. It gets trotted out when the city doesn’t immediately roll over and give in to the demands of business. Nevermind that what might be best for one business may not be in the best interests of the entire city. If Madison is so anti-business, why is there nearly half a billion dollars of development projects under proposal in the downtown alone?  Madison is proud of its quality of life and wants to improve it, which is in part directly through good developments, and in part indirectly from the increased revenue from the good developments. I can’t think of anyone who doesn’t want Madison business to succeed, and I’m tired of hearing otherwise.

This group of hotel owners general managers could have made a case for why the Edgewater is a bad deal, but they’re not going to do it by getting all the facts wrong and repeatedly misspelling the Mayor’s name.

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1 comment so far

  1. Eka on

    Well 120 a night is high for me but I’ve been unable to find many heotls in big cities that are less so I used that as an estimate. The job I work at pays very little. It’s pathetic actually the amount of money I make and I work with kids! I have to begin saving for a trip a year in advance just so I can keep something in my bank account. I love working with kids but my pay you can’t actually live on unless you have a very strict budget. I’m glad to hear of this hostel. I may have to go with that. It would save me so much money!


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