By Joe J. Wallace
Update: On Monday Mayor Winnecke announced a plan to start a downtown hotel by giving an out of town developer a gift of $37.5 Million with $20 Million of that amount as a direct supplement for the hotel itself. The article below is republished from 2010 as a reminder that planning and competence back in 2008 when the first of four rounds of half-baked announcements were made could have avoided the 5 years of false starts and embarrassments for the City of Evansville. In the end the subsidy of $20 Million was predicted to the penny by the article in the CCO years ago. Please recognize that at the time there was hope that the Ford Center would bring enough business downtown to attract a developer without a subsidy. Alas that did not happen and here we are in 2013 being asked to write a check for $20 Million as if it were 2008. In short valuations have not changed at all. The question of real interest is why the people of Evansville will not be 50% shareholders in this hotel as they are being asked to make an investment of 50% of the capital right up front.
Original Article: We all have encountered a time in life when there is something that we desire that just isn’t worth the cost associated with acquiring that object of our affection. It may be a toy for a child, an automotive accessory for a young man, that perfect pair of shoes, or an overpriced bauble of success for a captain of industry. The choice of whether to knowingly and deliberately overpay for what one desires in all of these cases has personal consequences but fortunately these consequences are only personal.
In decisions where taxpayer’s money is involved the consequences are distributed over the population at large, yet the decisions always seem to be made by the few or the one. Such a decision is facing the City of Evansville. The City-County Observer accurately predicted months ago that the Executive Inn would have to be torn down and that the financing for the project would not be secured.
Last week, The City of Evansville came face to face with what I will refer to as the Executive Inn Dilemma when Browning Investments of Indianapolis announced that they will be returning the Executive Inn to the City of Evansville on Monday August 17, 2010 at a meeting of the Evansville Redevelopment Commission. The reasons given were cost overruns due to some structural issues with the building and the fact that they have not been able to secure financing for the project after exhausting their options over many months.
Upon hearing this I did what I always do when curiosity gets the best of me and dug out some books from graduate school and did a little research on the internet. Given the conditions that David Dunn articulated to Dan Shaw of the Courier Press for a 250 room hotel, with rooms that rent for $120 per night, and an average occupancy of 60%, I used these initial conditions and assumed a 3% growth rate for the next 10 years. These assumptions lead to a value for the proposed hotel in the range of $18M to $22M with the variation coming from the efficiency range assumptions of the overall operation.
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Browning is on record from its 2008 announcement that a three star hotel of this size will cost around $35M to complete and that the recently disclosed problems will add several million dollars to the price tag. It is safe to conclude that undertaking this task will require a budget of at least $40M to complete.
A dilemma is a problem offering at least two solutions or possibilities, of which none is practically acceptable. One in this position has been traditionally described in America as being “between a rock and a hard place”. Here is the Executive Inn Dilemma:
• The Centre is Currently Losing Convention and Entertainment Revenue
• When the Arena is Built, Both will continue to Suffer Financially with no Convention Hotel
• Taxes from the Hotel are Committed to Pay off the Arena Bonds
• The Taxpayers were Promised a Three Star Hotel Financed Privately
• The Convention Hotel will Cost $40M+
• The Convention Hotel on Completion will have a Value of $20M +/- 10%
What Are We Going to Do???
First, given the value vs. cost proposition it is highly unlikely that there is going to be a white knight with deep pockets come to the rescue and take on a project that has a high probability of many years of losses and an instant $20M negative hit to the company balance sheet. For the same reason that a solid business like Browning could not find a way to make this happen, other for-profit entities will be quite bearish when deliberating on such an investment.
Secondly, If it is determined that Evansville must have a hotel right now, then the City of Evansville and Vanderburgh County, that owns the Centre are going to have to consider finding some way to arrange for financing for the Convention Hotel. This could come in the form of a bond issue to cover the construction with a leaseback agreement with an operator, a combination loan and grant to a developer, or a combination of other creative financing alternatives. The bottom line is that the City of Evansville probably can find a way to do this. The $40M question then becomes, is it prudent for the City of Evansville to pay $40M for something that has a value of $20M? As odd as it may seem, the answer is maybe. The aggregate economic benefit to the Arena, the Centre, and other Downtown tax generating businesses may just justify this.
The third option as pointed out so eloquently by Mizell Stewart in his Sunday editorial is to wait and see if the Arena delivers on the economic impacts that were so highly touted in the meetings that lead to the decision to build it. It is quite reasonable given the hyperbole surrounding the $128M Arena that it will have a $20M positive impact on the investment potential for a Convention Hotel. If that is the case, in a couple of years a private entity will eagerly embark upon this project.
I did a few more iterations on my valuation routine and here is what is needed to make a 250 room hotel achieve a value of $40M. The Convention Hotel will need to command between $250 and $300 per night and achieve an 80% – 90% occupancy rate. If the Arena can create commercial success that allows the rack rate to double and the occupancy to increase by 50% over the current assumptions, private investors will find this project attractive. That is no small requirement as Evansville has never been considered to be a market for $300 rooms.
Could the Executive Inn Dilemma have been avoided? No, but it could have been known before any shovel struck the ground for the Arena or any wrecking ball hit the Big E. The value calculations did not just appear. The value resulting from the assumptions that have been published has not changed in the last two years. There have been rumors of structural problems with the Executive Inn for many years. A test to have assessed that could have been done. It may have been done. The construction cost has also not changed dramatically. I must conclude that the Executive Inn Dilemma was unavoidable.
What is baffling though is why the analysis and the structural testing were not done three years ago when the planning process was begun. They could have been. If they had been, there may very well be a Convention Hotel under construction right now ready for a fall 2011 opening along with the Arena. A little more planning and testing could have avoided the anxieties of the last week along with any ire that the citizens of Evansville may feel if another bond issue is undertaken.
Evansville has created another classic paradox. Situations like this where the right hand does not know what the left hand is doing are known as Condorcet’s paradox or a paradox of voting. This is where a group of separately rational individuals or project managers may have preferences that are irrational in the aggregate.
Right now, the Big E has got to come down. The prospect of having this rotting reminder standing there looking like a scene from Will Smith’s “I am Legend†where he would capture zombies for medical research is just not an option. The people of Evansville and Vanderburgh County will have nearly $200M invested in the Centre and the new Arena. Both are showcase facilities and deserve to have something of class adjacent to them even if it is just a memorial garden or a park for the time being.
Notes for the Curious: I have included two websites below that are good tutorials on valuation methods and the equations used to reach valuations. For those who are curious and mathematically inclined valuation is a good skill to have as the same principles apply to parking garages, rental properties, and lease based capital equipment. Enjoy!!
http://www.hvs.com/Bookstore/HotelValuationTechniques.pdf
http://www.entrepreneur.com/tradejournals/article/120350582.html
Wow someone makes sense of a problem that should have been seen or forecasted by the Mayor and his cronies. To bad it will be swept under the rug by Mayor Johnny. Heck Evansville has all the money it needs to spend. Lets get another bond and continue to build more debt for our kids.
You need a political cartoon with a picture of the Executive Inn, and a bubble above it “Our river city runs deep with what matters most. Live here, work here, play here, stay here! I am Evansville, are you”?
thanks weinzapfel, the sooner you are out of politics the better
Welcome to the Hotel Weinzapfel
What a lovely place
What a nothing place
The KING is KING,– and don’t forget it!
The Weinzapfel gang is the Worst Administration the people of Evansville have ever experienced. Their Next Goal?–Ruling the Whole County thru a Consolidation(of Power).
The sum distillation of Mr. Wallaces’ article is the picture it paints, a correct one in my opinion, of perhaps the most inept city administration to ever hit Evansville.
Debt on top of debt for publicly owned entertainment facilities and ballparks while handing out tax abatements and phase-ins for business, and at the same time denying a local homestead credit.
It appears to me as if Mayor Weinzapfel views local taxpayers as just so many chickens to be plucked.
Mr. Whinner, or so the local school kids call him, is nothing more then another so called high profile Washington wannabe politician. I knew from day one he would be another no’good doer from the moment the baseball stadium ideal was shot down. Evansville has and seems will always need a Mayor who interest is within its city’s limits.. What we’ve had in the past are people whom only interest seem to be how they can make a fast buck off the once working class community.. This is not a political diverse issue, this is an issue about caring for what is right in our community.. This city needs a good old fashion House cleaning!
Shouldn’t we step back and take an honest look at all the events that have occurred in Evansville over the last year or so and attempt to determine if they are somehow related? What is especially interesting, maybe even “criminal” in one sense or another, is their relative timing.
The Arena deal gets approved. Property is bought up at way above market prices to speed the process along, as if there is some critical timetable that has to be met or else. This is kinda like a 2nd marriage, not two virgins right out of school getting together. Each side brings its own baggage to the merger. The county’s baggage, whatever that may be, was created by people who were voted in by both city and county residents so they all own any problems. On the other hand, the city’s baggage was created by people who were voted into office SOLELY by city residents. County residents, who had absolutely no say in the city’s affairs, now are forced to take on its baggage because of no “rejection threshold” in the vote.
(What about sewers?)
The consolidation saleswomen and men get in high gear pushing it. “Rejection Threshold” gets booted, virtually ensuring that consolidation will pass when it gets to the ballot with rural residents votes being diluted.
(What about sewers?)
Fowler gets booted from the EVCB for prematurely spilling the beans on the proposed plans for tearing down Roberts to make way for ball fields. This potentially may have caused disputes that could have affected the “big picture timetable”. She has to go away as quietly and quickly as possible!
(What about sewers?)
Arena constructiuon and Executive Inn work begin. No mention of structural problems and code-required building upgrades. Rumor is that there were no structural engineers or building department personnel available for many months to put two and two together. Ya think? Sounds like something this administration might try to sell.
(What about sewers?)
The Roberts plan finally is made public after it is pretty much too late to change anything. The only public input allowed is limited to “head-nodding” on what a beautiful project it will be.
(What about sewers?)
OOPS! The Executive Inn has structural problems with all the code-required upgrades and will cost millions more to renovate. Guess all those engineers and building inspectors finally came back off vacation. Sorry, too late to change any plans now! The Arena and Roberts demolition must move forward. Add the Executive Inn to the demolition list.
(What about sewers?)
OH NO! We can’t get financing due to a poor economy! What a surprise! The CRE biz got sloppy way over a year before anything was even committed to. Why is this a surprise only now?
..and here we are. A half demolished hotel, a half built arena, a functional stadium about to meet its demise, multi-million dollar ball fields about to be built that even have to have their maintnance costs financed and, last but not least, consolidation.
Are they all somehow related? Isn’t consolidation really all about getting an additional 50,000+ people to help pay for the city’s future financial problems? Is it realistic, in a crappy economy that has no light at the end of the tunnel, to go millions and millions and millions in debt that is supposedly going to be repaid entirely from taxes on DISCRETIONARY spending? Can that be considered good business practices?
I am going to give credit where credit is due. I believe that all those involved in making all this happen are intelligent, knowledgable and experienced people who aren’t just playing at business and fumbling around in the dark. That credit being given, that MUST mean that this whole process has been nothing but one huge conspiracy to “git ‘er done” at all costs and that the timing of all these events has been orchestrated from the beginning so there were not too many issues facing the public at any one moment or another that could upset the apple cart. Sound reasonable?
All this business rearding a baseball complex adjacent to Wesselman Park assumes the citizens of Evansville want to see our beloved Roberts Stadium leveled. Wrong again Mr.Mayor. Someone recetly made a comment about the 30 or so people who were against a downtown arena. Nothing could be further from the truth. Nobody wants to be looked upon as a naysayer as those folks were in the fifties who couldn’t imagine putting up that gigantic building on the east side in which to play basketball. Tha fact was that all we had then was the Armory. However, the downtown arena was put together to appease just a very small minority of persons and businesses. I have only run across three people who have voiced support for building that undersized facility in the wrong location. Unfortunately, the new arena won’t revitalize downtown anymore than Aztar has done. Remeber that main selling point that people will patronize downtown businesses and restaurants on their way to and from the boat.That hasn’t worked out as touted. The folks that run that facility don’t want patrons to stray too far from the gambling tables as evidenced by their many dining options within their own venue.
Much has been said and written about the lack of suitable parking being a problem when the arena opens. That will prove to be quite an understatement. One evening recently saw simultaneous events at the Center and Victory. Employees at both location reported parking places full within 6 blocks or more of that area. One can only imagine what the parking prospects will be with events at all three locations, not to mention 25 to 30 semi tractor-trailers and motor coaches clogging the “back forty” parking lot.
While University of Evansville officials have publicly extolled the virtues of playing basketball in a new facility, privately there is much concern about the potential senior fan erosion, many who simply can’t walk long distances from the available parking spots.
It is also reported that the Courier Company’s Home Show is making future plans, out of necissity, to hold that event in the Center as well as the arena due to space restrictions. The concourse width of the new building will be far less that half that at Roberts.
One of the other main selling points for the new arena was to attract bigger and better misic show to Evansville. We were told they would be able to hang their their monsterous arrays of speakers and light from the rafters. Isn’t it interesting that those concerts continue to come into Roberts Stadium, stack their speakers on the floor and make do with the lighting they are able to hang from those “flimsy beams.” Will the new arena be a nice facility? Absolutely it will. Is it suited for all the events that come into, or could potentially come into our city? The answer is a resounding NO! Keeping Roberts Stadium up and runnig for a few more years is still a very viable option for events such as the Shrine Circus, Jehovah Witness Conferences and yes, even University of Evansville basketball. These are the regular customers who have paid the freight here for decades. We can’t afford to compromise any of their events any more than we can afford to tear down Roberts Stadium now. Remenber all the second thoughts follwing the untimely demise of the L&N Railroad Depot? Once you hear the sound of a softball popping in the catcher’s mitt, it will be way too late. By that time this city administration and all their henchmen will have been voted out of office and that grand east side structure will be but a distant memory.
Mr. Wallace writes:
“Given the conditions that David Dunn articulated to Dan Shaw of the Courier Press for a 250 room hotel, with rooms that rent for $120 per night, and an average occupancy of 60%, I used these initial conditions and assumed a 3% growth rate for the next 10 years.”
Mr. Wallace,
This paragraph contains the weak point in your calculations. Three years ago, EVSC Superintendent Vince Bertram presented his Strategic Agenda, proposing a $149 million school construction spree, based on a 2.5% growth factor for 23 years. That assumption was questioned and he pooh-poohed the doubters. The following year, the Vanderburgh Co. Net Assessed Value plummeted 15%, leaving him to start his project 17% in the hole. The NAV has not regained much ground and with the high foreclosure and tax sale rates, no return to the previous level will soon be seen.
Something you omitted is that shows will cancel if early ticket sales do not reach desired levels. They will not return the following year. Each year there is no hotel, acts will cross Evansville off their list. Lost revenue and lost markets. Both equal lost growth in that area and money to pay for the bonds and any hotel.
Owensboro, Ky is taking a much more prudent approach to their downtown rebirth, even requesting architectural firms submit proposals for building designs and cost estimates. They are also listening to the public concerns about facilities and their locations.
Mayor Weinzapfel has only listened to himself while smiling and nodding to those who tried to convey their concerns. He cobbled this project together willy-nilly, on the fly. It looks like it, will operate willy-nilly, as nothing has been thought out or is convenient for the consumer.
The mayor had no long range plan. Kish and Barnett were brought in to handle the details. They are here for the money, not the honor. They could care less about Evansville or the success of the arena and the downtown.
If Roberts Stadium is left in place, the people who are used to coming to events and staying in eastside hotels will continue to come. They might be weaned to the arena. I said might.
Leave Roberts Stadium where it is. Smaller, less expensive events will not have to go to Owensboro to find a venue they can afford, if they can come to the location where they are known.
Winning a lottery is nice, but would you turn down a train load of pennies? Money coming to town in dribs and drabs or train loads is still needed money. Evansville needs to be attractive to all kinds of facility users, all year round. Baseball diamonds will not do that. Leave Roberts alone!
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“JOHNNIE’S JOY RIDE”
Like an irresponsible, teen-aged driver, with his “pedal to the metal” and unwilling passengers aboard, Mr Weinzapfel ignored warnings- “STOP! WE’RE GONNA CRASH!”
This wrong thing, in the wrong place, at the wrong time, Downtown Arena Project, has careened off the road and hit a bridge abutment. Voters/taxpayers/naysayers lay scattered and wounded.
Even the boldest optimist must concede, within the context of the givens, the Downtown Arena and its collateral dilemmas, is a “Buss In The Ditch.”
Mr Walace, the author of the story above, has been as kind as possible while revealing the truth facing taxpayers/voters.
Evansville and Vanderburgh County will need a miracle, in order to get back on the road.
I am, however, heartened that City/County Council and Commissioners are finally listening to the public. I only wish the mayor had done the same.
WFIE has reported that our Kentucky Cousin, Henderson has “BEGUN WORK SEPARATING STORM DRAINS FROM THEIR SEWAGE SYSTEM.” Evansville, on the other hand, has bought itself two years to come up with a plan. (Kick the can down the road)
Sanitary conditions and responsible stewardship of our river/drinking water have taken a back seat in “JOHNNIE’S JOY RIDE.”
This: In My Opinion
Hope the hell the idiots in the main stream media read this outstanding article by Mr. Wallace. Oh course I bet they can’t understand it.
Keep up the excellent work CCO and Mr. Wallace.
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