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February 16, 2016

Our local governments are giving your money away Part II)

Ken Kellar

In Part I yesterday, I made a general case that none of the proposed Frederick hotel complex warrants government funding. Today I take a look at the funding schemes to finance the hotel.


First a note on accuracy. Available project information has taken on the character of pro-government-hotel propaganda. Despite that, I think my facts and figures are close enough to communicate the issues.


Let’s review the scale of this fiasco. Our government plans to pay $45 million of the estimated $89 million total hotel complex cost. $45 million buys a 750 student elementary school in Frederick County. The county currently has two massive tax bills in the works to help fund those schools.


So, let’s work through how government is going to assemble $45 million in the near future to give to the hotel owner.


Gift 1. The city will buy the Randall Family LLC (Frederick News-Post) property at 200 East Patrick Street for $3.6 million and lease it to the hotel owner for $80,000 per year. The table below shows the rents that would need to be collected for various scenarios.


Frederick City will give $3.6 million in cash to the Randall family. They will immediately be $3.6 million richer and the city will be $3.6 million poorer.


The city will have traded $3.6 million cash for an $80,000 yearly rental payment. That equates to a 45-year, interest free loan (see the last line in the table).


The scenarios below show the numbers on various land investment arrangements.


For example, the first line shows the figures if the city wanted to realize a 3% return on its investment (ROI) over a 30-year period. They would need to collect $182,136 rent per year. Note that even if they accepted 0% over 30 years, they would need to rent the land for $120,000 per year.


So, not only will the city’s $3.6 million be given away, but the interest on that money is given away, too. Remember the city sold investments to get the cash.


Scenarios to recoup the city’s land purchase expense

Cost to city today

Desired rate of return on land investment

Years to recover cost

Required annual lease amount

(Hotel should pay)
















$80,000 actual deal


Gift 2. With $3.6 million down and $41.4 million to go, let’s look at the next funding scheme. The city is looking for $15 million from the state stadium fund to give to the hotel. Excuse me – “to pay for infrastructure.” I don’t have the space to question why we have a “stadium fund.” The rationale here is: “Hey, if we don’t waste that $15 million on a hotel, someone else in another city will get to waste it on something else.


With the city’s $3.6 million purchase of the hotel land and a gracious “gift” of $15 million from the state (not yet a done deal), we still need to give the hotel around $26.4 million more.


Gift 3. The city and county will gather the remaining money (around $26.4 million) using Tax Incremental Financing (TIF). Your elected officials will say this large sum of money will be given to the hotel (sorry, “infrastructure”) at “no cost to the taxpayer.” I disagree.


We all pay property tax on the assessed value of our property. The land owned by the Randalls pays some rate of property tax to the city and county. Once a hotel, and “infrastructure” like a conference center, are built, the assessed value goes up and the property taxes are increased.


So, here is how the logic goes. I’m putting it in quotes because I don’t want anyone to think I agree with it.


“The lot will never be privately improved. So property taxes will never increase. Therefore, if we the government take out a loan and give the cash to a hotel owner, we can pay back the loan with the increased property taxes coming from the improved property. The whole affair is free to the taxpayer because the increase property taxes are a new source of money.”


It’s a great story if you choose to ignore reality. If the Randalls offered a fair market price for their land, a business of some kind would likely buy it. Instead they either did not offer it, or demanded a high price. Only our officials are willing to buy the land at the inflated rate because it’s your money, not theirs.


So, the city and county will sell bonds to banks or private individuals to generate the last pile of money to give to the hotel. The county selling a bond is like you taking out a house loan. You get a pile of cash to buy your house, but you now have to pay back the loan with interest for decades.


The cronies will tell you the bond debt is free because the increased property tax will be enough to pay back the debt. What TIF proponents deceptively don’t discuss is opportunity cost. For you to believe the transaction is free to the city and county, you have to believe that the land would not have been purchased and improved for the next 30 years, or whatever the payback term of the bonds are. During that 30 years, you and I will only see the tax revenue coming from the vacant lot. For 30 years, with regard to taxes, it will be as if the hotel did not exist.


Worse, if the hotel places increased demands on our infrastructure (and I mean real infrastructure this time) like streets, police services, fire services, and street lights, the hotel will not contribute property taxes to those needs as all their property taxes will be used to pay off the county and city debt.


One more note on city and county bonds. They are supposed to be offered at the lowest possible interest rate the bond market will support. If too low, no one would by them, except another government entity of course! But here is a chance to payback some friends. In these days of fractional bond rates, you will know something is fishy if these bonds are offered at high rates to preferred buyers.


A couple notes on our Annapolis delegation. Not surprisingly the Democrats such as Del. Karen Lewis Young and Sen. Ron Young are all in. Republican Del. David Vogt appears to be for it, very disappointing but I’m not surprised. Sen. Michael Hough, who was instrumental in recommending the county’s hotel tax be capped at 3% when County Council President Bud Otis and friends wanted it raised by 66% to 5% made this statement (paraphrased): “We shouldn’t raise the taxes on a certain business so the government can pay to bring in a competitor.” Del. Kathy Afzali said essentially, “You can’t be against government handouts to developers while you are for government handouts to developers”


Well, Kathy, welcome to Frederick County where housing developers are evil greedy bastards and hotel developers are to be welcomed with open arms and open bank vaults.


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