Memo to Council: So Far, the Downtown Omni Hotel Has "Exceeded Financial Projections"

TheOmniandReunion.jpg
Contained within the stack of memos the City Manager's Office dispatches to media every Friday night was the one you'll find below from Assistant City Manager Ryan Evans, who gets an assist from Ed "The" Netzhammer, managing director of the downtown Omni. Say both, no doubt whilst hoisting stiff brown drinks and toasting Tom Leppert and Harlan Crow, the convention center's been far more profitable than they ever, ever imagined -- at least so far, but so what, because it's so good.

Netzhammer provides the 90-day statement comparing forecast to actuals; as Evans sums up, "the first three months of operations at the Omni Dallas Hotel have exceeded expectations." Which were ...?

Well, says Netzhammer, initially they'd projected a loss between the November 11 opening and January 31 -- $577,000 in deficits, to be exact. Only: "The hotel actually made $554,000 in profit or $1,130,000 over the plan," writes Maxwell's Silver Netzhammer. Explains he, among the glowing accolades cribbed from customers' comment cards:
It is customary that opening hotels have a soft opening where issues are corrected and the staff is trained. It is a time where the facility and operation prepares to be at capacity on a more constant basis. During this time period, incoming revenue traditionally does not meet the cost associated with operating the business, and therefore, the hotel records a loss. The Omni Dallas Hotel opened 60 days early during a very slow time in our industry, yet the hotel still exceeded the financial projections.
And to what does he attribute the unexpected good news? Well, the American Library Association's visit, for one. The details below. Hotel Memo

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61 comments
Articles on ADR
Articles on ADR

 If the purchase contract includes a contingency for creating a new lease or assuming an existing lease the buyer needs to get with the landlord and arrange to be approved, by him, for the new or assumed lease. When that is done and the buyer is approved, in writing, the purchaser(s) will again be asked to sign the document releasing the lease contingency that says the buyer is satisfied with the lease arrangement with the landlord.

Articles on ADR
Articles on ADR

 

The problem is that, at least in most courts, active judicial management does not happen. Further, despite the new mandatory limitations on discovery, most judges have so far seemed to ignore them and proceed as they always have. In most courts, this means that the lawyers are left to "work it out" without substantial guidance from the court. Litigation attorneys are by training and general disposition vigorous advocates who press the positions of their clients. As a result, discovery disputes often occur, resulting in formal motions to compel and more expense.

Jersey hotels
Jersey hotels

All business are depend on the financial structure, so that create strong financial structure. In this structure do pre-planning for the used of finance and invest of finance.

tim_lebsack
tim_lebsack

When a NASCAR fan becomes mayor, we'll get ourselves a racing team.  Awesome!

Articles on ADR
Articles on ADR

 Lots of people are attracted to the field of conflict resolution. And, many are eager to find work in the field. By far the most common questions I get on my website are questions relating to how to practice professionally - most want to mediate and go into private practice. Influenced by articles like the December 29,2009 U.S News and World Report Article, "Mediator, One of the 50 Best Careers of 2010" or this Forbes, May 2009 article, "America's Most Surprising Six-Figure Jobs," which included arbitrators and mediators in the mix, people are anxious to jump onboard the conflict resolver/mediator express and cash in. However, read on to find out the pitfalls of this approach. In order to succeed in the field you have to look beyond the Mediator/Private Practice mind set. Here is why.

holman
holman

I think it's about time to call "Little Becky".  She has the answer, not only for the HQ Hotel but, I believe, she could help out the DISD too.  "Fill yer boots, man!"

http://www.youtube.com/watch?v... 

If you haven't heard this, no matter what side of the issue you are on, you'll laugh till you cry.

The Derelict
The Derelict

i am going to call it a success.  the mistress and I stayed there and she let me put it somewhere I had never been before.  carry on!

holman
holman

This one will go down in the history books, certainly in financial circles and the commercial property markets.  The hubris of the Dallas politicians.  A big load of "teachable moments" and "messages sent". (ha!)

Sam Merten should write a book.  He's the guy who first identified when the City actually knew this wasn't going to work.  He published some of the results of a previous study done by these appraisers for the City on the "effect" of a HQ hotel on the profit (or loss) of the Convention Center Bureau.

continue at a $3,000,000 annual loss if you don't build it . . . 

suffer a $12,000,000 annual loss if you do.

In hindsight, even that was a wee bit light.

Bob
Bob

It amazes me that so many people have so much to say about which they actually know so little.  Most of the comments above are based on speculations, assumptions, opinions, and fantasies, all of them beginning with clearly stated biases.  You guys have been listening to the GOP candidates debating way too much.  Next time, start with the facts, all of the facts, not just the ones you cherry pick to prove your preconceived conclusions.

holman
holman

Librarians are "what the industry dubs "smerfs," which stands for social, military, educational, religious and fraternal groups. These visitors typically pack four travelers in a hotel room and don't have corporate credit cards to blow on expensive meals."This one will hurt you:

http://www.forbes.com/forbes/2... 

look at the chart . . . 

Queen for a Day
Queen for a Day

The City made a net operating income of $554,000. Omni Hotels got paid a Management Fee of $428,000 during the same period. While on the surface, this might appear to be good news for the City, it is much, much better news if your name happens to be Bob Rowling (since Oni doesn't have a nickel in this deal). Thanks again Mayor Leppert!

Redundant Again
Redundant Again

What this all probably means is that the older existing hotels in the Dallas market got hurt during this timeframe. Remember that "great sucking sound"? Well, this time it is not the sound of jobs leaving the country.

holman
holman

Here is a nifty, ballpark method our intrepid reporters can immediately quantify (measure) the exposure to the Dallas taxpayer every time our vaunted City Hall rolls out the Net Operating earnings results for the HQ Hotel:

Property Value = Net Operating Income ÷ OAR (Overall Capitalization Rate)

The City reports $544,000 in Net Operating Income for the first three months. Annualized, that is $2,176,000. Cap (divide) that number by 6% (0.06). The 6% number is called the OAR (Overall Capitalization Rate) for Class AA existing hotel Net Income before tax and debt payments. This rate is surveyed by a number of companies including Henry S. Miller each quarter. You can go on their website or call them to get the latest cap rate for this kind of real estate investment. Purchasers of operating hotels pay a multiple of a property’s income, basically. The cap rate doesn’t vary that much year to year, but call for the latest cap for hotels in this class.

$2,176,000 divided by 0.06 equals $36,267,000. That is what the Hotel is worth in today’s market. Subtract that from the Bond Debt owed by the taxpayer ($479,821,197) and the current exposure to the Dallas citizen stands at a MINUS $443,554,197.

This is the difference between what is owed and what it will sell for in the current market.

So every time the City rolls out this “net earnings from operations” number, annualize it then cap it at the latest OAR (say, 6%) and VIOLA! . . . you have the running damage to the taxpayer. Math made easy!

As City “expectations” drive up the earnings number hopefully, the hole the size of the Grand Canyon will recede.

holman
holman

If Harlan Crow and the Anatole had hung this fraud on the Dallas taxpayer, we'd throw him UNDER the courthouse. Those who cheer-leaded this deal would be screaming for the Feds.

The annual accrued interest payable each year, according to the Bond Issue doc, is about $32 MILLION a year. That's $2.67 MILLION a month for just the interest on the debt. Every month deferred is added to the accrued but unpaid total. Anyone getting the gravity of this?

Or in City Hall parlance, that's 1,470% below expectations, in the first three months.

Jon Daniel
Jon Daniel

It is preposterous that someone with knowledge of the subject, and skill to present it, is allowed to comment here. 

holman
holman

The taxpayer should not have been put at risk, even if it was a slam-dunk.

Worse:

At the moment the City changed the instruction order (the engagement letter) to the independent third-party appraisers from an "appraisal" to a "Market Study" . . . the City knew it was not financially feasible. 

Appraisers cannot appraise a proposed property that is not financially feasible, and a Market Study was of no use to the Public (the taxpayer) since it avoids the test of feasibility (that must be contained in every appraisal). Proposed projects must be financially feasible to possess Market Value. A Market Study is nothing more than a big fat sales brochure filled with unrealistic assumptions.

On page 10-1, the first Assumption and Limiting Condition statement within the addenda of the Market Study which governs the report on this project states:

"1. This report is set forth as a market study of the proposed subject property; this is not an appraisal report."

that removed the test of feasibility requirement. That statement had to be in there to absolve the appraisers from liability.

The cost to place it into service exceeds the value of it, once completed.

I suspect the City was told this once the appraisers completed their due diligence portion, ran the projected revenue and expense numbers (NOI) over a typical holding period, and capitalized them into a value estimate.

The City knew.

dallasmay
dallasmay

I stayed in the Hotel Opening weekend. I thought it was pretty great, my wife and I had a lot of fun. I especially enjoyed the "All Dallas" theme that spotlighted local food crafts and artists. 

All in all, I think its a good thing for Dallas. I hope it is able to pay for itself, and I think it will. Though it really make competition for upscale hotels in Dallas tougher. 

(By the way, you guys do know this is a major piece of Dallas's 2020 Olympic bid, right?)

holman
holman

The taxpayer knows the feeling.

Wylie H.
Wylie H.

If you want to see another municipal financial disaster in the making, take a look at Museum Tower (which is wholly owned by Dallas Police & Fire Pension).

Bent Rims
Bent Rims

and, you included no facts.

thanks Bob!

Holman
Holman

we screwed up and read the Market Study, the Bond Issue Prospectus . . . and the City's actuals.

It is not Chinese arithmetic.

The bond interest alone sucks it into a black hole, aside from falling way short of rack rate and occupancy projections.

But the nuke on this is that those bondholders are going to have to be paid $32 MILLION a year.

and that stops the show.

holman
holman

On poorly performing hotels, the management company gets a flat fee as opposed to a percentage of the profits (performance-based management).

scottindallas
scottindallas

 not sure property value is relevant to a gov't owned building.  The building is not fee-simple owned and likely can't easily be converted.  I didn't like the way this deal was structured, and never felt the taxpayer was among the chief concerns of those involved.  I may well be that a hotel is good and needed there, I don't like the command economy aspect of this deal. 

Oak Cliff Townie
Oak Cliff Townie

 So in Simple terms how long before these chickens come home to roost ?

holman
holman

proposed properties.

Dr. Clarkus
Dr. Clarkus

Lol at "appraisers can't appraise properties that aren't financial feasible".

You sound like you know what you're talking about, but your knowledge of what appraisers do or the purpose of market studies is lacking.

scottindallas
scottindallas

 the hotel may be a good idea, but there are other ways to structure the arrangement.  The city, in my opinion should have issued a ground lease and opened the project to whomever had the best plan.  In a ground lease the city could specify many terms and conditions, and the city would still get the benefit of owning the property, and being able to get the benefit of no property taxes on the land, while the taxes on the improvements would pass to the firm/leaseholder

Queen for a Day
Queen for a Day

Yeah, Summer Olympics in Dallas? Sure, the Olympic Committee already got burned once when they held the Olympics in Atlanta in 99 degree temperatures. And, Atlanta is no match for the heat Dallas experiences. Dallas should definitely plan heavily for the Olympics, right after we see flying cows.

Guest
Guest

 I stayed in the Hotel Opening weekend

I know. I watched you through the windows from the street.

Guest
Guest

Wasnt Museum Tower another Jack Matthews project? If so, I heard Jack Matthews had an blank check with the Dallas Police and Firemen Pension Fund because of Jack's relationship with the Administrator, Richard Tettamant. 

Also, all the council members serving as Board of Trustees of the pension fund, should be an absolute conflict of interest. 

holman
holman

Too funny.  I've been following that.  Of note is that not only did that pension fund lend the money, they actually BOUGHT the proposed project on paper, cutting out the absorption phase.  Any other normal lender would have just loaned the money contingent upon (phonied up) pre-sells of the units (50% or better).

Queen for a Day
Queen for a Day

It sure will make a nice homeless shelter though, won't it?

Queen for a Day
Queen for a Day

For the three monthly periods shown on the financials, the management fee varies widely, so I doubt a "Flat Fee" is in effect. Without the Management fee, the property's NOI would have been $982,000, so Omni Hotels (Bob Rowling) has earned more than 43.5% of the available NOI for the three month period. That's astronomical!

BP
BP

Well of course, in case there are NO PROFITS! 

holman
holman

The whole idea was to get it built and eventually sell it to the private sector.

That is where the above formula comes in.  It is a running gauge of just how much of a lick the taxpayer will have to take at various points in the future.

holman
holman

when the money we borrowed to pay for the borrowed money runs out.

about 2.75 years from now.

Rich
Rich

Well then, please help us out.   If the previous poster was incorrect, please share your knowledge.  "Lol" and "your knowledge is lacking" doesn't really add much to the conversation. 

scottindallas
scottindallas

 I'm not sure any city that has hosted the Olympics benefited.  I think the debt they incur ends up crippling the cities for some time afterward.

Oak Cliff Townie
Oak Cliff Townie

 Well if just Staying in a Hotel floats you boat more power to ya ...

Wylie H.
Wylie H.

No, Museum Tower was done by John Shugrue.  Dallas Police and Fire Pension did however fund Jack Matthews' hotel project across the street from DPD HQ on South Lamar.

holman
holman

maybe so . . . but it certainly doesn't look like it's based upon some percentage of net income (after expenses) - ha!

It may be front-loaded.  That way Omni can slip out the back door if this thing becomes radioactive (only kidding).

holman
holman

One good thing; as the rack rates and occupancy increases, the expenses are already covered so each succeeding dollar falls directly to profits - geometrically increasing the overall value of the project in the private sector.

However, covering $32 million in annual debt service a big hill to climb.

scottindallas
scottindallas

 I don't dispute your point.  Though, there are different ways to arrive at value.  Replacement cost is another, as potential lease agreements.  Your method is somewhat flawed as this is a nascent enterprise, and, as you admit should ramp up.  Again, I largely agree with your conclusion, I suppose I'm simply saying we will have to wait to get a better assessment.  But, I really do appreciate your efforts here.  I wish you were as numbers driven in regards to the death penalty.

Formula One
Formula One

Don't forget to add Jeanne "frown face" Chipperfield to the guilty party list. Texas Cannibus University Business School graduate. Enough said.

BP
BP

OK, I will reserve judgment on Rawlings regarding the Hotel, but he has enough baggage on other issues that link him to these other "birds." You know, "birds of a feather, flock together." 

holman
holman

I'd let Rawlings off the hook.  Just listening to him on this subject, he knows.  And he's after the fact.

BP
BP

So that is when the real bleeding begins, 2.75 years from now................and this is all window dressing by City Hall to cover the real truth.............................all we can say is "par for the course" when it comes to Suhm, Zavitkovsky, Jordon, Council and Pizza Mike................although we know the real rich white beneficiaries of the Hotel are Bob Rowling, Jack Matthews and "The Lepper", also known Tom Leppert...........

holman
holman

The critical test of financial feasibility is within the Highest and Best Use Analysis, which is the heart of any appraisal of proposed commercial property. 

The appraisers the taxpayer retained refused to say it was feasible, so the City ordered they change the focus of the process to a "market study", which avoids the critical test of feasibility.  Right here is what the taxpayer/voter had to know and it is precisely what the City covered up.

This is what I am talking about - the City knew the project was going to be a "Public Works" loser the moment the appraisers told them it would not pay for itself.

That would have been okay if they would have told the voting taxpayer before the bond election so the voter could make an informed decision.   However, the City continued to sell it as a money maker.  81,000 voted.  There were 2,000 more who voted it in.  That means it would have taken only a little over 1,000 to vote this thing down, and would have, had we not been misled. 

The Bond Issue was also sold as a money-maker with the taxpayer underwriting the debt, but that is not what this is, and the City knew it.

It appears some in the City conspired with others to defraud the Dallas citizen and the Bond purchaser.

scottindallas
scottindallas

 appraisers often do market studies to test for the needs of certain markets.  Also, a highest and best use analysis is another study they'd likely include.  I don't know how they could've done a feasibility study on a non-existent/nascent enterprise.  But, in seeking demand, the best use of the land for a hotel are indeed the balliwick of an appraiser.

dallasmay
dallasmay

Yeah, that was pretty funny the way I acted like I was going to jump from the 18th floor. You should have seen the faces of the security guards and staff when they were trying to talk me into coming back into the room. Priceless!

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