Lafayette Yard on Life Support

Despite the headline on today’s Trentonian article by David Foster, Trenton’s Municipally-owned hotel, flagged as a Marriott until June, has not been “saved.” The Times piece by Erin Duffy has the bare fact of the vote taken last night: “Trenton City Council agrees to give Marriott $295K.”

That’s about the size of it. Trenton is broke, and facing new gaps in funding over the next fiscal year measured in the Millions of Dollars upon facing the expiration of some of the state Payments in Lieu of Taxes (PILOTS) the city has been receiving for years. But Council still believes we have enough discretionary funds to spend a couple of hundred grand to keep the Lafayette Yard Hotel’s doors open for a few more months. The vote to grant the funds last night was 4-3 in favor. Had the vote gone the other way, the hotel today would probably be preparing to shut its doors and suspend operations.

As it is, that prospect may have only been postponed until June. Because the underlying business fundamentals of the hotel are not likely to change in the next three months. That is for sure. One of the biggest factors in the hotel’s lack of success to date – the commercial environment of Trenton’s downtown – is not going to improve. Indeed, with the prospect of significant new vacancies in nearby office buildings such as the impending emptying-out of 1 West State Street, the situation will if anything get worse.

So what may change over the next three months? Well, I expect City Council, and the public, to take a much closer and much more critical look at the proposals on the table for Lafayette Yard’s future. That includes the proposal from the Marshall hotel group to take over the hotel’s management; a plan to re-brand the place as a Wyndham Hotel; more accurate cost estimates (currently standing at $3 Million Dollars) for renovating the building; and – I hope – thorough examination of the financial prospects for the hotel.

Let’s start with that last item first. To bolster the case to keep the hotel going, the hotel’s current management, the Waterford Group, prepared a 5-Year Forecast of Revenues and Expenses, which can be found here.

Take a look. At first glance, this is a very encouraging projection. It forecasts five years of positive, and increasing profits, starting at $293,229 in 2013, and building to $1,029,445 in 2017. Fairly impressive, one would think.

But, how likely is this? A forecast for a profit this year of $300,000 seems awfully aggressive, considering that the results for the month of January alone showed a net loss of nearly $133,000. Add to this the tremendous dislocations and loss of sales momentum – translating to loss of sales – that would surely be experienced as one management and brand winds down and another starts up, and the projection for 2013 looks highly unlikely.

Let’s keep going, looking at 2014 next. From this year on, all the numbers in this rosy forecast follow from one key assumption: that Room Revenues from 2013 to 2014 will rise by a whopping 25 percent, from $3, 353,626 this year to a hefty $4,187,747 next; with more moderate, but still significant, increases for the next three years.

How can this be possible, you ask? Look at the bottom left hand corner of this page. “Projections are based on a renovated hotel,” we read. So that is the secret of the success that we can expect? Renovations? If We Build It, They Will Come? This seems to me to be an extremely weak basis on which to build highly optimistic budget projections.

Let’s go back to another document prepared recently by the Waterford Group. Last month, dated February 4, Waterford delivered to City Council a Historical Financial Review, a narrative description explaining the Hotel’s poor financial performance over the last few years. I have already quoted from this document a few times, but I will do so again because its conclusions about the past are highly relevant to discussing the future of the hotel.

According to the very same people who project significantly improved revenues – 25 percent! In One Year!! Because of Renovations!!! – the reasons the hotel has failed up until now are largely due to the hotel’s “market weaknesses in Trenton.”  And I quote:

• No large businesses in Trenton
• The city lacked the socio-economic diversity to realize revenues
• Negative press – front page reporting of violence and crimes that are a deterrent for people to come into Trenton.

I suggest that these factors are far more critical to the future success or failure of the hotel than property renovations. Given the extremely remote possibility of major improvements to these “market weaknesses” over the next five years, it is much more likely to me that the future of the hotel will be continued failure than dramatic improvement and success, I am sorry to say.

This weakness in the underlying assumptions of Waterford’s 5-year plan leads me to dismiss these projections as being unrealistic and overly aggressive. I would like to see a fresh set of projections and plans from a neutral, disinterested party that can dispassionately project more accurate numbers for the next five years.

Now that Council has spent another $300K to keep the hotel on life support until June, we now have a window of time to closely examine the proposals on the table, and to discuss the pros and cons of continuing to be a city in the hotel business, by the numbers.

We also have an opportunity to achieve some changes in the hotel’s governance. Yesterday, the chairman of the Lafayette Yard Community Development Corporation (LYCDC), Cleve Christie, resigned his position on the Hotel’s Board in the immediate aftermath of allegations of conflict of interest, but also after weeks of criticism that his Board had kept secret from Council the deteriorating financial condition of the hotel that led to last night’s request for the $295,000 in the first place.

I am glad to see Mr. Christie go, and would now urge the remaining members of the Board to tender their resignations so that the City – this time with the advice and consent of Council, which has been negligently ignored up until now – may reconstitute the Board as a more responsible body. Even if a decision to close the hotel is made in the next few months, there will be enough for the Board to do to unwind Lafayette Yard’s many and various obligations for the next year or so, I’d guess.

There will be activity in the near future on other hotel-related areas as well. Last night Business Administrator Sam Hutchinson told Council that the city had heard from one party interested in discussing the outright purchase of the hotel, which would certainly be a most welcome development.

And according to Erin Duffy’s piece in the Times, “There’s also an upcoming meeting with the state to discuss having the state and/or county share some financial responsibility for the hotel.”

That should be a very short meeting.

To Be Continued…