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Will the WCC hotel compete against private hotels?

WCC’s master plan calls for the construction of a hotel and conference center. According to Trustee Richard Landau, he prefers to have the College build and own the building and allow a hotelier to manage the operation.

This is an interesting model, largely because it mirrors the one WCC used for the Health and Fitness Center. The taxpayers should pay special attention here, because this model hasn’t worked out well for us. In the 12 years the HFC has been in operation, it has not yet broken even, despite the Trustees’ seemingly empty requirement that it do so.

It’s also interesting because it puts WCC squarely in competition with local hoteliers who already struggle to fill rooms. Perhaps you’ve noticed that several new hotels have opened in Ann Arbor in the past few years. The area saw a peak occupancy in 2014 – which was slightly less than 70%.

The “Field of Dreams” approach to hotel construction won’t work. If you build it, guests won’t necessarily come. In fact, it’s a good bet that the average occupancy rate for the entire area will actually drop.

One hotelier gets to compete against other hotel chains in the area, in a building it does not have to finance, maintain or pay taxes on. Hotels have horrendous maintenance and utility costs. They’re huge energy-wasters, and they have to be rehabbed about every five years. So, having someone else pay for the maintenance will be good for the one hotelier who gets to run the building. It will be terrible for all the other hotel chains that don’t have taxpayer-paid financing and maintenance, and who actually have to pay taxes on their buildings.

It doesn’t sound like much of a competition, does it?

The payoff on a WCC hotel is infinitely long.

I did an analysis of how much a 100-room hotel would cost and how long it would take to pay off. The analysis is based on certain assumptions, but I think the assumptions I made are reasonably fair ones.

Naturally, the results weren’t pretty. The payoff period was 100 years. (Not kidding.) That doesn’t even include the cost of the 10-20 major rehabs the WCC hotel would undergo in that time frame.

There is zero possibility that a WCC hotel could ever pay for itself in its lifetime, much less generate revenue.

The margins in the hotel industry range from slim to none. Sometimes, they’re negative. In periods of economic expansion, a mid-range hotel might turn a profit of 5%, based on a relatively high average occupancy rate throughout the year. During flat or declining periods, the net on a hotel may drop to 0%, if it doesn’t go negative. In other words, a hotel cannot always pay for itself, no matter how well-managed it is. It is highly susceptible to market forces.

When the WCC hotel isn’t paying for itself, the taxpayer will be paying for it. If the operator decides that it can’t make the WCC hotel work, it will vacate at the first available opportunity. That will leave WCC with an empty hotel building that it can either raze, sell, self-manage or convince another operator to try. Lather, rinse, repeat.

The local market isn’t showing demand for hotel space

The decision to build a WCC hotel has to be based on more than the desire to have one nearby. It has to be based on the realistic demand for services in the area. The Economic Outlook for Washtenaw County 2019-2021 gives more detail on the hospitality sector for the county.

“Employment at local hotels and other lodging places jumped by 104 jobs in 2016 and 143 jobs in 2017 as some new hotels opened but declined by 21 jobs in 2018. We expect employment at local lodging places to decline slowly over the next three years for a total loss of 22 jobs.”

Existing hotels are contracting. They’re either actively reducing their labor force, or they’re not replacing workers they lose unless they have to. If the hotels were running hot here, these employers would be adding jobs. They’re not.

The jobs at hotels aren’t high-wage jobs, either. People with low educational attainment typically fill these jobs. Kind of ironic, isn’t it? WCC wants to build a hotel that will employ the people that the College should be recruiting as students.

How does this failure of public policy even occur?

The HFC model didn’t work, so let’s not keep using it

WCC borrowed money to build the HFC, and now must increase membership to pay the building’s scheduled debt through 2027. It also needs money to pay the enormous repair costs the HFC now incurs. As an example, the College recently spent $300,000 to repair leaks in one of the HFC’s three hot tubs. The VP of Finance warned in July that the College would need to spend similar amounts to rehabilitate the building’s other two hot tubs.

If you’re counting, that’s nearly $1M of your tax dollars for three hot tubs. You probably renewed WCC’s millage request in 2016, thinking that they would use the money for education. (Look at it this way: WCC has now educated you on the cost to repair a commercial hot tub.)

Increasing HFC membership is actually a poor strategy. While it might increase revenue, it also increases the HFC’s rate of deterioration. The HFC was originally designed to support 6,000 subscribers. The building now has more than 7,000 subscribers and still can’t take care of itself.

A WCC hotel isn’t going to fare any better, and taxpayers should bring this plan to an immediate full stop. WCC should not use dollars that voters approved for education to build and mismanage a hotel. The College needs to spend our tax dollars on educating county residents. Speaking firmly at the ballot box is the best way to get the Trustees’ complete and undivided attention.

Do not give WCC more money for extraordinarily expensive and unnecessary revenue-generating schemes that are destined to fail. The College is, after all, a college. It is supposed to educate people. The people already provide adequate tax revenues for that purpose.

If the WCC administration no longer believes in the public benefit of educating Washtenaw County residents, they’re welcome to resign.

Photo Credit: Runar Pedersen Holkestad, via Flickr