Letter to the Editor: Ocean City Government At Its Worst

The Ocean City marina deal proposed by the administration, documented by City Solicitor Dorothy McCrosson and approved by City Council was a terrible display of government in terms of process and substance.

 
Process

1. At the "public forum" held at the Bayside Center on the Monday night (June 25) before the vote on Thursday (June 28), Director of Community Services Jim Mallon, on behalf of the city, did not have the five-year projections for marina costs and revenue. How do you have a legitimate meeting without the numbers?   
2. Council did not receive the actual documentation until the Tuesday (June 26) before the City Council vote.
3. The deal is a 10-year term with three five-year options — where was a sensitivity analysis of the projections beyond the five years publicly presented on the part of the administration or council's request for same.  No serious or competent organization enters into a deal for 10 years with three five-year options without a sensitivity analysis of better, or worse, or expected projections for revenue or expenses over the entire term. All we heard was McCrosson comment these are projections (only for the first five years). That is kindergarten stuff. An embarrassment. Incompetence.
4. Councilman Keith Hartzell asked McCrosson or believed the written documentation represented the deal as previously discussed.  How could that be? Nowhere in two written agreements is it specified the operator will invest $1.5 million (and nowhere is a breakdown of the $1.5 million specified). This is a construction project. How many construction loans as a bank counsel has McCrosson documented where there is no amount specified? In this case, it's either incompetence or willful misconduct. If McCrosson can't protect the city any better than this, she should resign.  This brings back memories of the ipe contract that did not properly protect the city.
5. The projections were not available to the public until after the council vote. Talk about disrespecting the public. 

The Deal

As previously mentioned, the deal (10-year term and three five-year options) has two revenue streams to the operator, Ocean City Marina LLC:  1) $135,000 paid by the city every year, original term and and all option periods, and 2) the operator collects all rents from which the operator first pays itself all operating expenses including a $15,000 management fee, then pays the city $135,000, and then keeps all the revenue once the city recoups its $135,000. Hence, the label "revenue neutral" — the primary selling point of the deal.

Discussion

The operator will go to a bank and borrow $1.5 million (we hope) and will repay the $1.5 million over 13 to 15 years with the $135,000 (1/12th paid every month) and $15,000 management fee. Do the math. Prime at 3.25 percent. I borrow at 4 percent fixed for five years. With an Ocean City lease, also assume 4 percent or better for the first five years — 4 percent on $1.5 million is $60,000 in interest which leaves $90,000 for principal paydown. Obviously, on less principal balance every year the interest will be less and the principal paydown will be more.

What happens to the $135,000 from years 15 through 25? It gets paid although the loan has been retired. That alone for a long-term investor is a good enough reason to do the deal. Granted $135,000 may be worth less in years 15 through 25 in present value dollars, but it is real money and the long-term investor willl have no money at risk. 

However, the second revenue stream is available to the operator and a chance for Ocean City to recoup its $135,000 it pays out per the above.  Let's suppose, revenue generated is only equal to the operating expenses, then Ocean City gets no money back. On the the next $135,000 of net income, meaning after payment of operating expenses first, the city will get paid back. Above revenue of operating expenses and $135,000, Ocean City Marina keeps the rest. I think this is the most likely scenario.

Why?

There will be no more boat slips in Ocean City due to the impossibility of getting permits.  When you have no more supply, prices usually go up and usually dramatically over a long period of time. Simple economics for those who care.  What was the price of a ticket at Wonderland Pier, Mayor (Jay) Gillian, 25 years ago? 10 cents or 20 cents? What is the price today? A dollar.  What was the price of a half pound of roast beef 25 years ago, Councilman (Scott) Ping and the price today?  

Lastly, the city just bought this location for $3 million a few years ago. Where does the city or state Green Acres funds get compensated for the $3 million?  The operator doesn't even pay real estate taxes or compensate for the use of the waterfront location. Mr. Gillian, it is like the city buying Wonderland for $10 or $20 million, figuring out a private operator could run the rides better than the city and having the operator replace the rides only and not have to pay for the fabulous location on the boardwalk.  In fact, the City of Ocean City is responsible for the parking area in the marina deal. 

In sum, the operator has no downside because of the $135,000 paid every year and the possibility of all the upside.  If you protect someone's downside, you don't give away the upside.  Ocean City government gave away a $3 million gem in a sweetheart deal. Ocean City government should have had at the very least a trigger or mechanism in the agreement to stop the $135,000 once the operator repaid its bank loan and/or slip revenues exceeded a certain dollar amount in the out years. The revenue neutral bar on how the deal was "sold" was too low and not adquately looked at.

One last item: It was comical and sad to hear the public talk about moving the shower building, which will be 15 feet high, to the north side or middle of the property from its current intended location of on the south side of the property. Boat lifts are set 2 to 3 ft above high tide. A 35-foot boat with a flying bridge is at least 15 ft high. So much for your view of the bay during the season.            

The last council meeting was in part a tribute to three retiring council people. What a lovefest? Drown yourself Ocean City government in self-appreciation while you give away our jewels. There was no serious or competent public discussion of this transaction that will last 25 years. Those who profess to love our city should try to protect it and respect it. Where is the decency to have a fair and open discussion with facts and figures in final form?

Actions speak louder than words.

Michael Hinchman
Ocean City