Citizens Oak Ridge

Comments Regarding: Subsidy by City of Oak Ridge to Crestpointe Development on Pine Ridge

Comments by Bill Schramm 109 Darwin Lane, Oak Ridge, TN 37830
revised: March 22, 2007

Regarding: Subsidy by City of Oak Ridge to Crestpointe Development on Pine Ridge
Overview: City officials should provide citizens with critical, even-handed analysis of proposal. To
date, City has been too involved in promotion, insufficiently involved in critical analysis.

Major Concerns:

  1. City’s attempt to rush a decision on subsidy question (slowed by citizen action requiring a referendum)
  2. Quality of debate so far => discussion as framed by public officials has been based upon:
    • False choices and Bad information  

FALSE CHOICE  #1

Accelerated timetable needed - City Council had to vote transfer of funds to IDB by March 19. 

Why?

  1. because the option that GBT, the developer, has for the purchase of the property expires shortly

    City initially indicated that a rapid decision was essential because Target only made choices on new
    locations each Spring => once citizen’s petition required a referendum and upset this timetable,
    this premise was proven false
    - at the March 19 City Council meeting, GBT’s representative made it clear that a referendum
    would not derail GBT’s plans
    - it now appears that Target makes location decisions more than once a year (GBT rep said 3 times/yr)
    - information previously provided to the community appears to have been misleading
  1. because the option that GBT, the developer, has for the purchase of the property expires shortly
    Lets look at this:
    - this land has been sitting unused for 5 years since the top off the hill was blown off
    - it is reasonable to assume that the cost of this action was high and it has provided virtually no
    return (except for the document storage building on a small portion of the property) since then
    - thus, we probably have a motivated seller
    - does anyone seriously believe that if the option for purchase expires, GBT can't get another?
    - this is not credible

FALSE CHOICE  #2

 It is now or never for Target => if we don’t get one now our chance is gone. This is False => but why?

two problems:

  • Target involvement is not presently guaranteed- City’s communications have effectively convinced
    the community that Target is ours for the asking. This is not the case and it is misleading.

    • Deputy City Manager indicated to the lunchtime Rotary Club that the developer, GBT, was
      attempting to get into a pool of about 40 projects to be considered by Target this Spring
    • Target would chose to participate in 10 to 15 of these 40 projects (i.e., not a sure thing)
    • subsidy by the City is to a developer, who promises to try and get Target as an anchor

  • Target Corporation does not care about Crestpointe development (or any particular development)

    • Target Corporation does appear to care about the potential of the market in Oak Ridge
    • GBT representative noted on March 19 that Target remains interested in the Oak Ridge market
      even with a delay associated with the referendum
    • if the market in Oak Ridge, justifies investment by Target, then Target will find a way to come
      without public investment
    • if the market in Oak Ridge does not justify investment by Target, then subsidizing the developer of
      Crestpointe is not going to make the difference
    • Thus, the real question that Oak Ridge faces may well be:
      • Should we pay $10.5 million to have a development (one that the City clearly wants to include
        a Target) open up in 2009 rather than 18 – 36 months later?

FALSE CHOICE  #3

This is the only possible site for a Target (or similar store) in Oak Ridge   => FALSE

  • by asking for a subsidy, the developer is telling us that the Pine Ridge site is not an appropriate site
    why? because it cannot be profitably developed => this indicates one of two possible problems:
      1. developer is paying too much for an unsuitable site
        • City sold Pine Ridge land for $2,300 per acre about 7 years ago ($2,300 x ~79 ac = $181,700)
          and there are indications that the price the developer will pay for the same land is
          $70,000 per acre ($70,000 x ~70 ac = $4,900,000)
        • City says that its money will not be spent to acquire the land, but when you throw your
          money in a big pot with other funds – its hard to say whose money goes for what
        • is this a bailout of the current failed Pine Ridge development?
          • the City says the site is topographically challenging => the market method of making an
            unattractive site more appealing is to cut the price
          • City’s subsidy allows owner to avoid facing this dilemma

      1. the development plan (lowering the site to one level) is too expensive
        - the market is telling us that there is a problem - we should listen         
    • further, developers are creative, if the market supports such investment -other sites will be found

      example 1: a proposal by Bob Monday has been put forward for land off of Illinois Avenue
      • the current Monday proposal greatl limits impacts to wetlands and would provide
        visibility of store from Illinois Ave. (something that it appears is important to Target)
      • Pine Ridge site would not offer store visibility from the developments access point
      • City officials have downplayed this proposal
      • it deserves serious financial review as it may achieve the City’s goals (as opposed to
        GBT’s goals) at lower cost and with less risk


      • Example 2: there is nothing stopping a developer and the City from talking to Wal-Mart about
      voluntarily relinguishing some restrictive easements on the Mall

      • Wal-Mart may not want competition next door, but neither does it want a blighted area next door
      • ome say Wal-Mart will never let go of the restrictive easements on the Mall
      • unless you try, you don’t know: Has anyone from the City asked Wal-Mart to release some of its
        restrictive easements?

    BAD INFORMATION

    1.   The developer, GBT, told the Oak Ridge City Council that it hates to ask communities for financial
    contributions

    • the City of Spring Hill to contribute financially to a development that GBT has in that community. 
    • So, while GBT hates to ask for money, they are willing to overcome their distaste regarding asking for handouts, if it increases their return on investment

    2.   The developer, GBT, told the Oak Ridge City Council that communities often contribute financially to developments like Crestpointe.

    • In the same Dec. 27, 2006 article, the Tennessean noted that Spring Hill Alderman Eliot Mitchell asked Craig Cole of GBT whether other communities had contributed to GBT developments.
      The response by Mr. Cole was no.
    • The article also notes that in spite of the fact that the Spring Hill Board Members refused the GBT request for money, the construction will apparently go on as scheduled

    3.  Discussions assume that the developer will actually build, what is proposed.

    • The Nashville Business Journal notes in an article dated Nov. 10, 2003, that GBT was downsizing a development planned for the intersection of Old Hickory Boulevard and Franklin Pike Circle in Nashville. GBT had previously received approval for a 450,000 square foot development, but was now seeking approval for a 188,000 square foot development. The article noted that this occurred because GBT had rethought its strategy.
    • GBT has every right to rethink its plans for a development or management of a property
    • City has proposed safeguards intended to ensure that proposed development meets City expectations
      • concern => the safeguards may be toothless once the City has paid its share of funds to GBT
      • safeguards may help during construction, but they can’t keep property leased and, thus, profitable
      • assume that project is built without a hitch, the City accepts construction work and eventually the IDB transfers funds committed by the City. Then assume that 3 years after the transfer, the development owner (which may or may not still be GBT) fails to maintain the required 350,000 sq.ft. that are to be leased to “new” retailers or Target decides to exit the Oak Ridge market
      • at this point, other than suing someone, what recourse does the City have?

    4.  The numbers for retail sales resulting from the proposed development (City’s Jan. 29 presentation) may or may not be reliable. It is not possible to judge. These estimates are central to the conclusion by the City that the project is financially beneficial. The retail sales estimates, however, provide no context on which to base their validity and are not adjusted based upon local experience.

    • There is no comparison of anticipated sales per sq. ft. to of other area developments
    • How do these numbers compare to: 
      • Wal-Mart, K-Mart, Home Depot in Oak Ridge and the Oak Ridge Downtown Mall
      • developments in Knoxville draw from a much more dense market => result is higher sales volume/ft2
      • if the sales estimates for Crestpointe look too much like those of West Town Mall, Turkey Creek and the Peter’s Road developments, it is a good sign that something is wrong with the numbers

    5.   The estimates of the financial gains from the development, are flawed as the City fails to consider:

    • the cost of providing city services for the development (police, fire protection), and
    • fails to specify the assumptions (which are critical) that underlie estimates regarding the portion of sales at the new development that will be cannibalized from existing local retail

     Other numbers in the January 29 presentation by the City are suspect:

    • Ex: Site preparation costs do not include the large cost of extending Boeing Road. City officials
      indicated at March 19 Council meeting that this cost would be borne solely by GBT. This is,
      however, the type of expenditure municipalities are often asked to make.
      There is no draft contract as yet between the City and GBT clearly defining these responsilities.

    6.   it is just as likely (perhaps more likely) that development of a retail center away from Downtown will mean that hopes of successfully redeveloping the Oak Ridge downtown area are impaired. 

    • it is just as likely (perhaps more likely) that development of a retail center away from Downtown will mean that hopes of successfully redeveloping the Oak Ridge downtown area are impaired.
    • failure to effectively re-energize the downtown area could lead to the loss of the major retailers and small retailers that are there now with a consequent loss of tax revenue
    • analysis by the City does not incorporate this potential risk

    7. Shortcomings in the City analysis make the claim that the project is low risk, highly suspect

    • one only needs to look at the Oak Ridge Mall to know that retail development is not without risk
    • the City has not explicitly recognized a number of risks normally considered in a project analysis and has not presented a sensitivity analysis (“what if” analysis) related to these risks
      • example: the City assumes an interest rate of 5% on the bonds that it plans to issue => what if
        the interest rate is 6% to 7% or 3% to 4% at the time the bonds are issued
      • this type of analysis is an essential part of any meaningful review. It has not been presented.
      • the Deputy City Manager indicated at the March 19 Council meeting that he considered the 5%
        interest rate estimate a “worse case” scenario
      • few economists would rule out the possibility of higher interest rates in 2008 and 2009
    • without considering interest payments on borrowed funds, which bring the total cost to between $16 and $17 million, the City proposes to spend $382 for every man, woman and child in Oak Ridge ($10,500,000/27,500) to get a shopping center
    • one City official indicated that the worst case (a failed project that leaves the citizens of Oak Ridge responsible for repayment of borrowed funds) was an “impossible” scenario
      -if the scenario was impossible, the GBT would have no trouble raising these funds privately
    • most significant statement on risk has been made by the Deputy City Manager in a letter transferring the bond resolution to the City Manager. Mr. Jenkins states, “It should be noted that the bonds and/or loans are general obligations of the City and will be supported by other City revenues if the project related revenues are insufficient.”
    • the estimate of net benefits by the City is almost certainly an overestimate (see #5 above)
    • even with benefits overestimated and costs underestimated, City’s most likely return is 6%
      - this is a poor rate of return given the risk level
    • higher risks demand higher rates of return, and the return on investment for the City is not adequate compensation for the risk that the City is being asked to undertake
    • the City can get a 6% rate of return many places with much lower risk
    • City is being asked to shoulder $10.5 million out of a proposed total development cost of $65 million
      - in other words, the City will pay 16.2% of the total cost of the project
    • City funding is a bad idea, but if City does support the project, it should demand a 16.2% equity stake
    • The Industrial Development Board (IDB) has the authority to issue bonds
    • IDB bonds would not put the taxpayers of Oak Ridge at risk unless the City Council explicitly obligates itself on the IDB bonds (which the City should not do)
    • If the project proceeds, funds should be provided by IDB bonds without obligating the City

    8.   The City states that no tax abatements will be provided for the retail in the Pine Ridge development.

    • Oak Ridge does give tax abatements for other retail currently => this is bad practice
    • other Cities sometimes give tax abatements when the location of a facility influences base employment that is, when the jobs brought in create an economic multiplier effect
      • example: the employment associated with locating a manufacturing or research facility will
        cause an increase in spin-off activity and employment in other sectors such as retail

    • retail development and jobs from retail are not subject to a multiplier effect
      There is no economic basis for paying to bring spin-off jobs to a community
    • the base economy will either support the spin-off activities or they will fail
      Oak Ridge should stop its current policy of giving tax abatements as incentives for retail

    • at the Feb. 5, 2007 public meeting, the City Manager stated that such incentives are a “fact of life”
    • the January 29 presentation by the City indicates that if the Pine Ridge project goes through, City staff will recommend an end to automatic commercial incentives by the City => this proposal is inconsistent with City Manager’s Feb. 5 statement and should be explained.                                                     

    9.   A contribution by the City sets a terrible precedent

    • When Spring Hill considered a similar request for money from GBT, the City Administrator warned the Alderman of Spring Hill, “I think that you are entering into a precedent-setting position, that could be brought back before you many, many times” (Tennessean, Dec. 27, 2006).
    • If the City contributes to this project, it is virtually certain that future projects will be presented to the City as follows: “we really want to do this, but we just can’t make it work without your help”

    10. The proposed project requires significant blasting. City fails to note that previous blasting on Pine Ridge caused large losses for nearby businesses and is likely to cause problems again. 

    11. The City fails to address the future costs that may be associated with construction on inadequately compacted fill. Even if buildings manage to avoid fill areas (which are in many places in excess of 60 feet thick), parking lots in a development will experience significant subsidence problems for years to come. If buildings fail to avoid major fill areas (or fail to adopt construction techniques needed to account for future compaction of fill - techniques that are much more expensive), Oak Ridge could in the future be looking at problems that will make Mono Lane seem trivial in scale.

    12. If this project does not proceed => someone will eventually find a use for Pine Ridge. 

    • a future use may not require changing the ridge from its present two-tier configuration to the one-tier platform proposed for Crestpointe. This would greatly reduce blasting and site preparation costs
    • in other words, other designs may be put forward with lower cost structures that, therefore, offer reasonable economic returns to investors without the commitment of City funds.

                                                                                                                                                                                  

    The Role of the City

    For the City, support of this project means throwing good money after bad:

    • project violates basic rules of business => sunk costs should play no role in current decisions
    • the sale of Pine Ridge land by the City occurred by means that avoided a competitive bidding
    • the land was sold below market value (an implicit subsidy of more than $1 million)
    • although the IDB/City had an appraisal of dubious quality performed
    • the reason for a non-competitive sale => unclear but action was contrary to the City Charter
    • the Council erred regarding the initial Pine Ridge action
    • now it appears that the City is going to try and make it right by throwing more money at

    The City has a terrible track record in trying to buy jobs and development through City deals.

    • the petition drive was successful in large part because the City has lost its credibility on land deals
    • actions such as the Pine Ridge land deal, the Centennial Golf Course and others should by now cause the City to question its ability to successfully pick winners.
    • the analysis and negotiation practices of the City when considering public financing of private
      development need to be reevaluated

    Government is a very poor source of capital for private business

    • it should raise red flags for Council when a development firm indicates that it cannot make a good case for its project funding in the financial markets => by requesting a subsidy, GBT is stating that it can’t convince the private markets of the wisdom of its proposal (these markets are far more sophisticated in evaluating such investments than is the City of Oak Ridge)

    In the past, the City has failed in its development negotiations to protect the City’s interests

    • the City has shown itself far too preferential toward the developer’s interests.
    • this is not the City’s strong suit and the City should avoid such situations