Downtown Metamorphosis

Downtown Development Chicken and Eggs

An audience of 1,000 or more sat bedazzled at the Tennessee Theatre as developer Ron Watkins narrated a stunning visual display of Worsham Watkins International's $440 million downtown development plan.

From a glass-encased, 140,000 square foot mall traversing Henley Street, to a Gotham City-like 33-story spired office tower, to a vibrant, festive Market Square, the renderings were all imposing, and so was Watkins' polished portrayal of the "dramatic transformations of the areas within our downtown" encompassed by the plan.

Yet aside from naming Marriott as the operator of a new 415-room hotel that would adjoin the office tower, not a single tenant was identified for any of the massive project's 3.3 million square feet of new commercial and residential space. Nor does Worsham Watkins intend to make any such announcements until after its development plans are approved by the city of Knoxville.

But wait—the plans include a $130 million investment by the city in four new parking garages, the mall traversing Henley Street, an opulent greenhouse and other public improvements...all in the name of underpinning a $300 million private investment in the project. The private investment is supposed to generate upwards of $11 million in incremental city revenues (mostly sales taxes), enough to cover debt service on the $130 million public sector outlay. But how can the mayor and city council justify incurring $130 million in debt for which taxpayers will be obligated until public officials know for sure that "destination attraction" and cineplex operators as well as the retailers and restaurateurs envisioned are committed in order to make the revenue projections realistic? Conversely, how can Worsham Watkins be expected to get these lease commitments it needs in order to raise the $300 million until the city's commitment to building the garages and other supporting infrastructures is assured?

These are just the biggest of the chicken-and-egg questions that overhang the massive undertaking at this point. But other obstacles to its going forward also loom. For example, Worsham Watkins is insistent that it must control all of the property on Market Square in order to "redevelop it in total." This can only be accomplished by acquiring all the property from its multiplicity of owners or by imposing mall-like, restrictive covenants on its use. But resistance can be expected from some owners, especially those who've recently sunk substantial sums into residential renovations on the square.

Can these and other issues be resolved or is the two-year collaboration between Worsham Watkins and the Public Building Authority that led up to last week's proposal destined to founder?

Conditional Show and Tell

To a long-time developer like Watkins, it's so obvious why he can't divulge the names of prospective tenants at this point that he's almost querulous when a journalist requests an explanation. "Tenants that are planning to come to Knoxville are giving us intentions that they would like to be a part of the project. If all their names are divulged I'm sure a lot of people will be contacting them...and wanting to participate with them...and that's just not appropriate," he says. "That's why we've tried to make it clear that until we have an agreement with the PBA and the city it's hard for us to go much further."

The PBA's administrator, Dale Smith, sympathizes with Watkins' concerns. A poker player himself, Smith uses a poker analogy to convey them. "If Worsham Watkins put all their cards face up on the table, in three or four weeks I could go out and bring in three or four competing developers, and somebody could steal a years' worth of work on their part," he explains.

That year's worth of work—actually it was closer to two years—was performed under an exclusive arrangement with PBA that evolved out of a competitive selection process under which PBA picked Worsham Watkins from among five applicants in the fall of 1998. Initially, the firm acted as a development consultant for a $250,000 fee, working in conjunction with economic feasibility consultants, architects, and others whom PBA paid fees totaling $1.1 million. When PBA's board of directors approved a development concept plan in March, Worsham Watkins had a 90-day exclusive to carry it out, and the firm's June 28 proposal consummated that at a cost that Watkins places at more than $2 million.

From now on, though, there's nothing to preclude any other developer from trying to get in on the action. Is it open season? "Nobody sitting here today can say that wouldn't be an option," says Smith, "but we have to very seriously look at the pros and cons. If we open it up to big players out of Atlanta or Boston, it might take 24 months to get solid proposals, and we'd be running a very high risk of losing Worsham Watkins and ending up with nothing."

To overcome the chicken-and-egg problems, Smith envisions a process whereby any PBA recommendation or city approval of public outlays would be conditioned upon a set of Worsham Watkins performance standards. "Before the city acquires a piece of land and starts making improvements, such as a garage, we would have to see that Worsham Watkins' financing is in place and the pre-leasing of a certain amount of space."

In the legalese of its formal submission to the PBA and the city, Worsham Watkins appears to have a similar contemplation. Included in the proposed terms of an agreement with the city of Knoxville (COK) is a provision that, "Since plans are still under active formulation by both parties, and commitments from third parties are a critical part of any final commitment by either party...then both parties agree that tentative, conditional commitments from everyone will have to be simultaneously confirmed when COK/PBA and WWI reach a definitive agreement."

Watkins spurns a piecemeal approach to approval of the proposed development. "From our point of view the commitment by the city will have to be total, and the commitment by the developer will have to be total...We do not have any interest in going forward on a partial project, and I'm sure the city doesn't have any interest in going forward on a partial project."

Even so, it's hard to imagine the city approving anything until certain linchpin commitments are in place on which many other tenant lease and financing arrangements may be dependent. These include agreements with the operator of the 10-screen cineplex that's proposed and, most critically of all, with Scripps Cable's Home and Garden Television Network for a "destination attraction" to go in the city's existing exhibition center.

Lots of national publicity about cinema operators curbing expansion because of "overscreening" was recently manifest locally when Muvico Theaters canceled plans for a cineplex in West Knoxville's Turkey Creek development. While Worsham Watkins makes a good case that a downtown cineplex with "free" parking should draw well from the south and north as well as the UT campus, Watkins acknowledges that, "All the cinema operators in the country at the moment are stressed, but that will work out in the next couple of years." In the meantime, he says, "We have had meaningful dialogue with almost all of the cinema operators in the country, but we have not made a final decision."

While Watkins won't acknowledge it, there was clearly disappointment and perhaps even surprise that Scripps/HGTV wasn't prepared to commit in time for the June 28 presentation. Indeed, HGTV's name appears in several places in accompanying submissions to PBA. But as HGTV's chief financial officer, Jim Clayton, quipped in a recent talk to a downtown civic club, "Scripps' board of directors moves two notches slower than the federal government."

Auspicious or Audacious?

When the PBA first unveiled its downtown development concept plan in January, a Metro Pulse columnist characterized it as, "So bold it almost bowls you over." And the then chairman of the PBA, James Haslam II, observed, 'If we get half that stuff, it will still be a win."

Many expected Worsham Watkins to scale way back on its actual proposal, but on balance it is even bolder. True, the proposed office tower has been shaved from 35 stories to 33, and the number of screens in the cineplex has been reduced from 16 to 10. On the other hand, Worsham Watkins now proposes to extend its redevelopment of Market Square to encompass the tawdry west side of the adjacent block of Gay Street that adjoins the recently restored Miller's Building. Moreover, a 5,500-seat covered amphitheater has been added to the project on the south lawn of the World's Fair Park, and a controversial, glass-enclosed walkway now extends all the way from Market Square to the new convention center, allowing the droves of people who are expected to be drawn to the area to move about in climate-controlled comfort.

The $440 million proposed investment (exclusive of the $160 million already committed for the new convention center) dwarfs everything else that's been built in Knoxville since the 1982 World's Fair. "I would guess that's on the order of double the total of all other downtown developments over that span of time," ventures Laurens Tullock, who was the city's director of development for much of the past decade and head of a downtown activist group prior to that.

The 518,000-square-foot, $70 million office tower has more heads shaking in disbelief than any other element of the plan. Some think it's too tall from an aesthetic standpoint while many others believe it's much bigger than the foreseeable demand for additional downtown office space.

The president of the Knoxville Area Chamber Partnership, Tom Ingram, demurs on both accounts. He sees the building making an affirmative statement about the city and proving attractive to prospective tenants that the city can't presently accommodate. "I think the office tower is going to be easier to fill than a lot of people might suppose," says Ingram. "We're seeing a lot of demand for large blocks of space, and we haven't even been able to show them anything."

Watkins, for his part, says, "We have a number of Fortune 500 companies with whom we are working, a couple of other New York Stock Exchange companies, and we have some local companies. There is a real need for a high quality office building and one that connects to a hotel lobby with fashion retail elements, restaurants, exciting places to shop for gifts, cards, and things like that."

As for the demand for the 259,000 square feet of entertainment space, 230,000 square feet of retail space, and 95,000 square feet of restaurant space that are proposed, Watkins says, "I think our numbers are conservative...and more competent people have analyzed this plan than any plan that's ever been put forward in this community, and I don't know anyone who said the numbers are unrealistic." Three volumes of studies by Chicago-based Economic Research Associates accompanied the concept plan that PBA approved in March.

At the Tennessee Theatre presentation, Watkins paraded out the head of Merrill Lynch's public finance unit in Chicago, Steve Coma, to attest that, "We are confident that all aspects of this project will be financed successfully." But in order to secure this financing, Merrill Lynch will be dependent on the same evidence of signed leases sufficient to cover debt service that the city needs to see in order to justify its $130 million investment.

In addition to public garages under the cineplex, the hotel/office complex, an apartment complex, and at the north end of the Fair Park (totaling 4,000 parking spaces), the city's proposed investment also includes $15 million for a glass-enclosed Winter Garden in the park. Even the glitzy greenhouse's avid backers acknowledge that $15 million is a lot to spend on horticultural housing. But they insist it could be a major attraction on its own right, and all the more so if it's tied to an HGTV Center that would go nearby. "I don't know if you would run out and build that on its own," says Smith. "The justification becomes much stronger if it's leveraging on HGTV and getting a lot of HGTV exposure."

Who Picks Up the Tab?

Most of the private sector financing is due to come from debt issued by or on behalf of Worsham Watkins or affiliated entities. Much of it may take the form of tax-exempt bonds (which afford lower interest rates) using the city's Industrial Development Board as a conduit and/or drawing upon the $130 million in tax-exempt borrowing authority that came with Knoxville's selection by the federal Department of Housing and Urban Development as an Empowerment Zone city. To qualify for this EZ financing, 35 percent of the jobs created by an investment would have to go to workers who live inside the Empowerment Zone's center city boundaries. Financial advisors to the project believe that the $52 million Marriott Hotel and possibly the $13 million "shoppertainment" mall over Henley Street could qualify. But such use of EZ borrowing authority raises the question of how much would be left to finance job-creating business facilities in areas like Five Points and the City Center Business Neighborhood adjoining Mechanicsville.

Tullock, who is now chairman of the Partnership for Neighborhood Improvement which oversees Empowerment Zone planning, believes that elements of downtown development "represent the kind of projects that would have the credit-worthiness that would make these bonds appropriate. My sense is that the 35 percent zone resident employment requirement provides some real opportunities for tying in with things we're setting up for the Empowerment Zone already such as the workforce career center at Pellissippi State's Magnolia campus."

Only the public-sector investment would be financed by general obligation bonds for which city taxpayers would be liable. This $130 million atop $160 million for the convention center itself would nearly quadruple the city's total debt, but there's no intent to hit up the taxpayers for any more money to cover it.

"The project has got to generate enough money to pay for itself," says the city's finance director, Randy Vineyard. By far the biggest generator is the recapture of state sales taxes provided for in a 1998 act of the State Legislature. Under that act, the city gets to keep all incremental sales tax revenues (above a base figure) collected in its Central Business Improvement District for the purpose of paying off convention center and related debt. Worsham Watkins projects $9 million in such revenue upon completion of the downtown development in 2004—and going up from there.

This money would actually go for servicing convention center debt in lieu of the 38 cents of the city's property tax rate (out of a $3.04 total) previously dedicated to convention center debt service. Some, if not all, of these property tax revenues could then be reallocated to cover downtown development outlays. One catch is that these outlays will have to made in years before any sales tax recapture will start kicking in. To cover this time gap, the city can resort to what's called capitalization of construction interest whereby the interest expense incurred during the construction phase of a project is added to the principal amount of the bonds issued upon its completion. Vineyard has resisted this financing technique in the past but now says, "If it makes sense for us to do it, we're going to do it."

But what if the downtown development flops and the projected sales tax revenues don't materialize? Vineyard says that, "While the numbers are far larger, I don't know that it's as big a risk as we took in connection with the World's Fair. We're in a better position to deal with it today than we were then. Our funding sources for the fundamentals such as paving streets, bridges and sidewalks aren't jeopardized, and we remain committed to making other things happen downtown as well. I have to look at downtown revitalization as an investment the city needs to make."

Market Square's Circled Wagons

During Watkins' Tennessee Theatre portrayal of plans for Market Square development, it seemed as if he were sounding all the right notes to allay concerns about what had become the most controversial element of the plan. Prior proposals to place a dome over the square were abandoned in favor of a "concept to restore Market Square as a historical landmark by recreating an uncovered festival marketplace....The plaza resonates with entertainment and activity. Small shops, restaurants, entertainment, coffee shops and bakeries fill the first floors of both sides of the plaza. Specialty boutiques, galleries for artists and craftsmen, loft housing and offices bring the upper floors to life." And Worsham Watkins' partner in development, John Elkington of Memphis-based Performa, Inc, assured the audience that the square wouldn't be like "just anywhere" but rather distinctively East Tennessean in its character. Who could ask for anything more?

What they failed to mention, though, was the developers' quest for total control over all uses of the property of the square. In its proposed terms of agreement with the city, Worsham Watkins provides that, "COK/PBA will acquire control of all the buildings on Market Square, and with certain exemptions to be determined, lease all of the property to WWI or its assigns...COK/PBA will impose Covenants, Conditions & Restrictions (CCR) in its lease with WWI, which will also apply to any owners who remain. WWI will have right of approval of these CCR's..."

As justification for these terms, Watkins asserts that, "You wouldn't go into someone else's shopping center and buy three store fronts and spend a lot of money renovating those if you didn't have anything to do with the rest of the shopping center...Market Square is unhealthy from an economic point of view, its buildings are falling down, and it's extremely difficult now to open a new business there and make it...The plan we've put forth is truly in the best interest of the community and that is to restore Market Square 100 percent to a vibrant, economically sound, safe, aesthetically pleasing area that the public can go dine, shop, play, and interact."

From PBA's perspective, Smith observes that, "It would be surprising if Worsham Watkins didn't ask for limitless control, but they may not get everything they ask."

The ball is now on PBA's court to make recommendations to the city following the public hearings and facilitated meetings of neighborhood and civic leaders that have been scheduled later on this month. Although PBA and Worsham Watkins collaborated on the formulation of a concept plan during the latter's consultancy, Smith stresses that, "PBA and Worsham Watkins are not a team at this stage. My role is not an advocate. I'm really a sponge in terms of getting public input and an arms-length negotiator with Worsham Watkins on the terms of any deal that we may recommend to the city." Fortuitously, Smith only joined PBA after the period of collaboration had concluded.

As for developer control of Market Square, Smith ventures that doesn't necessarily mean acquisition of the property by the city via condemnation or otherwise. "The developers' purposes can be accomplished through leases not purchases. If you're John Elkington, I think you'd be thrilled by having [one of the square's residents] lease you the ground floor while retaining ownership and continuing to occupy the loft above. The economics of that could be better for everybody than acquisition."

But some of the owner/occupants of property on the square don't see it that way.

"I think Market Square has the capacity to grow on its own and doesn't need to be dominated by one owner," says Emily Dewhirst, who was one of the first of a growing number of residents on the square to acquire and renovate its historic building stock. "I invested all my savings in this building and I don't need someone else telling me what to do with it."

Until quite recently, the square's single largest property owner and singularly successful entrepreneur, Mahasti Vafaie, had been sounding a similar theme, but the owner of Tomato Head and Lula restaurants has become a convert to the Worsham Watkins plan. "All of the things they want to do are great. You can't put them at bay waiting for somebody else to do something," Vafaie proffers.

© 2000 MetroPulse. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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