From their inception, downtown redevelopment plans have been predicated on the city's getting a return on its investment. All prior iterations of what's become known as the Worsham Watkins plan have shown revenues to the city sufficient to cover the cost of its investment in garages and other supporting public infrastructure.
Unfortunately, the latest set of recommendations don't sustain this coverage. A long-awaited report by the Public Building Authority's administrator, Dale Smith, contains more variations than the musical Goldberg (not Rube). But no matter which way you slice it, the report doesn't show enough revenue to the city to cover the various levels of public outlay that can be assumed. Equally disturbing, Smith has yet to receive the independent analysis of revenue assumptions that's due to be provided by a Chicago-based consulting firm, Economic Research Associates.
A rule of thumb in financing public projects is that $1 in revenue will service about $13 in debt. Thus, on bonds to finance the $160 million in total public outlays assumed in Smith's report about $12.3 million in annual debt service would be required. But the report only projects $8.4 million in city revenues from sales and property taxes, lease payments and parking derived from a $158 million investment on the part of WW and subdevelopers.
However, these totals are misleading in that a $39 million public outlay is included for a "destination attraction commitment" whose companion commitment on WW's part and associated revenues are both classified as "unknown." This amorphousness relates, of course, to the city's problematic quest to get Scripps Cable to locate a center of some sort in the city's existing convention/exhibition center on the World's Fair Park site. But even when the $39 million is backed out of the total cost, debt service on the remaining $121 million in public outlays is still well in excess of projected revenues.
Because so many uncertainties surround so many other elements of the WW plan, a more valid way of testing for cost coverage is to key to those elements that appear ready to go forward in the here and now. These include the revitalization of Market Square, a 157-unit apartment building just to its west, an office building in the next block westward and renovations of the Sunsphere, the Candy Factory and the Victorian houses on the World's Fair site.
Market Square is slated for a $7 million makeover. Garages to support the apartments and the office building are presumed to cost $16.2 million and $36.5 million respectively, and renovations on the World's Fair site add $9 million for a total cost of just under $67 million.
At first blush, associated revenues totaling $5.8 million would appear to be sufficient. However, these revenues include $1.7 million in sales taxes from retailers on the office building block—a clearly inflated figure that just happens to equal the sales tax take assumed when a 417-room Marriott Hotel was also due to be located on that block. The PBA report acknowledges that the city's failure to carry through on plans to acquire and demolish the Holiday Inn Select has kiboshed plans for a Marriott on that site. And Smith further concedes that he has "no idea" how much retail space of what ilk may be located there. So subtract at least $1 million from the assumed sales tax take, and the revenue shortfall recurs.
The office building that's currently envisioned for that block is only about half the size of a 500,000-square-foot, 33-story edifice that WW had proposed. A musical chairs-like aura overhangs the report's rendition of what else might go on the balance of this block. A second office building that would consolidate state offices in Knoxville, a cineplex, or, if the city should yet succeed in taking out the Holiday Inn, a hotel are all in the mix of alternatives.
But all of them are fraught with too much uncertainty for the city to bank on their coming to fruition. Despite the overextended state of the cinema industry, Smith professes optimism that a cinema operator will still materialize. But he would prefer to see the cineplex located on the site of the present downtown fire hall. Yet the economics of that location, which would entail construction of another public garage, are not favorable to the city either when viewed in isolation.
Achieving a positive return on investment for all partners is an acid test for any public/private partnership. And the PBA and the city need to satisfy this test before proceeding with what continues to be a highly desirable downtown venture.
One way would be to drive down the cost of the two parking garages that account for $51 million of the city's $67 million initial investment. Both of these garages are presumed to go underground despite an admonition from the PBA's design review consultant, RTKL Associates, that such parking is "extremely expensive to build, and in many urban situations, prohibitively expensive." While building these garages above ground creates its own set of complications, it could cut their costs in half. Moreover, the 1,150-space garage presumed to underlie the office building is the same size that was previously envisioned to support a much larger office building and a hotel on that block.
Another point of concern is that public sector costs have risen while private sector investment has declined. The aggregate $160 million in city outlays assumed in Smith's report is up from $130 million previously envisioned. (Costs of yet another garage to support a new hotel at an undetermined location closer to the city's new convention center account for the largest part of the increase). By contrast, the report shows WW, et al's investment dropping to $158 million from a previous $240 million. The resultant one-to-one ratio of private to public investment is way below the norm.
It needs to be borne in mind, however, that most of the reduction in private investment is due to the report's exclusion of several elements of WW's original plan. These include an elevated, enclosed shopping mall over Henley Street and a residential development on 11th Street that would have forced relocation of Fort Kid and the Victorian Houses. While taking away from the scope of the undertaking, these exclusions should go a long way toward satisfying the foremost criticisms voiced in public hearings. (Another contribution to the reduction is that the report classifies as "unknown" private outlays in connection with the elusive destination attraction whereas WW had proposed spending $33 million.)
Returns not ratios are the central issue here. Before the PBA board approves Smith's recommendation for spending an initial $20 million on site acquisitions, garage design and the like, it needs to be satisfied that the city is heading toward terra firma and not down a slippery slope at taxpayer expense.
Smith assures that ERA's analysis of revenues and returns will be furnished to PBA board members (and be made public) prior to consideration of his recommendations at a Feb. 22 board meeting. "If ERA can't do an adequate analysis prior to the board meeting, then the board shouldn't move forward until they get it," he opines.
Aside from concerns about Market Square that will be addressed in this column next week, yours truly wants to see the downtown development plan move forward as much as anyone—but not with blinders on.