Golden Parachute

At what point do we stop subsidies to spur downtown development?

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Frank Talk

by Frank Cagle

People open restaurants in Knoxville all the time. The good ones usually last, but sometimes they don't. It usually depends on how much money gets spent up front and whether the day-to-day business can cover the â“nut.â”

It is not atypical for someone to buy an expensive property that housed a failed restaurant for a few cents on the dollar and then go on to make a financially successful restaurant. It is a hallmark of successful restaurateur Mike Chase. Over 20 years ago he bought a building on Neyland Drive that had housed a succession of failed ventures. He cut the six-foot tall weeds, did a renovation and opened Calhoun's. It has been hugely successful, has anchored city redevelopment of the waterfront and generated a lot of sales tax.

Then there's Riverside Tavern. At a time when the city was desperately trying to find investors to help with development of the waterfront, a group of local citizens stepped up. One can only speculate about the inner workings of a private business, as there are no public records to examine. But as I understand it, the cost of building Riverside Tavern and developing a restaurant in a rather isolated portion of downtown gave the new business a tough â“nutâ” to manage.

Since Riverside went to the City Council to ask for relief on its lease, the reaction I have gotten from people is puzzlement. The place always seems to be busy. It is true the restaurant does a great lunch business. But others say the dinner crowd, while good, has not been enough to overcome a huge mortgage.

The owners are supposed to pay the city of Knoxville one percent of the annual gross. That's to lease the city-controlled ground the restaurant sits on. They are reported to owe the city $85,000, which would be translated into an annual gross for the restaurant of $8.5 millionâ"a good business. But I've been told the $85,000 is for the past two years, putting the annual gross at $4 to $5 million. Presumably not enough to return an acceptable margin at the expensive development cost of the restaurant.

For taxpayers it seems fair to ask why this is a special case. When other restaurant owners are overextended, they go out of business. Someone else buys the building and with less overhead they go on to success. The owners of Riverside Tavern have a deal with the Ruth's Chris steakhouse chain, which will lease the building from them and cover the mortgage. The City Council has voted to rescind the requirement that the owners pay them one percent of the gross. Thus the city will receive no ground lease payments from the Ruth's Chris deal going forward.

In the short term the owners are just out from under an onerous debt burden. But there is a three percent increase per year in the lease, meaning a compounding increase in revenue from the Ruth's Chris deal as years go by. When the mortgage is paid off the owners (or their children) will be into a healthy revenue stream.

These questions arise:

Why didn't the city require the new deal to include ground lease rent?

Why is it that Mike Chase, with a restaurant next door, has to pay the city $75,000 a year for his ground lease when Ruth's Chris, his nearest competitor, pays nothing?

It can be argued that the city was not in a position to be negotiating lucrative leases with restaurant chains, and the city feared one of the premier segments of downtown riverfront development might be dark. It was a risk they dared not take.

Riverside also argued the city had a commitment to provide more parking, thus they should void the lease agreement. No one seems to be able to find it in the contract. God knows what the city told them to get the restaurant built. But I wonder just where the parking promiser explained this parking would be found. Floating pods in the river?

But we need to ask why they should put Chase, who has generated millions in sales tax for 20 years, at a $75,000 per year disadvantage with the newcomer restaurant next door.

I don't know how you factor in the affection and esteem City Council holds for the Regas family and the understandable reluctance to play hardball with them. They've been good citizens and paid a fortune in sales tax over the years as well.

When it comes to downtown and riverfront development, it is obvious there are no hard and fast rules. The question for taxpayers is when downtown's redevelopment has reached a point where city and county government can stop making deals, start holding people to contracts and level the playing field.

It is the biggest question for downtown moving forward.

Frank Cagle is a political analyst and the editor of Knoxville magazine. You can reach him at frank@frankcagle.com .

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All content © 2007 Metropulse .

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