Developmental Issues: Does a Taxpayer-Funded—But Not Exactly Public—CBID Still Make Sense for a Revitalized Downtown Knoxville?

Developmental Issues: Does a Taxpayer-Funded—But Not Exactly Public—CBID Still Make Sense for a Revitalized Downtown Knoxville?

Photo by David Luttrell

Photo with no caption

Photo by David Luttrell

URBAN GROWTH: Under director Michele Hummel, who has headed CBID since 2000, the organization’s budget has more than doubled, and its reserve fund has become an important source of funding for private development.

Photo by David Luttrell

URBAN GROWTH: Under director Michele Hummel, who has headed CBID since 2000, the organization’s budget has more than doubled, and its reserve fund has become an important source of funding for private development.

HISTORIC DEVELOPMENT: Developer David Dewhirst has had a long and complicated relationship with the CBID, serving on its board in the 1990s and later benefitting from its grant program.

Photo by David Luttrell

HISTORIC DEVELOPMENT: Developer David Dewhirst has had a long and complicated relationship with the CBID, serving on its board in the 1990s and later benefitting from its grant program.

CATALYTIC CONVERTOR: CBID board member and part-time developer Kevin Grimac supports strategic, big-money grants for “catalyst” projects that provide noticeable economic ripple effects.

Photo by David Luttrell

CATALYTIC CONVERTOR: CBID board member and part-time developer Kevin Grimac supports strategic, big-money grants for “catalyst” projects that provide noticeable economic ripple effects.

TAILOR-MADE: Former CBID board chair Joe Petre’s company was awarded a $100,000 grant this year to redevelop the Tailor Lofts in the former Arby’s building on Gay Street.

Photo by David Luttrell

TAILOR-MADE: Former CBID board chair Joe Petre’s company was awarded a $100,000 grant this year to redevelop the Tailor Lofts in the former Arby’s building on Gay Street.

The J.C. Penney Building presents a problem—a big problem. Standing in the middle of one of Gay Street’s busiest blocks, between Mast General Store and the Downtown Grill & Brewery, it’s an enormous eyesore, and a reminder of the decrepitude into which downtown fell in the 1970s and ’80s. For several years in the ’00s the building was covered with a gigantic banner promoting urban living and promising imminent improvements; eventually, as the banner faded and grew weather-beaten, its optimistic motto—“Coming soon”—turned into a bad joke.

But the punchline came when the banner was removed. The facade and roof of the building have been nearly destroyed by years of neglect, exposing a gutted interior to passers-by. (The interior has since been covered up by a construction tunnel on the sidewalk in front of the building.) It’s a literally monumental reminder that downtown Knoxville’s long-term fortunes aren’t guaranteed.

Local developer David Dewhirst, who owns the building with architect and fellow developer Buzz Goss, has talked about its commercial potential for years. But even he isn’t sure if the project is, or ever will be, economically feasible.

“Do you know how difficult it is to take a building in that kind of condition, knowing that it’s going to take 18 months of work before you can open it? And trying to convince a retailer to sign a lease to take that space with holes in the floor, and you can’t even deliver it for that long a time period?” he says. “And on the other side you have a bank telling you, we can’t lend you any money until you have these things demonstrated. So I’ve got a complete catch-22 here, and it’s just damn tough.

“So what’s going to happen with it? I don’t know what’s going to happen with it. I’m going to do everything I can to make it a productive building instead of a big old piece of blight right in the middle of our downtown. It’s just not easy.”

Dewhirst compares the J.C. Penney Building to the Arnstein Building a few blocks away, on Market Street. The Arnstein is another long-neglected downtown landmark, currently nearing the end of a massive renovation—and is owned by a partnership that includes Dewhirst. In a matter of months, after years of construction and $8.5 million, the Arnstein will house the hip clothing-and-home-decor shop Urban Outfitters, the offices of renowned local architecture firm BarberMcMurry, and residential units in the top floors. The building is expected to be a catalyst for further retail development and to support existing businesses on Market Square and along Union Avenue.

The project never would have happened, Dewhirst says, without the same kind of public help he hopes to eventually get for the J.C. Penney Building. A controversial $250,000 grant from the city got headlines back in September, but Dewhirst got even more money—a $300,000 grant—from the quasi-governmental Central Business Improvement District in 2010. (Earlier that year, CBID had agreed to a $500,000 grant for an initial Urban Outfitters deal that fell through.)

“You won’t be surprised that I think they made a very good decision with the Urban Outfitters grant,” Dewhirst says of the CBID’s contribution. “If it wasn’t for all those things together, to help convince our bankers that this was a doable deal, and then to help create an environment that said to Urban Outfitters that we can make this deal happen—if it wasn’t for those things, even if Urban Outfitters had said, hey, we want to lease your space, and here’s what we need, I would have said, ‘Sorry, there’s no way I can meet those demands.’”

During almost two decades as a downtown developer, Dewhirst has had a close, if not always cordial, relationship with the CBID. He’s been a critic and one of the group’s biggest beneficiaries, and he briefly served on the CBID board in the 1990s. The public/private partnership that has supported the Arnstein development is exactly the kind of “catalyst” project Dewhirst thinks CBID should be involved in: large-scale, strategic developments that promise ripple effects and encourage additional growth. But all too often, he says, CBID has thrown money away on small, high-risk projects that offer little return, even if they succeed. It’s been too conservative, he says, waiting on developers to approach the board to request money, and it has failed to forge its own vision of what downtown can be and how it can help create that.

“We actually established the first guidelines for distribution of facade grants when I was on the board, and they were very limited in nature,” he says. “We pretended that they were going to be the tipping point that changed some property owner’s decision about whether he should develop his building or not develop his building. Well, that was not true. ... We gave tiny little amounts to all kinds of different entities. You name it—if somebody walked up and asked for $5,000, there was a good chance we’d give it away.

“At the end of the day, the impact of all that, after we took out the expenses, was very, very minimal. So over the past several years I’ve been arguing for the CBID to really decide what is strategically important for downtown—some of the stuff that just can’t or won’t happen without a large push, whether that be from the city, the CBID, whatever it takes to get it done.”

But Dewhirst’s imagined role for the CBID raises another important question: Just how much money should a publicly funded agency put into private real estate projects? Over the last decade, CBID has become an increasingly important player in major downtown development projects, from Mast General Store to Tupelo Honey and now Urban Outfitters.

The agency is funded by a special assessment—extra taxes—on property owners within the district’s boundaries: roughly the Old City to Volunteer Landing and 11th Street to Hall of Fame Drive. Even though it’s funded by taxpayers, the CBID’s development grants are awarded without significant public input. As downtown property values have risen and formerly empty buildings have been restored to the tax roll, CBID’s own bank account has gotten bigger and bigger, and so has its influence. And some people, including members of the CBID board, are starting to wonder just what the organization’s role should be in downtown’s new economic environment.

***

During the 1970s, business improvement districts began popping up across the United States as a way to supplement diminishing municipal investments in city centers. BIDs work by collecting a special assessment or additional tax on property owners in a specified area and, in turn, spending that money to upgrade the services offered by local government: street cleaning, increased trash collection, beautification, lighting, and security, but also incentives for business recruitment and development. The additional services were intended to be a supplement, not a substitute.

Knoxville’s CBID was established in 1993 to provide “parking management systems and facilities, security enhancement, beautification efforts, retail and service management programming, financial incentives for development, and trolley support.” The structure of the CBID, approved by a majority of downtown property owners, included an additional tax on property inside the CBID boundaries—25 cents per $100 of assessed value for residential property, 40 cents per $100 of assessed value on commercial property—and a small contribution from the city, which ended in 2011.

At the time, downtown was in dire straits—there were few residents, few restaurants, and even fewer retail outlets. If any developers had been willing to tackle expensive redevelopment projects, banks wouldn’t have been interested in financing them. The city provided basic services, but the CBID promised to enhance those, at no cost to local government.

“It’s the extra level of services that the city wouldn’t otherwise have enough funding to do,” says Rick Emmett, a CBID board member and downtown coordinator for the city of Knoxville.

Some of the CBID’s early expenditures were small: subsidizing the downtown trolley system, paying for 12 additional police cadets, or funding a parking-sticker program for residents. But those early measures were important first steps and helped set the stage for more ambitious efforts in the late 1990s and early 2000s. Some of the CBID’s services are still small, and might seem out of scale with the organization’s development side.

“All the planters and plants downtown—that’s not typically something we’d have in Bearden or Fountain City,” Emmett says. “We just don’t have the level of funding to do that, and that’s the kind of thing CBID’s able to step up to the plate and provide.”

The CBID’s current program still includes event sponsorship (the Dogwood Arts Festival, the ice skating rink on Market Square, the International Biscuit Festival, and Shakespeare on the Square have all received money in the last few years), cosmetic and infrastructure improvements (sidewalk repair, graffiti removal, those combined media racks on Gay Street and the Square), and marketing (the Buy Downtown Knoxville gift card, a downtown visitor’s guide).

Over the years, though, as downtown’s development momentum has increased and the city has turned its attention back to the city core, CBID’s budget has grown dramatically. It has more than doubled in the last decade, from around $200,000 at the turn of the century to $513,000 this year. And with more resources, the organization has increasingly focused on big development projects.

“Where a lot of CBIDs focus on beautification or security or maintaining and cleaning, our city’s been a great partner on that side of things, so we’ve found we can partner in some other areas,” says CBID Director Michele Hummel. Hummel, a Knoxville native and business graduate of Tennessee Tech, worked for IBM, Whittle Communications, Channel One, and a venture capital firm before joining CBID in 2000.

The CBID’s single biggest line-item expenditure is its $100,000 facade-grant program, which gives out individual grants up to $25,000. CBID’s growing reserve fund—$226,000 at the end of this year, built on years of growing revenue and unspent funds—is available for the kind of big six-figure grants that have gone to Mast, Urban Outfitters, Tupelo Honey, and several other development projects in recent years.

But the criteria for awarding those grants isn’t clear anymore, and with more and more developers asking for money, the process has gotten complicated.

“There are more people asking for money than we have funds,” says board member Kevin Grimac, who is also a part-time developer. (His recent projects include the Carson, a four-condo development on Central Street, and the still-in-progress Arcade Building on Gay Street.) “In full disclosure, I had a CBID grant when I bought 135 Gay Street 16 years ago. But it was truly a make-or-break deal. I’m not saying now that the deals aren’t make-or-break, but I was probably the only person that year asking for a grant, and [this year], at one meeting, we had three grant requests.”

The new economic environment, the high stakes, and the large sums of cash involved are enough to convince Grimac that a period of reflection is necessary.

“Downtown has definitely evolved,” he says. “I think we’re over the hump. So I think it’s time for us to step back and decide what the future looks like.”

***

The CBID has endured some recent growing pains as its role in development projects has changed. After Urban Outfitters pulled out of its initial deal with the Arnstein developers, downtown Knoxville appeared to be on the verge of becoming the hair-salon capital of the Southeast: The Aveda Institute was set to open in the former S&W Grand restaurant on Gay Street; Paul Mitchell was reported to be interested in taking Urban Outfitters’ spot in the CBID-funded Arnstein deal; and a third company applied for a $300,000 CBID grant as part of a deal, which eventually fell through, to open a salon and beauty school in the Kress Building on Gay.

After the board approved a $125,000 grant for the developers of the Market Square building that now houses Tupelo Honey in January, the CBID faced a philosophical dilemma. At its February meeting, the board voted to suspend its development grants until clear guidelines for distributing that money could be established. The major issue was one that has faced the CBID throughout its existence: whether the reserve fund grants should be spread out in smaller amounts to more projects or saved for big-time developments—like the Arnstein deal—that would also be expected to spur further growth. “That is something we’ve tweaked since I’ve been here, maybe three or four times,” Hummel says. “We had one program that was for smaller grants and more people, then we opened the doors and started doing loans instead of grants, and it wasn’t being used. Then we went back to more of a development grant. After revamping that, we looked at 30 different cities across the nation to see what their grants are, and just talking to our property owners: ‘What are you all wanting to see this program develop as? This is your program, how would you want to use it?’”

Hummel says stakeholders “overwhelmingly” favored smaller grants to more people, rather than a few strategically placed big pay-outs. That seems to be at odds with board members, most of whom support bigger catalyst grants as the most efficient use of the CBID’s reserve. The board and the CBID development committee generally win that argument, though. While the CBID’s monthly meetings are public, there’s no formal process for public input into how those grants are distributed.

“[The Arnstein] is a huge, integral piece of downtown,” Grimac says of the board’s recent catalyst-focused approach. “It’s a cornerstone. It’s a huge investment, when you look at $300,000 vs. the total project. I think it’s an investment for all of us, and especially when you consider what will be there in 12 months.”

Both Hummel and Joe Petre, a local developer and former CBID chair, point to the CBID’s $271,000 grant for Mast General Store in 2006 as an example of how the agency can bridge public and private investment, and leverage its own contribution into future growth.

“That was exactly the kind of catalyst project that we thought deserved the money. And it was a true gap-fill between what the developer at the time could come up with,” Petre says. “So bottom line, it was the linchpin in getting that deal done. And in conjunction with the city’s recruiting efforts and private recruiting efforts, CBID could fill the gap in between those two things, a perfect example of a catalyst that has obviously brought more to downtown. And that was at a time when we had only a $300,000-$325,000 annual income in our budget.”

But CBID’s moment of reflection didn’t last long. Following a brief review, the CBID board has quietly restarted its development grant program, under basically the same conditions that existed before the moratorium, with no clearer guidelines than in February.

“That catalyst grant is for something over $25,000—let’s see what the true gap is with your project, and let’s see what’s really needed, and see what we can do to help that,” Hummel says. “That one hasn’t been used or tested yet, but we’ve kind of gone back to our normal grant project.”

***

The divide over where and how CBID should spend its money highlights the organization’s diffuse constituency. Originally designed to serve the property owners who fund it directly, CBID also counts renters, business owners, office workers, diners, theater- and moviegoers, and shoppers among its customers; their participation in the downtown economy is essential to continued growth, even if they don’t contribute directly to the CBID’s special assessment. That diverse support, though, can lead to conflicting priorities.

“You can’t be everything for everybody, and it’s a tough balance,” Hummel says.

Dewhirst has watched these tensions escalate over the years. Based on his experience, he considers small, dispersed grants a waste of both time and money.

“It makes a lot of people go, why do we have a CBID if that’s all it’s doing? Because it’s just wasting a lot of expenses if it’s not really achieving a strategic issue,” he says. “But then when you go achieve a strategic issue, look out. Here come half a dozen people who think it’s not fair, it’s not what they want, you’re showing favoritism, blah blah blah, whatever it is. This is a political issue.”

Grimac says CBID will be criticized no matter what it does. Giving public money to private developers don’t always go down easy with the public—or with other board members.

“No matter what it is, some people applaud it, other people scowl at it,” he says.

The CBID’s immediate future seems clear: The money it invests in downtown business will turn into special-assessment money that is put back into the CBID budget, and any surplus will add to the reserve fund. A big chunk of that money will go back into downtown development and other improvement programs, which will cycle more money back to CBID. And so on. But how much bigger will it get? How much bigger does it need to be? Is there a point in downtown Knoxville’s future where the CBID is no longer necessary?

Petre has no problem with the organization’s expanding scope and influence. A bigger CBID means a more prosperous downtown, and a more prosperous downtown means a bigger CBID, he says.

“The dollars it takes to run the organization have not changed dramatically, which means that you probably have a couple hundred-thousand dollars more on an annual basis to do the things that are making downtown better and better than you ever had,” Petre says. (His company, Conversion Properties, was awarded a $100,000 grant this fall for a redevelopment project in the former Arby’s building on Gay Street, now renamed Tailor Lofts.)

“The beauty of this thing is that the tax base isn’t going backwards,” Petre says. “So as it continues to move forward and becomes more valuable, theoretically you should continue to have more money on an annual basis. ... There hasn’t been a profit motive behind it. It’s just been about sustaining the momentum that was started and trying to increase that momentum curve.”

Ultimately, however, the CBID’s future is up to the people who have the most at stake. The only mechanism available for dissolving the organization is a written petition, signed by 50 percent of the district’s property owners (or the owners of 75 percent of the area’s total assessed property) and submitted to the city.

“When CBID was developed, the stakeholders agreed to assess themselves,” Hummel says. “They’re the ones who voted in a CBID, and could be the ones to vote out a CBID.”

© 2012 MetroPulse. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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