'Bad Precedent'? City Council Approves $1.5 Million Grant to University Commons Developers

Knoxville’s future looks a lot like Walmart and Publix.

That is, if you believe the hype coming from proponents of the University Commons project, which is planned for the old Fulton Bellows site just off Kingston Pike near the University of Tennessee. The complex’s developers asked for and received a $1.5 million grant from Knoxville City Council on Tuesday night.

“It makes an incredible statement,” said the city’s chief policy officer, Bill Lyons, at the meeting. “It is a message that the core of the city is alive and well.”

“It is the thing to do to send our city forward,” said Councilmember Brenda Palmer, explaining her vote for the funding.

Vice-Mayor Nick Pavlis compared the project to the city’s investment in downtown redevelopment. And in an interview last week, Councilmember George Wallace called the development “a watershed project. … Like downtown, it will spur new development.”

It remains to be seen if what is in effect a giant fancy strip mall with a slightly more attractive design than your average big box center can actually spur development (especially when one of its tenants is notorious for driving smaller stores out of business), as the projected opening date for Publix and Walmart is not until the summer of 2014. But the ripple effects of Council’s vote—the measure passed 7 to 2—could be felt much, much sooner.

“It is not the role of government to get involved in development to increase the sales tax base,” said Councilmember Marshall Stair before voting no on the funding. “We’re setting a bad precedent. We start handing out grants like this, [developers] are going to come asking.”

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It was no surprise, really, that Council amended its budget to shift the $1.5 million from the city’s rainy day funds. Back in April, the panel unanimously passed the city’s largest and longest ever TIF (tax increment financing) for the development—a $10 million, 25-year deal.

Of course, back in April, CHM, LLC, the developers, said the retail complex would only take $62 million to build (now they’re estimating $65 million, according to the Knoxville News-Sentinel) and that $15 million of those funds would come from tax credits—but they only got $4 million.

“We had to cut costs,” says Jim Harrison, the “H” in CHM. “The thing with asking people to put up money for your project is they want a return on their investment. We’re to the point the returns aren’t there.”

Harrison calls University Commons “probably the riskiest” development CHM has ever done—the Fulton Bellows site is an EPA-designated brownfield, requiring special treatment. The complex will be built on what amount to stilts to avoid disturbing the contaminated soil in the ground, and runoff during construction will have to be treated.

The city has been eyeing the land for redevelopment for years, and before the housing boom collapsed, some developers were interested in building student housing on the property. Lyons posted on the blog KnoxViews last week that “numerous interested parties made inquiries about the site … None could come close to making it work, and none would accept the environmental exposure. The University passed on the site as well.”

When the tax credits fell through, Harrison says CHM approached the city to make up a $3 million shortfall. The city countered with $1.5 million, leaving the project still partially unfunded, which means it could still fall apart, despite the city’s grant.

“Walmart and Publix are paying the maximum amount we can push them for,” Harrison says. Still, he hopes his company will close on the land by the end of the year.

Bob Whetsel, the city’s director of redevelopment, says the $1.5 million is a small price to pay to redevelop a brownfield, especially given that the property value of the site will dramatically increase once it’s built out. The TIF will prevent the city from receiving the full property taxes for up to 25 years, of course, but Whetsel says there will still be an expected increase from around $7,000 a year to over $100,000.

“[That] moves to a pretty quick payback period,” Whetsel says.

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Whetsel and Lyons say the city funding will only be spent on infrastructure like roads, a bridge, and intersections, and that it will also be the last money into the project—if the development falls through, or if CHM miraculously comes in under budget, then the $1.5 million won’t be used.

But Councilmembers Stair and Nick Della Volpe, who both adamantly opposed the expense, say it bothers them that taxpayers are being asked to write the check for a retail development, especially given likely impending shortfalls in the city’s pension funds.

“There are big rainstorms coming, and I’m scared that when we get there, we won’t have enough in the rainy day fund left,” Della Volpe said at the Council meeting.

Della Volpe also pointed out that the TIF agreement drawn up by Knoxville’s Community Development Corporation said that money was to be used for infrastructure. Indeed, the actual TIF document says “Neither KCDC nor the City will directly fund such costs of private redevelopment projects except through the availability of tax increment financing.”

“Enough is enough,” Stair said at the meeting. “I think the city—we eventually have to say no.”

In an interview, Stair also mentions that the Publix will probably negatively impact the Food City in Mechanicsville, which he says company representatives have told him is already underperforming. (Food City’s corporate Knoxville office did not return repeated calls for comment.)

“To me, [Mechanicsville] is a much more fragile neighborhood,” Stair says. “If it closes, then we’re going to have an empty box in a challenging neighborhood.”

The city actually gave that grocery store a $350,000 PILOT (payment in lieu of taxes) in 2006 to encourage Food City to open. (The location also received $1.5 million in federal Empowerment Zone Funds.) When asked as to whether the city had considered any possible negative impact the University Commons complex might have on existing businesses, Whetsel commented, “I can’t speak to that directly.”

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At the Council meeting, Lyons called the development “a tremendous economic opportunity” and extolled the job opportunities for people in neighborhoods like Mechanicsville and Lonsdale. Nobody mentioned the class-action lawsuit that had been filed earlier in the day by three women in middle Tennessee, who are suing Walmart for gender discrimination. And nobody mentioned that the city and the county are in a holding pattern when it comes to shopping centers.

According to a report issued Monday by the Metropolitan Planning Commission, the city and county’s inventory of retail space has grown 7.9 percent in the past four years—there are now more than 200 shopping centers in the county. But during that same time period, the vacant space in those centers increased to nearly 13 percent.

“It’s the highest vacancy rate since 1996, when we first started doing the study,” says MPC’s Bryan Berry.

It’s those kind of statistics that worry Stair, who now says he has had second thoughts about his vote in favor of the TIF.

“In a lot of strip centers, 25 years is the life of the project,” Stair says. “I just wonder is it the best use of the property.”

But unless dramatic public opposition arises in the next two weeks—Tuesday’s meeting technically marked the first reading of the ordinance—the city will be at least partially funding developers to build slightly modified big boxes for large corporations. And as Palmer commented, not all big-box developments get people riled up.

“I dare say if we were talking about Target instead of Walmart there’d be a lot fewer comments,” Palmer said.

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