Five years ago today, the Webb Companies announced CentrePointe, a then-$250 million downtown Lexington development effort which planned to produce 900 jobs and the city’s tallest building on one block in the center of the city. Citing the urgency of the project, the developers moved quickly to demolish several neglected-but-historic buildings on the block.
Then, CentrePointe stalled.
The developers made some cosmetic efforts to clean up the site, ultimately transforming the pit of demolition rubble into a tiny pasture, complete with horse farm fencing. But actual construction never began.
Today, CentrePointe is still stalled.
The financial and physical ambitions of the project have shrunk somewhat: the plans now call for a $200 million development which no longer includes the city’s tallest building. Instead of the hulking monolith of the first three designs, the developers are now pursuing a less-imposing design which promises to blend with the surrounding city much more effectively.
But approval for the developers’ fifth major design iteration expires next week, and we’ve seen little progress on CentrePointe over the past year.
After five years, we have no economic activity on the site. No construction. No jobs. No building. No progress.
Over the years, we’ve been frequent critics of the CentrePointe project. Those critiques have stood up well to history.
The fifth anniversary of the announcement of CentrePointe, as well as the expiration of the project’s fifth design, seem like a good time for us to take stock of what Lexington should learn from the five years of failure with CentrePointe.
Hopefully, we can apply some of these lessons to CentrePointe (and to other major development initiatives in the city).
The developers lied.
They lied repeatedly. And with no trace of shame. It isn’t a pleasant or polite thing to say, but Lexington needs to stop being polite to hucksters and charlatans.
They lied about their secret mystery financier. They lied about his death. They lied about his heirs and ‘numbered Swiss bank accounts’. They lied about backup financing. They lied about backup financing for the backup financing. They lied about the urgency of demolishing historic buildings. They lied about their schedule. They lied about tenant commitments. They lied about 61 (or 64! or 65!) ‘handshake’ deals for their condominiums. They lied with pretty pictures of ugly buildings. They lied with pretty pictures of pretty buildings. And they lied with overly optimistic financial projections.
They lied to the press. They lied to the public. They lied to the Urban County Council. They might have even lied to themselves.
TIF is a scam.
CentrePointe has always depended upon tax-increment financing, or TIF, to support approximately $50 million of the project. TIF allows cities and states to allocate future incremental tax revenues to finance today’s public improvements related to new economic development initiatives.
The logic behind TIF is that the increase in economic activity which stems from a new project will generate taxes that will – eventually – pay back the state and city for improving roads, sidewalks, utilities, parking, or other infrastructure around the project.
Sounds reasonable, right? Build CentrePointe; generate new economic activity; generate new taxes from that activity; use future taxes to help pay for the “public” parking garage which CentrePointe needs to be viable. The city issues CentrePointe TIF bonds to investors, uses the investors’ money to build the CentrePointe parking garage, and pays back investors (with interest) out of the tax revenues from all of the economic activity CentrePointe creates.
But here’s the core problem: CentrePointe never generates enough economic activity to pay back bondholders.
How’d this happen? CentrePointe’s developers used wildly inflated projections to qualify for TIF, and few city or state mechanisms were in place to effectively challenge the developers’ assertions.
And therein lies the problem with TIF more broadly. Developers have every incentive to exaggerate their estimates of a project’s value to the community. If the project comes up short of their rosy projections, developers still reap the benefits of TIF (“Free parking garage!”), while taxpayers and bondholders assume all of the risks.
Those supporting TIF programs often assert that only bond investors bear the risk of project failure. But that rarely happens. As LEO’s Joe Sonka meticulously chronicles with Louisville’s Yum! Center (another state-sanctioned TIF program), the reality is that taxpayers are the true backstop when a project fails to live up to its projections.
TIF amounts to little more than an elaborate corporate-welfare scam.
With no downside risk, developers have no motivation to be realistic in their projections in their pursuit of state and local support, while state and local governments provide few checks on that runaway optimism.
Further, TIF provides developers with their infrastructure goodies now, and in exchange taxpayers and bondholders get a trickle of unreliable and unpredictable tax revenues over the next 30 years.
So far, the saving grace for the CentrePointe TIF has been that the developers have been unable to secure financing for the rest of the project, and haven’t yet been able to invoke the state and city support needed to build the parking garage.
Financials trump design.
Perhaps because the design has changed so often, many CentrePointe critics – including us – spent much of their time obsessing on the project’s design. This was especially true when the design got good following Jeanne Gang’s involvement in June 2011. Because the Studio Gang process was so inclusive, many in the community felt a sense of ownership of the resulting design.
But the reality is that the design of CentrePointe matters very, very little in comparison to the finances of CentrePointe.
Pretty pictures are nice, but pretty pictures crumble without viable financing. (And they have crumbled several times without viable financing.) Pretty pictures don’t matter as much as pretty business plans.
And CentrePointe has never had a pretty business plan, even when it had pretty designs.
Big is fragile.
The state’s agreement with the city specifies that at least $200 million be spent on CentrePointe by 2016 in order to qualify for TIF.
And the project’s price tag has dutifully maintained that $200 million threshold over the past 5 years.
As a result, CentrePointe has always been big and complex; it contains residential, retail, hotel, and office components. The viability of the project requires the success of all of these components – if any one fails, the whole project fails.
This is why the developers have had five years of trouble securing financing. A project of this size and complexity is inherently fragile.
A smaller project (or collection of smaller projects) would likely be much more robust, but then it wouldn’t qualify for TIF funding.
When projects get bigger and more complex, there’s greater risk for something to go wrong. CentrePointe’s size is a liability, not an asset.
Speculation is just gambling.
Speculation is not economic development. Speculation is gambling.
The developers gambled. They gambled with historic buildings. They gambled that they could get financing before the economy crumbled. They gambled that they could get they city to help finance part of their project. They gambled with the center of our city.
And they lost.
And we lost, too. We lost a little of our city’s history. We lost economic activity. We might lose even more if the project goes forward.
These are just a few of CentrePointe’s lessons for Lexington. There are undoubtedly many more (for instance, I haven’t delved into the project’s many historic preservation failures here).
Feel free to add what you’ve learned over the past five years in the comments below.