In 2009, an analyst hired by Kentucky’s Cabinet for Economic Development evaluated the CentrePointe development project in downtown Lexington.
The analyst looked at whether the Tax Increment Financing (TIF) that the developers proposed using made any sense. At the time, CentrePointe was slated to be a $298 million project, and the developers wanted to use Kentucky’s new TIF law to help subsidize the project.
Under TIF, the state and city would issue bonds to investors, and pay those investors back (with interest) by using the incremental taxes generated by the new development over the next 30 years. The TIF law stated that projects like CentrePointe needed to invest a minimum of $200 million in capital to qualify.
The analyst expressed skepticism about projects like CentrePointe – the real estate market was imploding in 2009. CentrePointe’s developers assured the analyst that the project was a sure bet: there was a mystery overseas financier willing to front all of the cash needed to build the project; there were top-notch tenants lined up (“Hard Rock Cafe”, “J.W. Marriott”); 65 of the 91 million-dollar condos had already been sold in handshake deals; the office and hotel spaces would have exceptionally high occupancy rates (even though they would also have exceptionally high prices).
Taking all of the developers’ assurances into account, the analyst thought the project would generate about $93 million in new taxes for the public. Sounds great, right?
Except that the same analyst found that CentrePointe’s bonds would also cost the public about $96 million to finance.
Even with all of the developers’ optimistic “best case” assurances – all of which eventually proved to be false – the Centrepointe bonds would still lose $3 million. [Updated*]
As CentrePointe repeatedly evolved over the ensuing years, it also repeatedly shrank. From the nearly $300 million sizing used for the 2009 assessment, the project shrank to $250 million, then $200 million. CentrePointe was shrinking to the point where its TIF funding was at risk.
Then, early last year, CentrePointe’s developers successfully lobbied the state legislature to lower the minimum capital investment needed to qualify for TIF to $150 million. In June 2013, the developers re-applied for TIF subsidies with a new, scaled-down CentrePointe.
The state hired the same analyst to evaluate CentrePointe, which was then estimated at $193 million (over $100 million less than in 2009). In their estimates, the analyst now estimated that the new Centrepointe Jr. would generate about $49 million in incremental taxes – about $23 million less than in the 2009 estimates.
This makes sense. As the size of the project shrinks, the incremental benefit also shrinks.
The problem? The new proposal still required an investment of $93 million to finance the CentrePointe bonds.
According to the state’s own analyst, the CentrePointe TIF bonds would be an extraordinarily bad investment in which bond investors would hand over $93 million, only to lose $44 million in the process.
Despite this extraordinarily negative analysis, the state and city decided to approve the TIF application for CentrePointe anyway.
Earlier this year, the developers began digging and blasting for a proposed $32 million parking garage on the site.
With the huge hole nearly complete, the developers have returned to the state and city to request that the TIF bonds for the garage be issued now – before the developer has spent anything close to the $150 million capital investment that is required to qualify for TIF.
In essence, the developer is requesting that the city and state take on a $32 million bond commitment (with an additional $33.5 million in financing obligations – $65.5 million total) on the dubious promise that the yet-to-be-built CentrePointe will someday generate enough new taxes to pay off bond investors.
This simply isn’t how TIF works. You don’t get the tax-funded financing before you build the thing which generates the taxes.
The state’s economic development analyst says that CentrePointe bond investors will never get paid back. And the analyst is undoubtedly correct.
The developers and their representatives repeatedly contend that TIF financing holds no risk for the city, the state, or taxpayers. (I don’t believe this assertion, but let’s run with it…)
If there really is no risk to taxpayers, then why do the developers need the city’s help in issuing TIF bonds? Why involve the city at all? After all, the developers could always pursue financing through normal real estate investment markets.
The reason is that they need the city’s help in creating the impression that the bonds are a safer investment than they really are.
But CentrePointe bonds aren’t a safe investment at all. In fact, they are likely to lose money for bond investors, because the project will never produce enough new taxes to pay investors back.
But the developers can’t let investors know that. Savvy investors would look at the risky business model of CentrePointe and refuse to fund it.
So the developers want to use our good name and credit ratings to help them deceive and defraud those investors, to assure them that the public stands behind those bonds and that the bonds are safe.
Today, the Lexington-Fayette Urban County Council will consider whether to ask the Kentucky League of Cities to issue TIF bonds for CentrePointe. While this move ostensibly shields LFUCG from liability when bond investors aren’t paid back, it is really a shell game. The League of Cities is a non-profit which consists of Lexington and other Kentucky cities, and lobbies on their behalf. Whether the League or the city issues CentrePointe TIF bonds, the reality is that taxpayers are still ultimately liable when the bonds fail. (And they will fail.)
The developers have attempted to maintain a veneer of respectability in our community – frequently pointing to their many, many development projects around Lexington as proof of their virtue. And CentrePointe fits the developers’ well-worn modus operandi of privatizing gains while socializing risks throughout those projects.
CentrePointe represents the very worst of corporate cronyism. By using an obscure and ever-shifting financing scheme, the Webb Companies are attempting to commit state-assisted fraud, while lining their own pockets and hoping that no one notices.
They’ve hoodwinked the Cabinet for Economic Development. Twice. They’ve hoodwinked the Urban County Council. At least two times. Now they want to hoodwink the Kentucky League of Cities.
These aren’t the actions of upstanding citizens. These are the actions of con artists and swindlers. They should be treated as such.
* An earlier version of this post included a smaller, state-only estimate of the impacts of CentrePointe from the analyst’s 2009 report. I’ve updated the post to reflect the full impacts to both the state and city. (This correction resulted in an even bigger shortfall for the TIF funding.)
2 thoughts on “Moving the Goalposts on CentrePointe”
The Herald-Leader article today claimed that all of the risk was with the bond purchasers. I suspect that somehow the taxpayers will foot the bill! But I’d like to see the fine print on the bond issuance.
All of the Downtown Lexington Kentucky Projects completed by the Webb Companies and subsidiaries were funded by bankrupting Kentucky Central Life Insurance. Thousands of Kentuckians lost their entire savings and entire retirement annuities. The Webbs stole $130Million and only paid back $6Million with a deal cut by Governor now in office.