Tag: Community

And now for the hard part…

Rob Morris 0 Comment CentrePointe, Local , , , , , ,

Critics have identified three interrelated categories of problems for CentrePointe since it was introduced to the public in 2008:

  1. Context.  Will it ‘fit’ with downtown Lexington?
  2. Financing.  Will it be built?
  3. Viability.  If built, will it work?

And CentrePointe has consistently failed across all three dimensions.  It didn’t fit Lexington.  It couldn’t be financed.  And it wasn’t viable.

As the project has changed trajectory in the past few months, it is worth re-examining these critiques.

Context
The first three iterations of CentrePointe were uninspired and uninspiring.  The designs seemed devoid of place – as though they could be plopped down on any block in any random city – Nashville, Atlanta, Phoenix, Detroit.  There was nothing about the designs which was particular to Lexington.

The bland and imposing structures were also the architectural equivalents of bullies – crowding Main Street, unwelcoming to pedestrians, overshadowing nearby buildings, and oblivious to the surrounding fabric of downtown.

The heavy-handed designs seemed to mirror the developers’ if-you-don’t-like-it-well-that’s-just-too-damn-bad demeanor.

In recent weeks, however, we have begun to see much more hope for CentrePointe.  With help from the mayor, the developers engaged Chicago’s Studio Gang Architects (SGA) to reconceive the site. And the developers have interacted much more with the public and the press – including a quasi-interview with the developer which utilized our questions from an earlier post. (We’d like to ask some follow-ups!)

Jeanne Gang presented her firm’s initial architectural concept for the CentrePointe block to a packed crowd at the Kentucky Theatre last week.

It was a great design.

GangCP And like most great designs, it poses elegant solutions to several problems at once.  Here are a few highlights which caught our attention:

  • Mass.  SGA departed from previous monolithic designs, and redistributed the mass of the project across the site.  The new asymmetric distribution allows the design to accomplish a number of goals.  Breaking the project into components also opens the possibility that the site might be developed in phases – perhaps as financing becomes available.
  • Main Street.  Along Main Street, SGA proposes having 6 distinct building designs which would mirror the varied designs across the street and which would also help maintain the organic, eclectic feeling of a typical Main Street.
  • Inclusiveness.  To help ensure distinct building designs along Main Street, SGA has selected five local architects to design 5 of the 6 buildings on that side of CentrePointe.
  • Plays Nice.  Unlike the earlier “bully” designs, this one seems to play nicely with the surrounding city. SGA used “shadow studies” to assess how the 30-story tower might throw shadows over nearby buildings.  Those studies helped them decide to place the tower near the corner of Upper and Vine Streets, where the building would be less overpowering on the surrounding blocks.
  • Circulation.  This design also departs from earlier versions in that it promotes pedestrian circulation with the surrounding city and within the site, with ample open spaces and public areas.  It is able to accommodate parking access for cars without significantly disrupting pedestrian access.
  • Lexington.  Studio Gang are trying to give the project local meaning – connecting it to our history, stories, and environment.   And while I’m skeptical of the real utility of “the connected separateness of paddocks” or “the porosity of limestone” as sources of inspiration for the new design, SGA is the first CentrePointe architect who seems to realize that it will be built in a unique setting within our unique city.

Studio Gang have crafted this particular design to this particular spot in Lexington, and the result is very encouraging.  Lexington may finally have a signature project worthy of the center of our city.

Financing
The changes in the nature of the CentrePointe project don’t alter the economic environment for getting the project funded.

While now armed with a world-class architect and a world-class design, the developers are still faced with the enormous challenge of finding funding while the commercial real estate market remains in severe recession.

Investors will be far less interested in the aesthetics of the project than its financial viability as an investment vehicle…

Viability
Our central criticism of CentrePointe over the past few years has been its economic viability.  We’ve spent a lot of time deconstructing the economics of CentrePointe, and whether it can ‘work’ as an economic entity.

In short, the project wasn’t – and still isn’t – realistic.

Each of the four components of the project (condominiums, hotel, retail, and office) demanded exceptionally high prices and required exceptionally high occupancy to be successful.

Despite the inclusion of SGA in the design of CentrePointe, the developers won’t be able to achieve the levels of occupancy needed to make the project successful.  (Both prices and occupancy were far in excess of the Lexington market.)

The project also needed the infusion of Tax Increment Financing (TIF) from the state and city to help pay for ‘public’ improvements to the site (including sidewalks, parking garage, storm sewers, and other infrastructure).

The city and state would issue TIF bonds (debt) to pay for today’s improvements, and would pay them back with interest by harvesting future tax revenues coming out of the CentrePointe site.

And, as we have shown before, the CentrePointe TIF – based on incredibly optimistic assumptions – never pays back the city or state for their investment.  In essence, TIF amounts to corporate welfare for the developers.

And no knowledgeable bond analyst would ever recommend the CentrePointe TIF to his or her investors.  It would never pay them back.

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Over the past three years, CentrePointe seemed like a lose-lose for Lexington: We lost if the project wasn’t built; we lost if it was built, too.

CentrePointe was a bad idea.  And it was badly executed.

The new approach to designing CentrePointe is different: This new design incorporates so many great ideas, and it seems to function so well with downtown Lexington.

Studio Gang has helped transform the threefold criticism of CentrePointe – It doesn’t fit Lexington; It can’t be financed; It isn’t viable – into a twofold critique.  CentrePointe still can’t be financed.  It still isn’t viable.

While still deeply skeptical about the project’s economic viability (and its value for Lexington), we find ourselves pulling for this vision of the project – just a little.

This CentrePointe seems like a good idea – maybe even a great one.  And that’s the first time we can legitimately say that about CentrePointe.

But great ideas are the easy part.

Now, the community’s attention must turn to the hard part of CentrePointe: Execution.

The transition to execution poses new challenges for the developers and for Studio Gang.

How will the project find funding?  Can they conceive a more realistic plan which pulls back from today’s more ambitious design?  Can they make a 20-story tower work, for instance?  Can they craft an economic model which doesn’t rely so heavily on TIF?  Can they build smaller parts of the project today, and finance the rest when the economy improves?

The future of downtown might rest on the answers.

UPDATE 7/18/2011: Jeff Fugate has an excellent post on what the new design of CentrePointe accomplishes over at ProgressLex.

The Promise (and Predicament) of CentrePointe

Rob Morris 3 Comments CentrePointe, Local , , , , ,

Since CentrePointe was initially proposed over three years ago, the project has been marked by fantastical bluster, broken promises, poor designs, and, ultimately, a failure to build.  All of which was compounded by the developers’ riteously indignant, arrogant, and combative attitude when challenged on the wisdom of CentrePointe.

A couple of years ago, after declaring CentrePointe an impossible-to-build failure, we outlined some basic principles for reconceiving the (still) empty block in the heart of our city.  Here’s an abbreviated excerpt from that post:

  • Create a vibrant destination which attracts residents, workers, and tourists.
  • Make that destination a distinctive place which no other city has.
  • Create public and private spaces within the destination.
  • Balance the types of uses within the development.
  • Ensure local businesses have significant presence.
  • Ensure that the space is well-integrated with the surrounding community.
  • Build it soon.

After three years of apparent tone-deafness by CentrePointe’s developers, the prospects for such a “signature place” seemed quite dim.

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On the sweltering third floor of the old courthouse yesterday, an overflow crowd of some 300 Lexingtonians received a tantalizing glimpse of a new approach to the CentrePointe project.

And that approach represented an enormous (and refreshing) step in the right direction.

With the encouragement of Lexington’s new mayor, the developers engaged Jeanne Gang of Chicago’s Studio Gang Architects (SGA) to rethink the CentrePointe block.

On Thursday, she present preliminary site design concepts for the CentrePointe block.  And she presented a marked departure from the old approach to CentrePointe.

NewCPDesign Gang’s presentation and the developers’ new approach are refreshing in a number of ways:

  • Design. SGA abandons the “Fortress Lexington” approach of the old CentrePointe.  By breaking the project into independent components with different volumes and designs, SGA will avoid the imposing and monolithic designs offered in previous iterations of CentrePointe.
  • Openness. By showing preliminary design concepts and inviting public input on them, CentrePointe promises to be a much more open project.  The developers are even inviting local architects to design the Main Street components of the project.
  • Humility. Gang showed her work and her thinking while it was still in progress, while it was still incomplete.  Exposing this level of uncertainty takes a striking degree of humility and confidence – for both the architect and the developer.  Whereas previous iterations of CentrePointe were presented as a fait accompli to be adored by a passive audience, SGA’s version promises to be a shared community treasure which we might be able to design together.  In this more humble regime, once-adversarial relationships might transform into more-cooperative ones.

The mayor and the developers and SGA are to be commended for crafting this new approach to CentrePointe.

The chances for creating a unique, signature place for Lexington went way up yesterday. And the developers deserve some credit for allowing that to happen.

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Despite the new approach to designing CentrePointe, a number of nagging issues remain for the tortuous project.

While Gang’s site design breaks up the monolithic tower of previous CentrePointe concepts, it appears to maintain the overall square footage and volume of the last iteration of the project.  If the project is roughly the same size, it should be roughly the same cost – around $200 million.

And if the developers have had difficulty lining up financing for the past three years, what will allow them to line it up now?  The commercial real estate market remains deeply depressed, and it isn’t clear that such abundant premium space would find tenants in Lexington.  The business model issues we identified early in the project haven’t fundamentally changed.

Is it possible that the new design will be so revolutionary, so inspirational, so great that investors and tenants will line up around the CentrePointe block to get in?  Perhaps.  We’d be thrilled.  But we doubt it.

The $200 million price tag is also important because that is the minimum required to qualify for tax increment financing (TIF).  TIF allows cities and states to allocate future incremental tax revenues to finance today’s public improvements related to new economic development initiatives.

In CentrePointe’s case, the city and state would finance about $50 million in improvements – a parking garage, sidewalks, storm sewers, etc. – around the project, and they would hope to recoup that investment from new taxes generated by CentrePointe.  In previous analysis, we’ve found that the CentrePointe TIF is highly problematic, and that it is doubtful that the city or state would ever get their money back.

Even though the new design direction is encouraging, several other aspects of the project are still unresolved.  Is the project the appropriate scale for Lexington?  Can it find willing tenants? Can the developers nail down financing?  Is the TIF worth the up-front expense?

The developers find themselves in a dilemma: If their project falls below the $200 million mark, it will be much more realistic to finance and to find occupants.  But it will lose the $50 million boost from TIF financing.

If the project comes in over $200 million, it is much more difficult to finance and occupy, and the opportunity for financing the project in the next 5 to 6 years looks grim.  (The TIF agreement between the Kentucky Economic Development Finance Authority and the city specifies that the $200 million be spent by January 2015).

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We applaud the developers’ new, more-open approach to designing CentrePointe.  Bringing Jeanne Gang and SGA in to rethink the site is a welcome departure from the past three years. As frequent critics of CentrePointe and its developers, we’re very encouraged by the new direction of the project.

But because the economic challenges to the project linger on, we’d like to see a more open, more flexible approach applied to the execution of the project as well.  Perhaps the project could be built progressively or in stages, to allow for further construction as new financing becomes available. Perhaps it could be downsized to multiply financing options.

If – and this is a big ‘if’ – the developers can rethink their business model the way they’ve begun to rethink the design, the future of CentrePointe may be bright indeed.

UPDATE 6/6/2011: Graham Pohl now has a fine post up on an architect’s perspective of the new CentrePointe design and process over at ProgressLex.

The Trouble with Consultants

Rob Morris 6 Comments Local , , , ,

In the wake of the scandal surrounding Angelou Economics and their “recycled” economic development plan for Lexington, there have been a number of calls for developing a more homegrown economic development strategy.

These include Tom Eblen’s thoughts on local knowledge and leadership, John Cirigliano’s project-based approach, and our own ideas about extending the work of the mayoral transition teams.

In response to these calls for a more local economic development approach, I’ve noticed counter-memes emerging.

  • One argument contends that we need consultants to fight insularity and to provide a valuable outside perspective.
  • Another – in a particularly egregious defense of the indefensible – contends that this is what creative professionals do, and shame on those who called out Angelou – they destroyed a civic foundation of teamwork and trust.

I think these arguments are mostly wrong, and that they mostly distract us from taking the reins of our own economic development.

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I’m pretty jaded when it comes to consultants.

I’ve managed a wide range of consultants throughout my career: industrial designers, research agencies, brand consultants, business strategy consultants, operations consultants, and even internet consultants at the height of the dot-com bubble.

I’ve engaged with enough consultants over the past 15 years to notice distinct patterns:

  • Consultants play “follow the leader”.  Every industrial design consultant starts by deconstructing what Apple does.  Business strategy consultants start with Google.  Or GE.  Or Proctor and Gamble.  They consistently take the leader in a category and dangle it in front of the client like red meat.  The implication: “With us, you can make products like Apple.  You can grow like Google.  You can mint money like P&G.  Just hire us and we’ll share that ‘secret sauce’.“
  • Consultants tell clients what they want to hear.  A few consultants throw some early jabs to get a client to sit up and listen – “Here’s why your marketing sucks…”  Ultimately, though, they calibrate their recommendations to what they think the client wants to hear.  What they deliver are bland, unobjectionable, safe ideas which don’t really threaten the status quo.  “You can be wildly successful without discomfort!”
  • Consultants position for the next engagement.  The most successful consultants are always angling for their next big score.  They deliver big, fat, visually-stunning reports loaded with aspirational recommendations which seem reasonable enough, but which neglect any significant detail on how to execute what they recommended.  Because execution is something they would be glad to help you with, for an additional fee.  They promise the ‘secret sauce’, but never actually provide the recipe.
  • Consultants recycle.  Relentlessly.   Once a consultant comes up with a ‘big idea’, they don’t usually isolate it to a single client.  They leverage that idea over and over again, across their business.  They might customize or repackage their big idea for each client, or they might just make it a signature ‘product’ which they patent or trademark.  About eighteen months after we rejected an industrial design, for example, we’d see elements of that design pop up in another client’s products.  Many of the presentations and reports we got from consultants were 70% to 90% ‘boilerplate’ – stuff which could have been used for any of their clients in any industry.

Not every consultant follows these patterns, but enough do that these behaviors are fairly predictable.  If consultants are so predictable, why do so many people work with them?  There are a couple of unfortunate reasons.

First, consultants can provide a kind of political cover for difficult decisions: “I’m not recommending layoffs, the consultant is…”  Their ‘independence’ and ‘objectivity’ make the consultants’ recommendations seem to carry more weight than when those same recommendations come from the people who hired them.

Second, and often related, is that consultants help us look busy when we’re tackling a difficult problem.  They signal to others that we’re taking action: “Our consultant is looking into that.”  In these cases, the appearance of action seems more important than the production of results.

Consultants can, indeed, provide a valuable outside perspective.  Often, they’ve seen a lot of diverse examples of smart stuff that others are doing, and they bring those best practices to their clients.

But consulting engagements perform best when consultants augment and enrich the client’s work – when the clients have already done their homework; They fail when the client abdicates their work to the consultant.

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MadLibs2 Given my jaded perspective on consultants, I wasn’t too surprised when Ben Self exposed the Madlibs-style, fill-in-the-blank consulting work done by Angelou Economics in their “Advance Lexington” strategy for economic development.

Angelou fit a lot of the consultant patterns.

  • They recycled reports they had created for other cities.
  • They played “follow the leader”, holding out their work in successful cities like Austin and Boulder with the implicit promise that Lexington could be like them.
  • They also told their clients what they wanted to hear – recommending a much more prominent role for report sponsor Commerce Lexington (which is partly subsidized by Lexington taxpayers) in Lexington’s economic development.  That gives Commerce Lexington “cover” when it requests increased public funding; After all, it isn’t Commerce Lexington’s idea…

The problem for Lexington is that we attempted to have the consultant do our work for us without doing our own homework first. We can’t expect to get great economic results when we outsource our economic development strategy to others.

We had folks whose job it was to produce such a strategy.  They just didn’t.  They abdicated their responsibility to a consultant.  And that’s not acceptable.

The important question: Why didn’t Lexington already have a strategy for economic development before we engaged Angelou?

Beyond Angelou

Rob Morris 2 Comments Local , , , , , ,

In December, I was honored when Lexington Mayor-elect Jim Gray asked me to join one of his economic development transition teams.  In preparation for our first meeting, we were given a packet which described the state of economic development in Lexington.

As I reviewed those materials, I noticed several references to “the” strategic plan for Lexington’s economic development; Yet that strategic plan wasn’t part of our materials.  I scanned the city government website for the strategic plan, and came up empty.

At our first meeting, I mentioned that we needed to get our hands on that strategic plan.

But Lexington didn’t actually have a strategic plan for economic development.  Despite having a Mayor’s Office of Economic Development and a staff of economic development folks at Commerce Lexington, we hadn’t developed a comprehensive approach to Lexington’s development.

Instead, the city and Commerce Lexington co-sponsored a $150,000 engagement with Angelou Economics, an Austin-based economic development consultancy.  The final Angelou deliverable would include an economic development strategy for Lexington.

I was stunned.  Not only did we not have a coherent economic development strategy, but we had seemingly outsourced the formulation of that strategy to an out-of-town consultant!

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Angelou released a draft of Lexington’s economic development strategy last week.  In the process, they unleashed a torrent of criticism after Ben Self showed that Angelou essentially recycled reports they had provided to other cities, often copying entire paragraphs and even pages.

The recommendations that Angelou makes aren’t bad.  They recommend creating a better support network for entrepreneurs.  They recommend setting up a minority business accelerator.  They recommend setting up a comprehensive marketing plan for Lexington to help recruit new businesses.

The trouble with Angelou’s report (as might be expected after Ben’s analysis) is that “Lexington” is missing.  Much of what makes Lexington special and unique – our history, our geography, and our culture – is largely absent from the Angelou strategy.

There’s no significant mention of downtown.  Of the Distillery District.  Of our neighborhoods.  Of our unique individuals and personalities.  Of our history.  There’s only a passing mention of our horse farms and our rural landscape.  There’s no mention of the World Equestrian Games.

As a result, Angelou fails to identify what gives Lexington a competitive advantage in the global competition for businesses, jobs, and talent.  So while the recommendations aren’t bad, they just ring hollow.  They are bland and generic.  They don’t feel special to Lexington.

When Angelou recommends focusing on “Clean Technology”, for instance, that sounds like a good idea.  But what gives Lexington any special advantage over any other city in pursuing clean tech (Especially when every other city is pursing such a “hot” industry)?

These kinds of questions arise with most of the Angelou recommendations. What would a marketing plan for Lexington look like?  What would it build upon?  What – specifically – would give Lexington the ability to create a best-in-class workforce?

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We have the beginnings of a very solid economic development plan.  It just didn’t come from Angelou.  It came out of the two economic development transition teams that Mayor Gray appointed.  (You can download PDFs of the two “Economic Opportunity” reports from the mayor’s transition website.)

The two teams – made up of leaders from across the city – developed recommendations for how the mayor should approach economic development in Lexington.

And the transition teams recommended many of the same actions that Angelou did.  The difference?  The ideas contained in these reports are far more actionable than the ones we received from Angelou.  They are far more interesting.  They are far more relevant.  They are far more tailored to Lexington’s specific challenges and opportunities.

Like Angelou, the transition teams recommended enhancing support for entrepreneurs.  But the transition teams went further, and offered much more specific examples.  These included: Having the mayor visit 5 entrepreneurial events each year (along with a list of suggested events); Having the mayor organize an annual innovation conference, along with specific suggestions on structure and format; and, having the mayor’s office produce “The Lexington Entrepreneur’s Guide” online and in print.

The transition teams’ suggestions for a marketing plan for Lexington included specific, actionable ideas on who to include and how to approach marketing our city.  We could get testimonials from Jess Jackson (of Kendall Jackson Wineries) or Elizabeth Arden (Note the Streetsweeper’s comment below), who happen to own horse farms here.  The transition reports recommended building databases of local resources which could be called upon when recruiting new businesses to Lexington.

The transition teams also offered suggestions on how to better utilize downtown, our horse farms, and the Distillery District.  They offered specific ideas on building upon our health and educational systems.

And unlike Angelou, the recommendations contained in the transition team reports are much more tailored to Lexington, and – as a result – the recommendations are much more actionable.  They form the foundations of a real economic development plan for our city.

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Somehow, about 25 volunteers – in the span of a few meetings across a few weeks – leveraged their knowledge and experience to produce some innovative ways for Lexington to pursue economic development.  And the final product is more valuable than the report the consultant provided.  And it didn’t cost $150,000.

There are a lot of great ideas in these transition team reports.  That said, those ideas don’t yet form a cohesive economic development plan.  That work remains to be done.

Given how productive the transition teams were in such a short time, why not let leaders from throughout the community develop the strategy for Lexington’s economic development?  Why not let them recommend the structure, the direction, and the financing of Lexington’s economic development efforts?

All it took to create these transition reports was leadership from our mayor.  Likewise, our mayor should initiate the process of building an economic development strategy for Lexington, created by us.

We should use the Angelou fiasco not only to penalize Angelou for doing poor consulting work, but also to learn how to do our own economic development better.

On Compromise

Rob Morris 0 Comment Ideas, National, Taxes , ,

Last night, Congress passed the $900 billion tax compromise reached between President Obama and Republican leaders.

In the end, progressives and conservatives alike lambasted the deal.  And that might be a very good thing.

I’m no fan of the bonus tax cuts for the wealthy that Obama conceded to congressional Republicans; Despite Republican claims, those cuts fail to create significant job growth.

Lost in much of the analysis over what Obama conceded, however, is just how many bigger concessions he won back from Republican leaders, as Ezra Klein points out with this chart:

Tax Cut Compromise Proportions

Unproductive and unneeded tax cuts for the wealthy make up only one-eighth of the compromise. The other seven-eighths of the deal are much more stimulative to our economy and to job production.

In essence, this tax deal is a second “stimulus” which is much-needed at this stage of our fragile economic recovery.

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During the Constitutional Convention in Philadelphia in 1787, representatives of each state teetered on the knife’s edge between walking away from the proposed Constitution for what they might have to give up, and giving up important principles (and power) in order to gain something better, stronger, and more resilient.

While the present compromise is not nearly as momentous, it does remind me of what Benjamin Franklin – then 82 years old – said when addressing that convention in September, which galvanized the representatives into agreement:

I confess that there are several parts of this constitution which I do not at present approve, but I am not sure I shall never approve them: For having lived long, I have experienced many instances of being obliged by better information, or fuller consideration, to change opinions even on important subjects, which I once thought right, but found to be otherwise. It is therefore that the older I grow, the more apt I am to doubt my own judgment, and to pay more respect to the judgment of others. Most men indeed as well as most sects in Religion, think themselves in possession of all truth, and that wherever others differ from them it is so far error. Steele a Protestant in a Dedication tells the Pope, that the only difference between our Churches in their opinions of the certainty of their doctrines is, the Church of Rome is infallible and the Church of England is never in the wrong. But though many private persons think almost as highly of their own infallibility as of that of their sect, few express it so naturally as a certain french lady, who in a dispute with her sister, said “I don’t know how it happens, Sister but I meet with no body but myself, that’s always in the right – Il n’y a que moi qui a toujours raison.”

In these sentiments, Sir, I agree to this Constitution with all its faults, if they are such; because I think a general Government necessary for us, and there is no form of Government but what may be a blessing to the people if well administered, and believe farther that this is likely to be well administered for a course of years, and can only end in Despotism, as other forms have done before it, when the people shall become so corrupted as to need despotic Government, being incapable of any other. I doubt too whether any other Convention we can obtain, may be able to make a better Constitution. For when you assemble a number of men to have the advantage of their joint wisdom, you inevitably assemble with those men, all their prejudices, their passions, their errors of opinion, their local interests, and their selfish views. From such an assembly can a perfect production be expected? It therefore astonishes me, Sir, to find this system approaching so near to perfection as it does; and I think it will astonish our enemies, who are waiting with confidence to hear that our councils are confounded like those of the Builders of Babel; and that our States are on the point of separation, only to meet hereafter for the purpose of cutting one another’s throats. Thus I consent, Sir, to this Constitution because I expect no better, and because I am not sure, that it is not the best. The opinions I have had of its errors, I sacrifice to the public good. I have never whispered a syllable of them abroad. Within these walls they were born, and here they shall die. (…) I hope therefore that for our own sakes as a part of the people, and for the sake of posterity, we shall act heartily and unanimously in recommending this Constitution (if approved by Congress & confirmed by the Conventions) wherever our influence may extend, and turn our future thoughts & endeavors to the means of having it well administered.

On the whole, Sir, I can not help expressing a wish that every member of the Convention who may still have objections to it, would with me, on this occasion doubt a little of his own infallibility, and to make manifest our unanimity, put his name to this instrument.

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Progressives hate what was conceded in this deal.  So do conservatives.  And everyone should be concerned over how much this deal grows our national debt.

Both sides wanted their leaders to stick to core principles – no matter the cost.  But that’s demogoguery, not democracy.  It isn’t how our country works.  It isn’t how our country was formed.

“Compromise” has become a foul word in this political season.

But it is the very heart of a functioning democracy.

A Small Business Perspective on Jobs and Tax Cuts

Rob Morris 6 Comments Jobs, National, Taxes , , , ,

Lowell's

In late July, one of our technicians left our award-winning auto repair shop to return to his hometown.  He has been our only employee to leave since I bought the business over two years ago.

His departure raised a question for us that a lot of small businesses have faced in this economy: Do we accept the risks of hiring a new employee to replace him?

The answer, I think, is instructive for many of the economic and political issues facing our country.

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Impatient voters punished Democrats two weeks ago for not giving enough focus to our nation’s sputtering economy after the near-implosion of 2008.

With our nation’s unemployment rate hovering just under 10% (and ‘real’ unemployment much higher), voters sent a clear signal that they want government to focus on creating jobs and growth.

According to the Small Business Administration [PDF Link], small businesses like ours make up 99.7% of employer firms, and account for two-thirds of new job creation.

Both Republicans and Democrats have reiterated the importance of getting small businesses hiring to get our country’s economy moving again.

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This week, congress reassembles in the wake of the elections to consider extending temporary tax cuts  implemented under the Bush administration in 2001 and 2003.

Republicans want to extend the entirety of the Bush tax cuts, which would add $5 trillion to the national deficit over the next ten years, and vastly expanded the national debt over the past decade.

Democrats want to extend the tax cuts as well, but would let them expire for the highest-income households which make over $250,000 per year.  The Democratic plan would cost almost $700 billion less than the Republican plan over the next ten years.

Republican leaders claim that giving tax breaks to top earners is critical to generating the new jobs that the economy needs to recover.

Unfortunately, they’re wrong.

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Just how would the Republican proposal affect small business jobs? A hypothetical example from my industry might help us get to an answer.

A very healthy auto shop might have annual sales of $1,000,000 – an amount which would put it well into the top 5% of shops nationwide.  If that shop is exceptionally well-run, it might see net profits of 30%, or $300,000.

For those few shop owners in such a fortunate situation, what are the implications of extending the Bush tax cuts for those making more than $250,000?  Under the Republican plan, that shop owner would save an incremental $1,500 in taxes over the Democratic tax cut plan.

As a small business owner, I’d happily take the $1,500.  But such a small amount would give me zero incentive to undertake the much greater expense – and risk – of hiring a new employee.

So while extending the Bush tax cuts would certainly line my pockets, they would do little to encourage me to create jobs in my small business.

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Some observers might contend, as incoming House Budget Committee Chairman Paul Ryan did on CNBC yesterday, that most job growth comes from larger “small” businesses and that my example above isn’t really that relevant to job creation.

So let’s pretend, for a moment, that our hypothetical business is actually 10 times as large as the example above: It has annual sales of $10,000,000, and its owners see profits of $3,000,000 per year.

Under the Republican plan, that business owner would save an additional $125,000 in taxes over the Democratic tax cut plan.  Now, this seems like an amount which might let a business hire a couple of additional employees.

But while the tax savings might be enough to hire additional employees, it provides little actual incentive to use that newfound money to hire in an uncertain economic environment.

A tax windfall fails to meet a prudent business owner’s criteria for making a hiring decision. Business owners don’t hire because we have extra money laying around. We don’t hire out of charity. We hire when there is more work to do.

Again, I’d happily take the $125,000.  But I’d also know that a drop of just 1% in my sales – a fairly likely risk in our current economy – would wipe out my tax savings.  If I were that business owner, I’d stash my cash as a hedge against an uncertain economy.  Net effect: no new jobs created.

The criteria for hiring is scalable: Whether a business has $1 million, $10 million, or $100 million in sales, the decision to hire is based on needing employees to meet demand – not on having spare cash supplied by tax cuts.

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In my shop, the economic slowdown – coupled with a nearby street closing for almost a year – contributed to a sales decline of over fifteen percent from our record 2008 levels.  The declines would have been worse if not for our solid reputation, our increased community involvement, and our vigorous marketing.

In fact, our business has more customers than ever before; It’s just that each one is investing far less in their cars.  We see a lot more folks putting off needed maintenance and hoping that their cars won’t break down.

And as I look at replacing the technician who left in July, this drop in sales has been my primary consideration.

An extra $1,500 from tax cuts wouldn’t induce me to hire a new technician.  Neither, frankly, would an extra $125,000.

I’ll hire when our core business is better – when there is more work to do – and not just when I have a convenient pile of cash.

And to make our business better, we need more customers with more money – and more willingness to spend.

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To encourage small business hiring, policymakers need to encourage spending.  In particular, they need to encourage the kind of spending which reverberates through the economy as that money is spent and respent in the form of wages, further buying, more wages, and – ultimately – hiring.

This respending feedback loop is key to creating enough demand that businesses like mine will start to hire again.  It is key to driving our nation’s self-sustained economic growth.

The fatal flaw of tax cuts for the wealthy is that the cuts don’t foster respending at a scale which drives significant hiring.  As seen in my examples above, a large chunk of each dollar given out in tax cuts to the wealthy is stowed away in savings – thereby stunting the benefits to the economy.

Mark Zandi, Moody’s Chief Economist, has found the same phenomenon in his research (Full PDF Here).

Tax cuts to the rich don’t yield as much overall economic benefit because the wealthy don’t need to (and won’t) spend that money, thus diminishing the virtuous feedback loop.

Zandi

Government spending which goes to those in need – the poor, the unemployed, state governments – does get respent (often out of necessity) and the feedback loop is much, much stronger than with tax cuts.

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If I’m looking at my bank account, the tax cuts seem like a fantastic idea. More money for me!

But if I’m looking at my business, my employees, their families, and my community – I want the government to focus on assisting those in need.  I want the government to encourage buying (especially from small, local businesses).  That’s what will help my business for the long term. That’s what will – ultimately – encourage me to hire.

Lose the tax cuts.  Give me customers instead.

Right.

Rob Morris 1 Comment Campaigns, Local , , , ,

On November 2nd, Lexington chooses its mayor.  I’ve spent much of the past few years observing the two candidates in action.  

Here, I address why one candidate is the right choice for Lexington, and why he will lead our city to a more prosperous and successful future.

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I first got to know Jim Gray personally about a year and a half ago.  After I had written about Lexington several times, I was pleasantly surprised when he asked to meet with me.

Gray I had long admired Jim’s accomplishments as a successful businessman and civic leader.  But as we talked about our backgrounds and about his experiences as Vice Mayor, I realized that this was the man Lexington needed to lead our city to a better future.

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Jim Gray is the right person to lead Lexington back to prosperity. Let’s explore why.

Humility
For all of his accomplishments and personal achievements (more on those in a bit), Gray is surprisingly humble about his success. Gray’s humility manifests itself in a number of important ways.

  • He acknowledges his own imperfections.  Rather than becoming defensive about his faults, he surrounds himself with people who more-than-compensate for qualities he may lack.
  • He listens.  A lot.   He knows that he doesn’t have all of the answers, so he seeks out people who have more knowledge and ideas.  And then, he listens carefully to what they have to say.
  • He is inclusive.    He always uses inclusive terms – “we”, “us”, “our” – when talking about Gray Construction (his family business where he serves as CEO).  He generously shares credit with others for the company’s success.

While his humility helps him lead and inspire those who work with him, it doesn’t always serve Gray well in politics.

For one thing, bragging comes unnaturally to him – he finds it awkward and unseemly to crow about what he has done and how he has led.

For another, he is inclined to be magnanimous – sometimes maddeningly so – with his political opponents.  While his opponent kicked off the campaign by attacking Gray, Gray has kindly maintained that his opponent “is not a bad guy, he’s just made some bad decisions”.

Accomplishments
Looking around the city and the commonwealth, Gray has left a lasting economic legacy which will serve our community long after his political career is complete.

Gray has led Gray Construction to be one of our city’s most innovative firms, and the company has a long record of job creation and city-building.

Gray It starts with Gray Construction’s downtown Lexington headquarters, located in the old Wolf Wile building.  Gray took a dilapidated building and transformed it into one of Lexington’s most inspiring workplaces.  The building stands as a stellar example of blending historic preservation with economic development.

But Gray’s accomplishments don’t stop there.

Sayre From here at Lowell’s, we can see Sayre’s Buttery and Upper School. Both buildings use modern building materials and techniques, while maintaining consistency with our historic North Limestone neighborhood.  That is a trademark of a Gray urban construction project.

In other parts of Lexington, Gray Construction projects include:

  • CenterCourt, a mixed-use development near the UK campus
  • A LEED-certified distribution center for Kentucky Eagle
  • The headquarters of Big Ass Fans
  • Amazon’s Lexington distribution center

Gray was instrumental in the inception of the 21c Museum and Hotel in Louisville.  Combining the best of old downtown Louisville with new design and materials, 21c has now been voted the #1 hotel in the U.S. for two years in a row.

South of Louisville, Gray built the visitors’ center at Bernheim Forest, Kentucky’s first LEED Platinum building.

In Georgetown, Gray built Toyota’s sprawling manufacturing facility, a vital part of our local economy.

Gray has changed the face of Lexington and of Kentucky for the better, and our community is more beautiful and more economically vibrant as a result.  He knows what makes a city thrive.  And he knows what businesses need to create jobs.

Insights
Jim Gray brought his experiences and insights from the business world to his (part-time) role as Lexington’s Vice Mayor.  He has had a knack for asking the right questions and doing the right things while in office:

  • He challenged the economic viability of the failed CentrePointe development from the beginning.
  • While the mayor waffled, Gray took the lead on looking into scandals at the Airport, the Library, and the Kentucky League of Cities.
  • He looked into how public safety was compromised by poorly-executed fire station brownouts.
  • He asked how wise it was to close several blocks of a major artery into downtown (South Limestone) for nearly a year.
  • He pushed for alternatives to the $160 million water plant which has now raised water rates by 65 percent.

Some have dismissed Gray’s actions as ‘grandstanding’.  But when we look back at the record, we see that he was right to ask these questions.  Every time.

Vision
Gray has been able to synthesize his business experience, what he’s learned about city goverment, and what he has heard from our community into a new vision for what Lexington could be.

But beyond a simple and unactionable vision, Gray has also detailed a ‘Fresh Start’ plan to specify what he will do as mayor.  The plan helps translate Gray’s vision into actionable steps.

Don’t agree with something in Gray’s plan?  Let him know.  Challenge him to make it better.  Tell him how.  As he says, the plan “is designed to be intelligently changed”.

Gray’s plan also reveals something even more important about Jim Gray: He has been thinking carefully about the future of Lexington.  He has kept his eyes open.  He has listened to our citizens.  He cares deeply for our city.

And, he has very good ideas for making Lexington an even better place to live and work.

I think we should give him the chance to implement his vision.

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On November 2nd, I hope you will join me in voting for Jim Gray as Mayor of Lexington.  I give him my whole-hearted endorsement.

 

Wrong.

Rob Morris 0 Comment Campaigns, Local , , , , ,

On November 2nd, Lexington chooses its mayor.  I’ve spent much of the past few years observing the two candidates in action.  

Here, I address in some detail why one is the wrong choice for Lexington.  Next, I’ll address why the other candidate will lead Lexington to a more prosperous and successful future.

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Last December – late in his third year in office – Lexington Mayor Jim Newberry proposed an ordinance to overhaul Lexington’s ethics laws.

Newberry Among other proposals, the ordinance suggested that lobbyists be prevented from serving as fundraisers or campaign treasurers for local campaigns.

Two days later, Newberry attended a $10,000 fundraiser for his campaign at the home of David Whitehouse, a registered lobbyist.

Proposed after the Urban County Council had adjourned for its winter break, little came of Newberry’s ethics proposal when council reconvened in 2010, and the mayor did little to promote his ethics initiative.

In microcosm, “Lobby-gate” encapsulates Jim Newberry’s tenure as Lexington’s mayor.  Let’s look at a few themes which emerged from this incident:

  • Scandal Blindness.  The mayor seems unable or unwilling to recognize and act upon wrongdoing.

Why would Newberry attend  fundraiser in a lobbyist’s home only two days after suggesting that Lexington should eliminate such a practice?  He either didn’t think – or didn’t care – about how apparently inappropriate his actions were.

  • Failure to Lead.  Newberry has resisted decisive action when faced with important issues.

While ethics reform was a centerpiece of Newberry’s 2006 run for mayor, he waited over 3 years to offer a proposal, and did so only as he and his competitors were ramping up for the 2010 campaign.

  • Hypocrisy.  In the wide gulf between words and deeds, the mayor often opts for symbolic posturing (rather than substantive action).

When questioned by local media about the fundraiser, his response was less-than-satisfactory for a ‘reformer’: “I… will continue to operate by the rules of the world as they exist.”

With his ethics proposal, Newberry could now make the empty claim that he ‘delivered’ a campaign promise for ethics reform.  Meanwhile, he would do precious little to see his half-hearted proposal – made while council was on break – into law.

  • Favoritism.  When Newberry does take action – or refuses to act – the beneficiaries are often his friends and campaign contributors.

Refusing to act on ethics reform allows lobbyist-contributors like Whitehouse (who represents a software firm that did work on the city’s financial systems) to operate without scrutiny or interference from the city.

  • Failure to Deliver.  Ultimately, the Newberry regime is marked by a pattern of profound inability deliver meaningful results.

Lexington’s ethics laws today are essentially unchanged from when Newberry entered office.

Isolated to a single incident, these flaws might be forgivable.  But they are not isolated: We can see these tendencies consistently pervading Newberry’s conduct as mayor.

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Scandal Blindness
This administration has been plagued by scandal.

  • There was out-of-control spending by the Bluegrass Airport staff and poor oversight by the Airport board of directors, who are appointed by the mayor.
  • There was out-of-control spending by the Kentucky League of Cities and poor oversight by KLC’s board.   Newberry is a member of that board.
  • There was out-of-control spending by the Lexington Public Library staff and poor oversight by the Library board of trustees, who are appointed by the mayor.
  • In the wake of the Haitian earthquake, there was Newberry’s failure to quickly approve sending a specially-trained Lexington Search and Rescue team into the quake zone.  The delay meant that the team was relegated to a support role.  The mayor’s indecisiveness likely cost lives.
  • There were the accusations of fraud by Patrick Johnston, Newberry’s own Director of Risk Management in the Lexington-Fayette Urban County Government.

While actions in question failed to rise to the legal definition of fraud, the investigations into the Johnston affair revealed fresh concerns over how Newberry’s administration behaved – including audit breakdowns, ethical failures, privacy breaches, and retaliation.

After months of obstruction and delay in the Johnston affair, Lexington was left with a ridiculous predicament: the city government sued itself, and taxpayers footed both sides of the $50,000 bill.

While Newberry wasn’t implicated in these scandals, he has been indecisive and ineffectual in responding to them.

First, Newberry minimized possible wrongdoing.  Then, he questioned the motives and challenged the authority of those who wanted to take action on the scandals, preferring to let the respective boards handle their ‘internal’ issues.  As weeks and months of inaction (and, in some cases, obstruction) became deeply embarrassing, he finally ‘welcomed‘ the investigations which were already underway.

As scandal upon scandal broke, Newberry could have learned from each one – figuring out how to lead decisively in the face of scandal.  Instead, Newberry seemed to intensify a kind of bunker mentality – choosing to hunker down until the uproar passed.

Failure to Lead
As seen with the scandals above, Newberry has demonstrated an appalling failure to lead just when his leadership was needed most.

Another area which needed strong mayoral leadership has been Lexington’s urban development, especially throughout downtown.  Instead, Newberry has adopted a laissez faire attitude – opting instead to do little to help guide downtown development efforts.

  • The mayor has been a steadfast supporter of the failed CentrePointe development, even as the project’s deep flaws became evident.  As a result, Newberry stood by while the developer tore down a neglected-but-historic block of buildings in the center of our city.  And he has done little to ensure that responsible development happens on that still-vacant block.
  • As the council adopted design guidelines for the downtown area, Newberry failed to offer any executive leadership to see form-based guidelines defined and implemented.  So when CVS wanted to build a new pharmacy at the gateway to downtown, Lexington had few formal requirements guiding the ultimate design of the structure.
  • The mayor has extended this do-nothing approach to historic preservation initiatives, refusing to see how economic development and historic preservation can be complementary efforts.  He has incorrectly characterized design and preservation as matters of ‘taste’ rather than of smart economics for Lexington.
  • At the last minute, the mayor launched a poorly-conceived and transparent effort to block the funding of improvements for Lexington’s Distillery District.

As we’ll see more in a few moments, when the mayor actually does take decisive action, the results are questionable.

Hypocrisy
Without apparent shame, the mayor often maintains a stark and hypocritical disconnect between what he says and what he does.  He seems to think that voters won’t notice if he does one thing while he says the opposite.

  • He pushed his expensive water plant plan through council while accepting huge contributions from water company executives and allies.  Now he is ‘outraged‘ about 65% increase in water rates – a burden that his plant put on taxpayers.  Hypocrisy.
  • He and his staff actively suppressed the release of government information during the Johnston scandal while announcing a ‘new’ government transparency initiative.  Hypocrisy.
  • He dragged his feet on investigating scandals at the Airport, the Library, and KLC, only acting when his inaction became embarrassing.  Now, he likes to claim that he ‘strongly condemned’ the same scandals he failed to act upon.  Hypocrisy.
  • He browned out fire stations and decreased police and fire staffing while declaring that public safety was “job one”.  Hypocrisy.
  • His contributors like to ridicule putting local businesses first (especially this local contributor who contracted on the local $160 million water plant with his local business), while he champions projects which benefit those same contributors – some of Lexington’s wealthiest citizens and corporations.  Hypocrisy.
  • He attacks his opponent’s accomplishments in his part-time position as Vice Mayor, all the while hoping nobody asks “What has Jim Newberry really accomplished as mayor?”  Hypocrisy.

This serial hypocrisy is compounded by Newberry’s profoundly Bushian inability to admit mistakes. Such lack of humility means that he is unable to go back and fix the problems of his administration.

Newberry’s campaign is built upon the cynical belief that voters will remain ignorant of such hypocrisy.

Favoritism
There is a short list of mayor-driven accomplishments during the Newberry tenure: downtown streetscapes, the Lyric theater, the $160 million water plant, and CentrePointe stand out.  As we look across this list, we notice a distinct pattern: the primary beneficiaries of the mayor’s action – when he chooses to actually take action – are Lexington’s richest citizens and companies.

  • If the Tax Increment Financing (TIF) that Newberry promoted for CentrePointe does more for Dudley Webb than for the average Lexingtonian (and it does), it amounts to little more than corporate welfare.
  • If streetscape projects greatly benefited Leonard Lawson (the owner of ATI Construction and already one of Kentucky’s wealthiest people), while the average citizen was made to wait in traffic jams for 15 months, it seems that the mayor’s friends’ priorities are put ahead of voters.
  • KAWCPlant If the mayor pushes through a $160 million water plant which lines the pockets of Warren Rogers and other campaign contributors – while making average families pay 65 percent more for water – that, too, amounts to corporate welfare and pay-to-play.

These projects were among the most contentious that the council considered over the past four years.  And on each one, the mayor was more active and vocal than usual in strong-arming them through council.  For whose benefit?

Failure to Deliver
When we look over the Newberry record, we have to ask what Jim Newberry has really accomplished for Lexington.  And that record is not impressive:

  • He dropped the ball on overseeing the Airport scandal, the Library scandal, and the Kentucky League of Cities scandal.
  • He dropped the ball on CentrePointe.
  • He dropped the ball on the water plant.
  • He dropped the ball on delivering more firefighters and police officers.
  • He dropped the ball on saving lives in Haiti.
  • He dropped the ball on the fire station brownouts.
  • He dropped the ball on the budget and responsible spending.
  • He dropped the ball on jobs.
  • He dropped the ball on economic development.

After so many fumbles, it is time to bench our current mayor.

Jim Newberry is the wrong choice for Lexington.

The CentrePointe Scam

Rob Morris 10 Comments CentrePointe , , , , , ,

We’ve long been critical of the economics of the proposed CentrePointe development just a few blocks away in downtown Lexington.  

One of the least understood portions of the project is the element known as Tax Increment Financing, or TIF.

In essence, TIF allows cities and states to allocate future incremental tax revenues to finance today’s public improvements related to new economic development initiatives.

The recent changes to the CentrePointe project invite a reassessment of the CentrePointe TIF program.

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NewCP2CentrePointe’s TIF program would use future new tax revenues from the CentrePointe development to fund about $50 million in projects around CentrePointe.

These public initiatives would include:

  • A new underground parking garage beneath Phoenix Park;
  • Renovating Phoenix Park;
  • Renovating the old Fayette County Courthouse (now the Lexington History Museum); and,
  • Providing new infrastructure including storm sewers, sidewalks, and – according to the most recent renderings – a pedway which seems to cross Upper Street to (?!) McCarthy’s Irish Pub.

The state and city would issue some $50 million in 30-year bonds (i.e., public debt) to fund the initiatives.  Over the course of the next 30 years, our governments would pay out some $100 million in principal and interest to the investors in the CentrePointe TIF bonds.  The state would cover three-quarters of the total payments (about $72 million), and Lexington would cover the rest.

Then, the state and city would hope to use new taxes generated from CentrePointe over the next 30 years to offset the $100 million spent paying bondholders.

But is this a good investment of taxpayer dollars?

To get an informed answer, we need to dive deep into the business fundamentals of the CentrePointe TIF project.

(Note: What follows is financially ‘geeky’, but it is also critical to understanding how our money is invested.)

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We have two major concerns with the CentrePointe TIF:

  1. The valuation methodologies used by the state and city are fundamentally flawed, and are not the standard for evaluating a long-term investment.
  2. CentrePointe will not generate the promised revenues, due to incredibly optimistic business model assumptions.

Let’s look at each of these concerns in succession.

Valuation Methodology
As far as we can tell, there have only been two evaluations of the public impacts of the CentrePointe project:

  • A late 2008 assessment of CentrePointe done for Lexington by Morgan Keegan & Company which expected $211 million in total tax revenues over 30 years; and,
  • An Economic Research Associates (ERA) report [PDF Link] done last summer for the state’s Cabinet for Economic Development, which expected nearly $70 million in tax revenues from CentrePointe for the state alone.

Of the two, ERA’s assessment is the more recent, more complete, and – in our judgment – more reliable.  It is also the one which the state used to approve the CentrePointe TIF.

But, as mentioned above, there are deep flaws in how both of these reports valued the public benefits stemming from CentrePointe.

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Businesses make investment decisions all the time: products, facilities, acquisitions, marketing, and so on.

When businesses evaluate an investment project, they look at how much they put in up front (‘the investment’) versus how much they can get out over time (‘the return’).

But when looking out into the future, most businesses lower the value of future earnings.  In other words, the promise of $1 million next year isn’t worth as much as $1 million in-hand today.  A lot of things can happen in the course of a year – inflation, disasters, competition, market shifts.  And $1 million two years from now is worth even less, because there is even more risk of something happening.

Typically, stable and established businesses use an annual rate of around 10% to ‘discount’ future earnings.  For example, if an investment generates a return of $1 million today, that is valued at $1 million.  Simple enough.  But if it promises another $1 million next year, that is worth just $900,000 to us today (i.e., 10% off of $1 million). The promise of $1 million two years from now is worth just $810,000 today, and earnings further in the future are given even steeper cuts in their valuations.  So the promise of $1 million 30 years from now is worth just $42,000.

This ‘discounted cash flow’ method is the same standard that Warren Buffett and other investors use to evaluate how much to pay for an investment, and it is the financial equivalent of ‘a bird in hand is worth two in the bush’.

Depending on the kinds of risks an investment faces, the discount rate might be significantly higher.

When we purchased Lowell’s, we used a 20% discount rate.  Even though Lowell’s was a solid business with loyal customers, we faced a number of uncertainties.  Would we lose key employees? Would customers stay away in droves?  Would things fall apart? Those things didn’t happen, but they posed very real risks as we purchased a new business.

With an especially speculative venture like CentrePointe, we would usually apply an annual discount rate of 20%. Or more.

So what kind of discount did Morgan Keegan and ERA apply to CentrePointe’s promised future tax revenues?

Zero.

Instead of incorporating the risks inherent with a project like CentrePointe, these assessments valued CentrePointe as if there were no risks at all. In these scenarios, the faint promise of $1 million in 2040 from CentrePointe was just as secure as having $1 million in our wallet today.

This is especially problematic, because so much of CentrePointe’s tax revenues were promised so far in the future, when a conventional valuation methodology would steeply cut their value.

For instance, in Morgan Keegan’s assessment, nearly half of CentrePointe’s tax benefits – over $100 million – came between 2030 and 2040.

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The original report [PDF link] from Economic Research Associates (the state’s CentrePointe consultant) estimated that 30 years of tax revenues from CentrePointe would generate some $70 million for the state – while the state’s expenses for CentrePointe projects ran $72 million.  So ERA projected that the state stood to lose $2 million on the CentrePointe TIF.

And that estimate derived from the faulty methodology we described above.

So what does the CentrePointe TIF look like when we apply standard valuation techniques?  Let’s be generous, and apply the 10% annual discount rate reserved for stable investments to our analysis of CentrePointe.  We’ll also use ERA’s estimated stream of future tax revenues.

Using a more conventional valuation of CentrePointe’s incremental taxes, they’re only worth about $25 million to the state, and an estimated $32 million overall.

In reality, the city and state would incur $50 million in public debt today for the CentrePointe TIF bonds, and only get back $32 million of that in future tax revenues.  CentrePointe TIF is a poor investment which loses $18 million for taxpayers.

And that is even before we look at the stability of CentrePointe’s overly-optimistic business model…

Business Model Assumptions
A distinct pattern emerges in ERA’s assessment [PDF link] of the CentrePointe project for the state. At numerous points throughout the document, ERA hedges: they express skepticism about some element of the project, but then use the developer’s assertions about the project as ‘proof’ of its ultimate viability.

How ERA evaluates CentrePointe’s million-dollar condominiums is typical of these hedges (we’ve added emphasis in red):

“ERA approaches new luxury condominium projects in 2009 with a healthy degree of skepticism. […] Bank financing for new condominium construction has seized up. There is a very high degree of uncertainty in residential markets, especially high-end condominiums, across the U.S.  And in recessionary times, introducing a luxury product where it has not been present before represents a considerable risk.

“However, there are two reasons for optimism in the CentrePointe Tower. First, the developers have pledged an all-equity transaction. This greatly reduces the risk that loans would have to be renegotiated in the middle of a deal, that payments would be missed, or that financing would be pulled at the last minute. While it does not eliminate all risks associated with financing, an all equity transaction greatly reduces the risks and complications of development in this difficult market.

“The second reason for optimism is that the developers have reservations for 64 units, out of 91. While a reservation is less a commitment than a purchase contract, this is still an impressive level of sales for this stage of the process. With two-thirds of units reserved before construction begins, the developers have demonstrated there is demand for these types of units.”

Both of the reasons for optimism that ERA cites come directly from the developer’s tenuous assertions.

The ‘all-equity transaction’ refers to the developer’s dead mystery financier, whom the developer had claimed was putting up cash (the ‘all-equity’ part of the transaction) to back the development. Last week, the developer admitted that he was forced to pursue more conventional financing.  Using ERA’s logic, this would greatly increase the risks to the project’s success.

The ‘reservations for 64 units’ refers to the handshake deals that the developer claimed for the old CentrePointe design.  As we have previously documented, 64 ‘reservations’ stretches the bounds of credibility in a market which only sold 10 million-dollar properties in all of 2008. And last week, the developer trimmed the number of condominiums in the new design from 91 to 63.

(Update: As Beverly Fortune notes, the numbers haven’t gotten better for million-dollar residential properties: Only 8 sold in Lexington in 2009, and only 5 have sold thus far in 2010.)

With both ‘reasons for optimism’ now rendered impotent, how would ERA evaluate CentrePointe’s condominiums today?

ERA’s skepticism extends to every other major part of the project:

Offices: “Estimated rents of $26 per square foot would be about $6 per square foot higher than the current highest quoted rate in the market – a number that may be difficult to achieve given current market conditions and may require some concessions.”

Retail and Restaurant: “ERA believes that $27 per square foot is an aggressive ask in this market, especially in downtown.”

Hotel: “With a first year ADR [room rate] of $175 and RevPAR [revenue per available room] of $103 at 53 and 45 percent higher than any comparable properties in the market at the end of 2008, these metrics may be optimistic. […] Projected hotel occupancy as well, is projected by the developer to be nearly 10 percentage points higher than the 2008 year-end average of 61.9 percent.”

In evaluating the entire project, ERA says

“Traditional bank financing would be extremely difficult, if not impossible, to secure for a project of this scale at a time like this. […] If the project’s equity financing remains intact and the investors are satisfied with the projected return, then ERA does not see a market barrier to feasibility of the project.”

How would ERA evaluate CentrePointe’s feasibility now that the ‘equity financing’ has fallen through?

Not well, we suspect.

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We took the liberty of re-running ERA’s estimates with more realistic (but still quite generous) assumptions:

  • The developer estimated that he would spend about $250 million on the old CentrePointe design. While there are few specifics, he has used a figure of $200 million for the new design.  We adjusted construction spending down by 20%.
  • The developer assumed they could get higher occupancy levels (over 71%) even though they were charging 50% more per night than the Lexington hotel market.We adjusted hotel occupancy to market levels – a more reasonable 62%.
  • The developer has claimed to be able to sell two-thirds of their condominiums at the outset of the project. We adjusted expectations down to about 20% at the outset, and we never expect full occupancy of the 63 condos without drastic reductions in property price.
  • The developer assumes a $26 to $27 per square foot rate for its office, retail, and restaurant leases.  We’ve adjusted those assumptions down by about 20%. Such an adjustment still leaves these CentrePointe spaces as the highest rents in the Lexington market.

These adjustments to the CentrePointe business model have a number of economic ripple effects: Lower spending, lower sales, lower profits, fewer jobs created, lower quality of tenants, and lower tax revenues.

Using these more realistic assumptions, our estimate is that CentrePointe will generate incremental state and local taxes worth only $21.5 million ($16 million of that would go to the state, and the remaining $5.5 million would go to Lexington).

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As long-time critics of the CentrePointe project, we hear a common counter-argument: that CentrePointe is a private development on private property and that we and our community leaders have no business questioning the project.

CentrePointe is a private development on private property.

But CentrePointe also has a number of externalities that make it of public interest. It would require significant public investment in new infrastructure and facilities to support the new development.

And while TIF projects are targeted to public improvements, the reality is that about half of the $50 million publicly-financed CentrePointe TIF projects would most directly benefit CentrePointe’s developer: the parking garage, sidewalks, pedways, and other infrastructure.

It is highly unlikely that the developer would go forward with the project without the public subsidy of these elements – despite his prior threats to do so.

A second TIF reality is that the public bears a disproportionate part of the risk of the new development: In return for putting up $50 million of our money today, taxpayers are promised an unreliable trickle of future tax payments over the next thirty years.

So despite what many of CentrePointe’s defenders – including Lexington’s mayor – say, CentrePointe’s TIF program does amount to a public subsidy of the private development of CentrePointe.

And when we apply a realistic analysis, that CentrePointe TIF subsidy is a truly awful investment.

In return for committing $50 million in new debt (and paying another $50 million in interest on top of that), taxpayers get a return of just $21.5 million.

Local government would lose almost $7 million on its $12 million investment, while the state would lose $21 million on its $37 million investment.

And despite the developer’s indignant none-of-your-damn-business attitude toward public inquiry on CentrePointe, it clearly is a public issue with public dollars at stake.  The CentrePointe TIF is little more than outright welfare for the developer and his project.

The CentrePointe TIF is a spectacularly bad public investment, and every attempt should be made to rescind the TIF approval.

The proposed redesign of CentrePointe should be a time for community leaders to rethink the community’s investment in CentrePointe.

At a time when our public budgets are under extreme duress, now is not the time to spend extravagantly on a wildly speculative private development such as CentrePointe.

No responsible business would make this kind of investment.  Our governments shouldn’t either.

The Tombstone at CentrePointe

Rob Morris 3 Comments CentrePointe , , , , , , ,

We last wrote about CentrePointe one year ago this week.

In Tangled Webb, we wrote about the folly of the CentrePointe development, capping a series of posts chronicling our growing skepticism about the downtown Lexington project’s financing and viability.

We then stopped writing about CentrePointe because there wasn’t much left to say.

Four months later, Business Lexington reprinted Tangled Webb, prompting an aggressive and condescending response from CentrePointe’s developer, in which he simultaneously attacked us, bloggers in general, and Business Lexington.  He asserted that we knew “little about commercial real estate development or the potential and viability of this project”.

Time would tell.

NewCP
New v. old CentrePointe designs

A New CentrePointe?
Yesterday, finally admitting that his financial backing had failed and that his initial design wasn’t viable, the developer submitted a smaller design for CentrePointe to the Courthouse Area Design Review Board (CADRB).

The new tombstone-shaped design (shown at right, superimposed over the older design) is 210 feet shorter than the one that the CADRB had previously approved.

The project still proposes a 237-room J.W. Marriott, along with office and retail space.  The upper tiers of the project would house 63 high-end condominiums (scaled back from the originally-proposed 91).

The developer asserts that “progress is being made” on “more conventional financing”.

What is the CADRB?
Within Lexington’s crazy-quilt of planning bodies and agencies, the CADRB is a five-person board commissioned by the Urban County Council to oversee a small portion of downtown called the Courthouse Area Design Overlay Zone.  The CentrePointe site falls within this irregularly-shaped zone.

In 2008, the CADRB approved the developer’s demolition of several long-neglected-but-historic buildings on the site – including Morton’s Row, which had some of Lexington’s oldest commercial buildings.  In June 2008, the CADRB approved an initial design for CentrePointe, issuing an “authorization permit” good for one year.  The CADRB  then approved a modified design again in November 2008.

On July 8th, 2009 the developers sought – and received – an early extension to their November 2008 authorization permit.   That third permit expires less than 30 days from today.

The Overlay Zone is intended to “encourage growth and redevelopment in the downtown area, while preserving and protecting the unique features and characteristics of the area.”  As outlined in its bylaws, the CADRB has 5 mandates:

  • promote those qualities in the environment which bring value to the community;
  • foster the attractiveness and functional utility of the community as a place to live and work;
  • preserve the character and quality of Lexington’s heritage by maintaining those areas which have special historic significance;
  • protect investment in those areas;
  • raise the level of community expectations for the quality of its environment.

Since initial approval, the CentrePointe site has been, by turns, a pit of rubble, a dust bowl, a pond, and, now, a horseless horse pasture with huge signs heralding how CentrePointe is “Coming Soon”.

By issuing demolition and construction permits for the CentrePointe site, the CADRB failed on every one of its own mandates.  The development has failed to bring value to the community.  It has failed to deliver the promised 900 jobs.  It has failed to preserve the character and quality of Lexington’s heritage.  The fantastical proposal never had the right scale or proportion for the Overlay Zone. Along every dimension, CentrePointe has been a collossal failure.

In light of that multidimensional failure, now is the time for the CADRB to take corrective action.

New design, same old problems
NewCP2While scaled back in height, the new ‘Pointe-less’ design for CentrePointe is no less problematic than the old one.  It fails to address some of the project’s deep, long-standing flaws. These include:

Financing: While the developer asserts that progress is being made on new funding, this is actually a step back from previous assertions that funding was already in hand.  On June 4th, 2009, the developer assured the Lexington Forum that he had two ready sources of funding if his dead mystery financier’s estate didn’t come through.  Yesterday’s application for extension made it clear that those sources failed as well – if they ever existed at all.

Capital flows to the most promising investments, even in a difficult economic environment.  The fact that the developer has yet to secure funding for CentrePointe speaks volumes about its quality as an investment.

Business Model: The developer has continually asserted that he has a ready list of tenants for the property.

But there are enough problems with his business model assumptions to call the viability of the entire project into question.

  • Analysts hired by the developer assumed that the J.W. Marriott hotel could achieve higher occupancy rates – at start-up – than surrounding hotels even though the Marriott would charge 50% higher room rates.
  • While the number of million-dollar condomimiums has now been scaled back to 63, that is still far too many for the Lexington market to absorb (when only 10 million-dollar properties sold in all of Lexington in 2008).
  • The one retail prospect that the developer has named as ‘interested’ in the project wasn’t really that interested.

Vague Assurances & Broken Promises: The developer has offered many claims – but little substance – with regard to the project’s viability.  He has repeatedly decommitted from previous promises.  When challenged, the developer usually responds by playing either victim or bully – and, sometimes, both at once.

It is time to openly challenge the developer’s overreaching claims and blithe assurances.

Scale: CentrePointe’s proposed tower has never had the appropriate scale for the historic character of the Overlay Zone.  The CADRB’s approval of the initial designs and subsequent re-approvals were mistakes.

Now is their chance to undo those mistakes.

Accountability for CentrePointe
Before issuing a fourth permit, the CADRB needs to require the kinds of accountability for this iteration of CentrePointe that was missing in the project’s earlier phases.

They have a responsibility to ensure that our community does not end up with – in the words of former Councilmember Don Blevins Jr. – a “vertical Lexington Mall”.

When the developer presents CentrePointe’s new design to the CADRB on June 30th, the board should do the following:

Ask the tough questions.  Especially the ones which weren’t answered the first time.

  • Does the developer have financing in hand, or is he just ‘working on it’?
  • What, exactly, happened to CentrePointe’s previously ‘rock-solid’ financing?
  • Can the developer really build the design being considered?
  • What is the business model for this property?  Will that model really work?
  • Is this design really consistent with the unique character of our downtown?

Require documentation.  Don’t accept the developer’s word at face value.  His proven inability to deliver on previous promises mean that he should be required to document the stability of his financing and his business model before any design is approved.

Rethink prior approvals. As mentioned above, the CADRB made a mistake by approving the old design of CentrePointe.  Don’t just rubber-stamp the new ‘tombstone’ design.  Make sure it works with the surrounding community.

The Overlay Zone exists for a reason.  On June 30th, The CADRB should fulfill their duty to ensure responsible economic development within the Zone which preserves the unique character of our downtown.

The old design of CentrePointe didn’t do that.

The new one still doesn’t.

The CADRB should reject the application for extension.

It is time to put a stop to the empty promises.  It is time to stop enabling this kind of overreaching incompetence.  It is time to end the delusional fantasy of CentrePointe.

Will Creative Cities Matter?

Rob Morris 7 Comments Local , , ,

Lexington hosted the third installment of the Creative Cities Summit late last week (previous editions were in St. Petersburg in 2004 and Detroit in 2008), and the event was headlined by internationally-recognized experts in urban growth and vitality: Charles Landry, Rebecca Ryan, Richard Florida, and Bill Strickland, among others.

CCS-300x253  The event drew participants from across North America, but most of the attendees seemed to be from Lexington.  And while Lexington was not the central focus of the event, our city naturally entered into many of the conversations.

In the wake of the event, a vigorous local debate emerged about whether Creative Cities was significant for our city.  What’s intriguing is that much of the debate is occurring between folks who normally get along.  And much of the negative criticism is coming from folks that I like and respect (see here, here, here, and here), and who aren’t typically curmudgeonly.

That criticism has led to head-scratching – and, at times, indignance – from those who felt that the summit was a worthwhile, transformational, and enlightening experience.

And that leads us to an interesting – and telling – distinction: Most of the attendees of the summit seemed energized by the discussions and the ideas which emerged from Creative Cities; Most of the criticism came from those not in attendance.

* * *

There seem to be three basic criticisms of Creative Cities:

1. It was too exclusive.  This criticism usually centers around conference participation: who was invited, who wasn’t, and the perceived snobbery of some of the attendees.

2. It was too expensive.  This criticism focuses on the $199 registration, and whether the scholarships to the event were adequately publicized.

3. It was too much talk (and much of that talk was self-involved drivel).  This criticism takes multiple forms, including:

  • The conference was too self-involved and self-congratulatory, and prioritized self-help and good feelings over substantial change.
  • It glorified out-of-town gurus who repackaged the obvious while angling for their next consulting gig.
  • It didn’t involve enough meaningful action, and thus amounted to a vacuous echo-chamber of do-nothing happytalk.

As an attendee of the summit, I find a kernel of truth in all of these criticisms.  But I don’t think that any of them are completely fair, and none are particularly helpful in crafting a better future for Lexington.

I have to admit I’m not all that patient with the ‘exclusive’ or ‘expensive’ arguments.  Everyone was invited; everyone had a chance to participate.  While the price of the event was problematic for many, it was far cheaper than similar events with participants of this caliber.  Events like this cost a lot – and high-quality speakers, food, and facilities are necessary to draw a national audience.

What concerned me the most about these critiques was that the perceived exclusivity or expense of the event often became an excuse for dismissing the good ideas which arose there: A good idea is still a good idea, even when someone has to pay to hear it.

And if the criticisms of conference ideas are based upon bruised egos and hurt feelings, then I’ve got zero patience for that.

I’m much more sympathetic to the ‘too much talk’ reasoning.

Before I bought Lowell’s, much of my corporate life was spent in the company of very skilled consultants: research consultants, design consultants, business strategy consultants.

There was a predictable part of nearly every consulting engagement where the consultant would suggest that hiring them for another engagement was part of the solution to the problems we hired them to resolve – “The way you fix that is to hire me again!”.  Consultants always position themselves for doing more consulting.

We did get to see that angling-for-the-next-gig routine with some consultants at Creative Cities.

And admittedly, there was a little too much excitement over slick ideas and catch-phrases, and not enough thought about the hard work needed to truly transform Lexington for the better.

But that hard work isn’t what a conference is for: The summit was for learning and for exchanging ideas; the hard work comes after.

* * *

The structure of the conference didn’t help its perception – especially on Twitter – for those who didn’t attend.  In the process, I think some of the shortcomings of Twitter for civic conversations like these were exposed.

The most compelling (and, presumably, highest-paid) ‘keynote’ speakers addressed all participants at the same time.  For these speakers, attendees usually tweeted about the same inspiring messages, giving rise to the echo-chamber perception.

For instance, when Bill Strickland spoke at the end of the conference, many non-attendees mocked his ‘poor people should be considered assets, not liabilities’ line.  They seemed to say What fool would pay to hear something so blatantly obvious?

But Strickland had spent several emotional minutes demonstrating how attitudes, institutions, and architecture in his native Pittsburgh neighborhood treated poor people like liabilities.  At the same time, he had shown how he had successfully used beauty and light and architecture and respect to transform his home neighborhood by treating poor people like assets.

When those present tweeted the ‘assets’ line, they were truly moved and inspired by Strickland’s story and context.  Those outside the venue only saw vacant platitudes.

This same pattern repeated itself again and again throughout the other keynotes: The rich, compelling images and backgrounds and stories couldn’t traverse Twitter effectively; only the catchiest (and apparently empty) phrases made it out.

In between keynotes, there were 4 simultaneous breakout sessions.  While the breakouts weren’t as inspiring (or ‘tweet-worthy’), they were far more practical and hands-on about the mechanics of transforming a city for the better.  They were – for me – the most beneficial part of the conference.  I learned about:

  • Detroit’s strategies for reviving long-neglected neighborhoods, building-by-building and block-by-block.
  • How Toronto and Portland are funding and implementing inspiring, for-profit social innovation initiatives which pull people and neighborhoods out of poverty and make their cities more livable.
  • The model Massachussetts’ Creative Economy Director uses to get tangible economic development successes in arts, software, design, video games, and music.

From the discussions around my table, other Lexingtonians learned even more from the sessions I wasn’t able to attend.  We also talked with people on the ground in Atlanta, Des Moines, and San Antonio about their experiences in their cities.

Because I was so busy listening and taking notes, I was much less occupied with getting the word out on Twitter.  I saw this effect repeated with other attendees, as well.

So the resulting Twitter stream was decidedly biased in favor of the least-important, most self-helpy kinds of messages, while the deeper, more important insights went relatively silent.

And I think that is the source of the skepticism and derision from those ‘out-of-the-room’, while those ‘in-the-room’ were decidedly enthusiastic about how the event played out.

***

Will the Creative Cities Summit matter to Lexington?

It is far too early to tell.  It will take time, work, and discipline to realize the vision that many of us had leaving the summit.

Should the Creative Cities Summit matter to Lexington?

Absolutely.

Seeing the innovations that other cities have applied in improving their quality of life is vital as we attempt to build a better Lexington.  We need that kind of cross-pollenation with our own innovative initiatives to ensure the best possible future for us and for our city.

For those who feel as though we need a lot less talk and a lot more action, then mark this coming Saturday 17th April on your calendar.  That is when ProgressLex is hosting the Now What, Lexington? ‘unconference’ at the Carnegie Center in Gratz Park.

Now What? is explicitly geared toward generating tangible action from the ideas of the Creative Cities Summit.  Whether or not you attended Creative Cities, you should come to Now What? if you want to join with others to make Lexington better.

Now What? will be tweeted, too.  But it will be better if you show up.  As we’ve seen, Twitter isn’t always the most effective medium for conveying important ideas.

It is free.  Everyone is invited.  We’ll be doing things.  No excuses.

Read more of the continuing conversation about the Creative Cities Summit on Twitter with the hashtags #ccslex, #uncreatives, and #uncreativelex.  Read about the upcoming Now What, Lexington? unconference with the hashtag #nowwhatlex.  Full disclosure: Lowell’s is a sponsor of Now What, Lexington?