Tag: Fraud

Is CentrePointe a crime?

Rob Morris 2 Comments CentrePointe , , , , , ,

Eight years ago today, the Webb Companies announced CentrePointe, a shiny new development in downtown Lexington.

The developers promised to spend $250 million. They promised Lexington’s tallest building. They promised exciting new tenants. They promised to build it by 2010. They promised 900 new jobs. They promised to revitalize downtown.

Every one of those promises have been exposed as elements of an elaborate fraud designed to scam taxpayers out of over $100 million.

Luckily for us, CentrePointe’s fraudsters are particularly inept developers. Their continual bumbling would have been comical – if not for the physical destruction and disruption they wrought in the center of our city.

There was the mystery overseas financier with a pile of cash to fund CentrePointe. Who died. Without a will. His cash was in numbered Swiss bank accounts. There were the meetings in Zurich with the heirs, who were committed to CentrePointe. When that fell through, there were a succession of banks ready to step in. And the developer constantly emphasized how eager the banks were to get into this amazing project. Last year, there were all of the bond investors and underwriters who were so close to jumping aboard. But none of these financiers, banks, investors, or underwriters ever actually materialized. Bumbling.

There were the new developers who emerged last August, and who wanted an even worse deal for the public than the Webb Companies did, before their scheme appropriately collapsed and they withdrew from the project. Bumbling.

There was the never-ending chain of missed timelines and broken promises: The developers were always one approval or one transaction away from starting (or restarting) the project. They plastered ‘Coming Soon!’ billboards on the site. They always expected to break through in 30, 60, or 90 days. And as they blundered their way from deadline to deadline, eight years passed. Bumbling.

There were the imaginary collections of eager tenants. JW Marriott! Hard Rock Café! House of Blues! Jeff Ruby’s! Urban Active! Stantec! And then there were the 61 (or 64! or 65!) ‘handshake’ deals for CentrePointe’s million-dollar condominiums. Every one of which backed out – or was never actually involved in the first place. Bumbling.

There were all of the pretty pictures of ugly designs, as the developers discarded architects like underwear. Bumbling.

CentrePointeDesignsWideSmall
CentrePointe Design Roulette

There were the fantasy financial projections. CentrePointe’s fraudsters attempted to use public tax increment financing to help fund the project. Using aggressive and unrealistic assumptions about their hotel, retail, office, and residential tenants, they implied that CentrePointe would have a greater economic impact than ever possible. And they used these artificially inflated business models to convince state and local leaders to support the project with public taxes. But even when they rigged the game in their favor, they were unable to pull off their deception. Bumbling.

Finally, there was the developers’ hilariously amusing tendency to wildly lash out at their sharpest critics (including me once back in 2009). In these kneejerk responses, they almost always portray themselves as victims and defiantly attack the motives and the intellect of their critics, while unintentionally betraying a deep sense of shame at their own impotence. Bumbling.

The horse is more likely to move than the cranes...
The sculpture is more likely to move than the cranes…

Meanwhile, the CentrePointe block itself actually regressed. The historic, dilapidated buildings on the original site were pounded into an ugly pit of rubble in 2008. In 2009, the developers topped the rubble with dirt, creating a downtown dust bowl. The poor drainage on the site meant that it turned into a mosquito-breeding pond whenever it rained – as it did a lot that summer.

In 2010 – in tacit acknowledgement that little was likely to happen on the site – the developers created a tiny horseless horse farm, complete with wooden fence.

Four years later, they blasted a 30-foot deep hole in the ground, and quickly erected cranes which have since been largely inactive. Today, the motionless cranes remain the only significant structures on the site. For the past two years, no progress has been made on CentrePointe.

The past eight years have seen the site move from a functioning part of the community to a blighted eyesore and nuisance.

::

As I read through the most recent CentrePointe developer screed [PDF] from this week lashing out at the city, the press, and social media for not coddling the developers enough, I reflected on the past eight years.

Eight years later, we’re left with an endless stream of empty promises, no jobs, and Lexington’s biggest hole. The plans for CentrePointe have become cheaper, smaller, later, and less grand. And less likely.

CentrePointe – or whatever it is ultimately called – will never be built until a competent developer takes over.

With their agreement with the city that they must fill in the site if it sits idle for more than 60 days, I expect that these developers will attempt to string the city along with superficial actions. Every couple of months, they’ll rearrange the deck chairs of this land-bound Titanic, but it is still doomed: They won’t actually build a thing.

In writing about CentrePointe over the past eight years, I’ve declared CentrePointe a scam, a con, and a fraud. I must admit that I used these terms somewhat loosely and provocatively, and I always meant to.

I never intended the terms in a strictly legal sense. But why not? CentrePointe is definitely a bumbling eight-year-long failure on the part of developers, but could it actually sink to the legal qualification of criminal acts? Did the developers knowingly lie and deceive the public and public officials in a naked, greedy attempt to loot our treasury?

Is CentrePointe a crime?

Well, the developers certainly lied. They lied about the building. They lied about the design. They lied about the tenants. They lied about the financiers and the financing. They lied about the timeline. They lied about the business plan. They lied about what they spent. They lied about the economic benefits.

They’ve lied so much that they lose track of their lies.* And their lies are well-documented.

And if they actively deployed these lies to obtain public financial support for which they weren’t properly qualified, well, that sounds like fraud, attempted fraud, or conspiracy to commit fraud to me.

Is CentrePointe really a crime? I don’t know. But now – eight full years into this debacle – might be a good time to ask.

* In August 2014, for instance, they claimed that they had already spent $29.4 million on CentrePointe. In their screed just this week, they claimed the less impressive figure of $28.0 million. So, which is it?

The Great CentrePointe Parking Garage Mystery

Rob Morris 4 Comments CentrePointe , , , , , ,

IMPORTANT: Following my initial post yesterday, I found new and different information on parking costs for underground garages. Please see important updates at the end of this post.

Why does it cost twice as much as normal underground garages?

Over the past 7 years, I have publicly challenged many aspects of the CentrePointe project in downtown Lexington, with a particular focus on how the 700-space CentrePointe parking garage would be financed:

  • I used a fable to illustrate the absurdity of funding the parking garage with tax-increment financing (TIF), and showed how the public financing scheme could be the biggest windfall for CentrePointe’s developers;
  • I looked at how the shrinking size of the CentrePointe project endangered the TIF funding for the garage;
  • I chronicled how the our council approved a scheme designed to defraud garage bond investors;
  • Last week, I contended that the trouble that developers were having in issuing the garage bonds portended bigger problems for the CentrePointe project as a whole (regardless of whether the new mystery partner works out).

But despite all of my criticism of the financing for the garage and the viability of the entire project, I never thought to look at the cost of the CentrePointe garage itself.

I apologize.

::

CentrePointe Nothing

CentrePointe: Nothing Happening, 5/12/15

A couple of weeks ago, CentrePointe developer Dudley Webb addressed the Urban County Council

to argue that the developers should not be forced to fill in the pit at CentrePointe. (His commentary begins at 26m:49s in the video. If you want to have a little fun before reading on, my response to Mr. Webb begins at 2h:12m:00s.)

In the course of his comments, Webb shared intriguing details about the finances and the challenges for CentrePointe.

In justifying the pursuit of TIF funding for the parking garage, for example, Webb casually dropped that the CentrePointe garage would cost $50,000 per space (largely driven by the requirement for underground parking). He claimed that “those numbers don’t work”.

At 700 spaces, that adds up to about $35 million for the entire parking garage.

CentrePointe Garage Cost

CentrePointe Garage Cost, AECOM Report, June 2013

That figure seems roughly consistent with other estimates on CentrePointe: The most recent publicly-available figures [PDF link] put the parking garage at $31.9 million, which worked out to about $45,500 per space.

The $50,000-per-space figure fits with the developer’s propensity to throw out big, round numbers, but it isn’t that far from what they’ve previously claimed.

So I didn’t pay that much attention to it.

::

Yesterday, I was engaged in an online discussion about CentrePointe, and one participant asked me a number of pointed questions about how the parking garage worked.

That was when I realized that, while I knew quite a bit about the scheme to pay for the garage, I knew very little about the business model of the garage itself.

As I began to dig, I started to see that CentrePointe’s parking garage is wildly overpriced.

As I looked at parking garage studies and parking garage construction from around the country over the past 5 years, one particular figure popped up again and again for the cost of an underground garage: $20,000 per space.

From Boston to New Jersey to San Diego [PDF Link – Outdated 2002 Study], local reports put the cost-per-space of underground parking garages at about $20,000. (One went as high as $21,000 per space.) [Please see updates to these figures at the bottom of this post.]

These garages had about the same depth as CentrePointe. They had about the same capacity as CentrePointe. Nothing in the way that CentrePointe’s garage has been described makes it sound especially unusual compared to other underground parking garages around the country.

And yet, the CentrePointe garage appears to cost over twice as much as standard underground parking garages.

How can that be?

It can’t.

::

If CentrePointe used a more realistic $21,000 per space, then its 700-space garage should cost only $14.7 million.

But the CentrePointe documents show the parking garage costing $31.9 million….

Where did that extra $17.2 million come from? Welcome to the Great CentrePointe Parking Garage Mystery.

As far as I can tell, there’s never been a detailed public accounting of the costs of the garage, so I can’t tell you where these phantom ‘costs’ came from.

But I can speculate. There are a couple of likely candidates:

  1. The garage costs were simply inflated. A lot. And the developer hoped that no one would notice.
  2. The property costs (or some other non-public-infrastructure cost) were rolled into the garage costs. And the developer hoped that no one would notice.

And for over seven years, it seemed that no one noticed.

In either case, however, the result would be the same: The developer would get to pocket an extra $17.2 million funded with our tax dollars.

But why does that really matter?

Two reasons.

  • First, the developer would get an unearned windfall skimmed out of public taxes. (He doesn’t need the welfare. We do need the tax dollars.)
  • Second, overpaying for the garage crowds out funding for truly public infrastructure. Renovating the old Fayette County Courthouse, in particular, was supposed to be part of the CentrePointe TIF, but seems to have dropped out of the most recent TIF funding efforts. We should put it back in.

It is time to ask the developer sharper questions about the cost of his parking garage.

IMPORTANT UPDATE: The $20,000 per-space amount is not as universal as I initially found. Other studies show per-space costs for underground parking ranging from $25,000 to $35,000 per space [Both PDF Links]. (It is worth noting that the author of the latter study has made developer-friendly arguments campaigning against off-street parking requirements – i.e., parking structures like CentrePointe’s garage.)

I apologize for not finding these sources before the original post. I don’t want to mislead anyone. I do want to understand these costs better.

While these amounts would change the magnitude of the amounts I calculated above, they don’t change the core critique of the parking garage for CentrePointe.

Factoring in these new amounts, it seems that CentrePointe’s parking garage is still overpriced by between $10,000 and $20,000 per space, which amounts to extra costs of between $7 million and $14 million across the whole project.

Asking the developer sharper questions is still warranted.

CentrePointe is Still in Trouble

Rob Morris 3 Comments CentrePointe , , , , , ,

CentrePointe Version 8

CentrePointe, Version 8

Over the past couple of weeks, the Lexington-Fayette Urban County Government and the developers of CentrePointe have traded barbs over the direction of the perpetually-troubled $180 million retail, office, residential, and hotel project.

Citing a lack of work over the past 60 days, the city triggered a provision in their agreement with the developers which would require the developers to fill the gaping hole the project has left in the middle of downtown Lexington.

The developers responded by claiming that the city was wrong – work had indeed been done on the site in the past 60 days. The developers then threatened to sue the city if they did not rescind the requirement to fill the hole.

Late this week, a deal was struck between the city and the developers to postpone the confrontation.

In a joint press release, the city and the developers claimed that a new, unnamed development partner has emerged. City officials expressed confidence in the new mystery partner’s ability to develop a project of CentrePointe’s magnitude. The new partner just needs 90 days to determine whether they will proceed.

It probably won’t work out.

The problem isn’t that we’ve heard all of this about CentrePointe before. Although we have. Mystery white-knight savior? Plenty of those. Promises to resolve everything, something, or anything in 30, 60, or 90 days? We’ve lost count. City officials positive about the financing? Yep.

No, the real reason the new partner won’t proceed with CentrePointe is the lowliest, least exciting part of the project.

CentrePointe is in trouble because no one will buy the publicly-financed bonds for its parking garage.

::

Why the parking garage?

Because the public financing of the garage bonds promises to be the most profitable part of the project for the developers – perhaps more profitable than all of the other components of CentrePointe combined. (See here for why the parking garage generates so much profit for the developers.)

Back when the Urban County Council approved the convoluted $30 million garage bond scheme in September 2014, I called the plan fraudulent. CentrePointe’s developers were planning to use the city’s good name to offer bonds which were virtually guaranteed  to lose money for investors. There was even a strong possibility that investors would lose all of their money.

If the developers were able to assemble a bond offering, it would have been fraudulent.

But they haven’t proven competent enough to defraud investors. Yet.

At that meeting last September, councilmembers were told that a bond offering statement could be prepared in the next week, and the bonds could be offered for sale in a month or two.

That was eight months ago, and the bonds have yet to be issued.

Roger Peterman, an attorney who consults with the city on bond issues, told the council that a bond underwriter had been retained who “assured us that there’s a market for these bonds.” In fact, the underwriter was so enthusiastic that they were interested in purchasing and reselling the bonds themselves (rather than simply identifying purchasers), which Peterman characterized as a “much stronger commitment”.

So with all of this “enthusiasm” and “commitment”, why weren’t the developers able to issue the bonds? Why can’t they find willing underwriters and investors?

Because the bonds are inherently toxic.

The garage bonds for CentrePointe carry huge risks, and investors are balking.

::

The primary “showstopping” risk is that the bonds won’t begin to pay out until at least $150 million in new capital has been invested in CentrePointe. This is a requirement of the state statute governing the type of tax-increment financing (often called TIF) used for CentrePointe, and it means that investors wouldn’t receive any money until CentrePointe is almost complete.

Understandably, investors aren’t thrilled with the prospect of waiting that long.

That’s what makes this risk a showstopper: Developers want money from investors now, but investors have no guarantee that $150 million will ever be spent. Investors have no guarantee that they would get any of their money back. So potential investors are recoiling.

And developer Dudley Webb admitted as much last week when he spoke before the Council.

“We are so close. But also I want you to understand the difficulty in getting this thing to the closing table.

“We have the prospects who will buy the bonds, and they want to be sure that the project is built, because there is a $150 million spend requirement that has to be done on that block before the TIF income comes.

“So getting all six of these people, these lenders, to the table at the same time to close, along with the equity [i.e., bond] investors has been very difficult.

“…You have to also get the hotel people to come and bring their cash to the table at the same time of the closing of the bonds. The problem with that is that the hotel people came back and said ‘We want to invest, but we’re not gonna invest and put our money up until you deliver the garage.’

“So it’s which [comes] first, this chicken-and-the-egg concept.”

CentrePointe Version 8

CentrePointe, Version 8

Because the developers have pursued a piecemeal approach, with each of the project’s six components funded separately, they admit that they are unable to get their investors and lenders on the same page. The lenders for the buildings want assurance that the parking garage will be in place, while the garage bond investors want assurance that all of the buildings will be built.

This “chicken-and-egg” standoff is unlikely to be resolved unless the developers can identify a single lender or investor willing to front all of the cash needed to complete development of CentrePointe. Then, perhaps, the bond investors would have enough confidence to purchase the garage bonds.

But for the past seven years – across eight different CentrePointe concepts – the developers have repeatedly failed to identify just such an investor. (I’m betting that’s why they fell back to their piecemeal approach in the first place.)

And even if the developers found such an all-cash savior, the garage bonds wouldn’t begin to be paid off until CentrePointe was nearly complete – which further deters garage bond investors, who want to start getting paid back right away.

::

Even if the developers can contrive a way to fully fund CentrePointe, there is another unavoidable risk for bond investors: The bonds can never pay for themselves (much less make any sort of profit).

When I referred to the garage bond scheme as fraudulent, this is what I meant. The developers’ own analysis shows that CentrePointe will never generate enough taxes to pay back bond investors, even if the project is completed as planned. (I won’t go into all of the details in this post, but you can get the full analysis here.)

This means that any investor who buys garage bonds is practically guaranteed to lose about half of their money. CentrePointe’s bond scheme is as if I asked you for $100 today, and promised that I’d pay $50 back to you over the next 30 years. Interested?

This is perhaps another reason the bond offering has been delayed. In order to sell the bonds, any bond offering statement would need to obscure the fact that the bonds would never pay off. And if they didn’t obscure that fact, then no sane investor would buy them.

Together, these two risks for garage bond investors pose an insurmountable challenge to CentrePointe’s developers: They can’t get investors unless they complete the project first AND they can’t get investors if the investors realize that they’ll lose their money.

And that’s the central reason that CentrePointe is in trouble: Once they are deprived of the ability to dupe investors, the developers are also deprived of the profit-making potential in the garage bond scheme.

Even if the newly-minted mystery development partner is real, investors will remain rightfully wary of buying the garage bonds before CentrePointe is complete.

Even if the mystery development partner fronts all of the money to complete CentrePointe, the development won’t generate enough taxes to pay bond investors back. Ever.

So, even if the players change and even if CentrePointe gets built, the garage bond scheme is still a fraudulent scheme.

And if the mystery partner can’t goose their profits with the garage bond scheme, then they probably won’t proceed with the project.

::

The developers and their partners have sometimes characterized themselves as “doers” and their critics as “complainers” who cheer for the failure of CentrePointe.

And they’re absolutely right.

As long as what the developers are “doing” is attempting to defraud investors, it is the duty of critics to “complain” loudly and often.

As much as I’d like to see something built in the gaping maw of CentrePointe in the very heart of our downtown, I don’t want to see it built with further fraud and deception.

So unless the fundamental financial structure of CentrePointe changes, I am cheering for its failure. No apologies.

How Council Voted to Defraud Investors to Benefit the Webbs

Rob Morris 9 Comments CentrePointe, Local , , , , , ,

Call it “CentrePointe Fatigue”.

After six-and-a-half years of bulldozing, promises, broken promises, half-truths, and outright lies on the CentrePointe project, folks are just plain tired of talking and thinking about CentrePointe. They’re tired of waiting. They just want something, anything to be built on the long-empty block in the center of our city.

And I get it. After writing over twenty posts examining the business model, architecture, and politics of CentrePointe (see here and here for a sampling), I got tired of talking and thinking about it, too. The interest and outrage was hard to sustain (even if thoroughly justified).

You can see it in online conversations. You can see it in the newspaper1. You can see it in Urban County Council meetings. The coverage and the questions got lazier. At some point, the fatigue just took over. People lost the will to keep investigating and to keep fighting, especially as the project stalled repeatedly.

And that’s precisely what the developers have counted on all along.

If they just waited us out and wore us down, they could walk off with their bonanza payout financed with our tax dollars, and we’d all be too tired, too exasperated, or too relieved to notice.

Against this backdrop of CentrePointe Fatigue, Lexington’s Urban County Council voted 15-0 last Tuesday to approve a new scheme to finance a $32 million parking garage for CentrePointe.

But what really happened was deeply disturbing: The Council unanimously approved a scheme which is designed to defraud investors for the benefit of the developers.

Is ‘fraud’ too strong a term?

Let’s dig in and find out.

::

With any economic development initiative, governments hope to foster increased economic activity in a particular place. The increase in activity is sometimes called an ‘increment’. Tax Increment Financing (TIF) is an economic development scheme where the projected future taxes generated by the new economic activity – the increment – are used to pay for ‘public’ infrastructure improvements.

In CentrePointe’s case, these ‘public’ improvements included a $31.9 million underground parking garage, as well as improvements to sidewalks, sewers, streets, and the rapidly-deteriorating Old Courthouse. In all, CentrePointe includes about $45.5 million in so-called2 public infrastructure.

The CentrePointe TIF proposed financing the infrastructure by issuing bonds to investors, and paying those investors back – plus interest – over the next 30 years with the ‘tax increment’ generated from the project.

Would CentrePointe be able to generate enough in new taxes to pay bond investors?

That was the central question of a 2013 report [PDF download] commissioned by the Cabinet for Economic Development and written by AECOM Economics, a Los Angeles based consultancy.

The AECOM report stands as the only comprehensive evaluation of the economic impacts of CentrePointe in its current incarnation.

AECOM’s report is deeply flawed3. It uses non-standard valuation techniques which tend to dramatically overstate how much CentrePointe is worth to the community.

Despite its flaws, AECOM’s evaluation is still instructive: it raises significant doubts about the viability of the CentrePointe TIF. It also contains what state and local officials knew (or should have known) about whether the TIF could be successful.

There are two key tables in the 52-page report which should have set off alarm bells for the Cabinet for Economic Development and for the Urban County Council.

In the opening pages of the report, AECOM sizes CentrePointe’s tax increment: $48.8 million. Compared to what was there before, AECOM claimed that CentrePointe would be expected to generate nearly $49 million in new taxes over the next 30 years.

CentrePointe Tax Increment

CentrePointe Tax Increment: $48.8 million (AECOM Report, June 2013, p.3)

 

So, would that be enough to pay back bond investors?

No.

A little deeper in the report, AECOM summarizes the public costs of the CentrePointe infrastructure bonds. While the ‘public’ infrastructure would cost $45.5 million, the interest payments (called ‘financing costs’ in AECOM’s report) on the infrastructure bonds would pile up another $47.7 million. Over the next 30 years, then, the infrastructure bonds would cost a little more than $93 million.

CentrePointe Bond Cost

CentrePointe Bond Cost: $93.2 million (AECOM Report, June 2013, p.10)

 

How can $49 million in new taxes from CentrePointe pay off $93 million in debt and interest for the infrastructure bonds?

It can’t.

And therein lies the central fraud of the CentrePointe TIF. There will never be enough economic activity on the CentrePointe site to pay off the debt and interest on the infrastructure. That’s what the only credible, comprehensive analysis of CentrePointe says.

The Cabinet for Economic Development should have known this. (It was their report.) The Urban County Council should have known this. (They were provided the AECOM report before approving the CentrePointe TIF).

Despite knowing that the CentrePointe TIF could never pay for itself, in July 2013 both the city and state approved this audacious scheme to offer fraudulent bonds to investors which they knew could never pay what was promised.

And they approved this scheme all for the benefit of the developers, who get a ‘free’, taxpayer-financed parking garage.

Pretty bad, huh?

Wait, it gets worse.

::

For the CentrePointe TIF, the state will set aside the new, incremental taxes generated by CentrePointe, in order to repay the public infrastructure bonds. The state will hold on to those taxes until at least $150 million in capital is spent on the CentrePointe site. (This is a requirement of Kentucky’s ‘Signature TIF’ law.)

Once the state and city approved the CentrePointe TIF scheme, the developers began to dig and blast for the development’s $31.9 million underground parking garage.

After the developers completed most of the digging last month, they returned to the city and the state with an even more audacious scheme. They asked the city and the state to issue bonds for the parking garage now – before they had spent anywhere close to the $150 million required to release the incremental taxes for repaying the bonds.

The state Cabinet for Economic Development refused the request, and claimed that it was more appropriate for the city to issue the parking garage bonds.

The Urban County Council debated the request, with many council members (appropriately) expressing reservations about the liability for the city in issuing bonds before anything was built which would generate the funds to repay them.

Last Tuesday, the Council heard – and approved – an even more convoluted proposal. (This GTV3 video captures the entire 40-minute meeting.)

The Kentucky League of Cities (KLC) – a non-profit association of Kentucky’s cities – offered to act as a conduit to issue the parking garage bonds under its authority. In order to do so, Lexington would need to enter into an interlocal agreement with another Kentucky city (in this case, Midway) to form a new non-profit corporation which would issue the new bonds. Lexington would pledge its portion of the TIF revenues to KLC for the repayment of the bonds.

While there were a few pointed questions from council members about the project, the overall mood in the room seemed to be a palpable sense of relief – something, anything was finally happening. There was also palpable relief that this whole issue would soon be someone else’s liability.

The council voted 15-0 to pursue using KLC to issue the parking garage bonds. Most of the participants congratulated one another on the ingenuity of this new scheme.

They shouldn’t have. Their hands are far from clean.

By inserting additional layers into the already-labyrinthine CentrePointe TIF scheme, the Urban County Council unanimously voted to make it nearly impossible for bond investors to understand that they will never get their money back.

During last Tuesday’s Council meeting, Roger Peterman – a partner at Dinsmore and Shohl who consults with the city on bond issues – claimed that the potential bond investors “are sophisticated investors [who are] willing to analyze more difficult credits like these.”

Let’s parse that a little. As a so-called ‘sophisticated investor’ myself4, I wondered about how other sophisticated investors would get access to information on the CentrePointe TIF.

When I contacted the Cabinet for Economic Development to obtain a copy of the AECOM report, for instance, I was told “The consultant’s study is protected from public disclosure by state law.” Remember, this is the only credible report on the CentrePointe TIF, and the public agency which commissioned the report was refusing to release it to the public.

I managed to obtain the report through other channels, but I wonder whether the average bond investor would have had the ability and the network to discover it.

Most of these bond investors would deal directly with KLC’s proposed “Lexington-Midway interlocal non-profit bond-issuing shell corporation”5. Very few would have visibility into the convoluted TIF program, much less the precise financial details of the CentrePointe TIF. Even if they knew to look for the AECOM report, how many would press further after being stonewalled by the Cabinet for Economic Development?

‘Sophisticated investors’ also bought the AAA-rated bundles of mortgage-backed securities and collateralized debt obligations which supercharged the subprime mortgage crisis in 2008. Calling them ‘sophisticated’ doesn’t mean that they have a clue about what they are investing in.

But the Urban County Council does know what they are doing: They are using KLC to issue bonds which they know can never be paid back. They are assisting in perpetuating the CentrePointe TIF fraud6.

Wait, it gets even worse.

::

Because the state will hold the incremental taxes from CentrePointe until $150 million is invested in the site, that means that there will be no funds available to pay back bond investors until the project reaches that $150 million threshhold.

But if KLC issues the parking garage bonds through their shell corporation today – when only $5 million of capital has been invested – how will bond investors be paid?

What assurances do bond investors have that anything else will be spent, and that the parking garage bonds will ever begin to be paid back? Only the blithe assurances of the developers. And six-and-a-half years later, those assurances carry very, very little weight.

If the project stalls after the parking garage is built, then what?

Wait, it gets even worse still.

::

There’s one more aspect of what the Urban County Council did last Tuesday which should alarm us: They prioritized the CentrePointe parking garage over the stuff that’s truly public: sidewalks, streets, sewers, and the Old Courthouse.

Remember how the CentrePointe TIF application filed by the developers called for $45.5 million in ‘public infrastructure’, including the $31.9 parking garage?

What was approved on Tuesday was a scheme to fund the parking garage alone.

What happened to the other $13.6 million of infrastructure? When and how will bonds be issued for that? Will those bonds be prioritized behind (i.e., paid after) the parking garage bonds?

It was disturbing to see how eager the Urban County Council was to set up financing for the stuff which benefits the developers (the parking garage) without advancing the stuff which is truly public in nature.

::

If the KLC scheme for the CentrePointe TIF proceeds, the net effect of all of these maneuvers is that only one party involved with the CentrePointe TIF comes out ahead: The Webb Companies.

Bond investors are likely to lose about half of their investment – and that’s if the project is ever completed as planned.

Lexington and Kentucky taxpayers will have earned the right to have their future taxes skimmed for the next 30 years to pay back part of the obligations to those duped bond investors, while incurring the additional legal liability for our city officials and KLC having set up a fraudulent bond offering.

The Webb Companies, however, come out way ahead.

By waiting until the public no longer noticed, The Webb Companies get a ‘free’ parking garage financed with our future tax dollars, while incurring none of its associated costs or risks.

If the rest of the project can never be built – and bondholders can never be paid – The Webb Companies still got a brand new underground parking garage (which they never paid for) on their land.

If they do happen to complete the project, their development will be much more attractive to tenants because of the taxpayer-financed parking garage.

The Webb Companies come out ahead whether the development gets built or not.

In the process of using this taxpayer-funded scheme, the Webb’s have likely more than doubled their profits at our expense7.

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By taking advantage of CentrePointe Fatigue, the developers have once again privatized gains while socializing their risks to the rest of us – as they have done repeatedly over the past 40 years.

Along the way, they have convinced city and state leaders to use our good names (and credit ratings) to defraud bond investors in order to benefit The Webb Companies.

After six-and-a-half years, I know that it is hard to sustain outrage and interest in CentrePointe. But it has never been more critical to be outraged at shameless hucksters who line their pockets with our money.

 

 :: NOTES ::

 

Read more

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.

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.

::

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).

::

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.

An update on CentrePointe

Rob Morris 5 Comments CentrePointe , , , , ,

At the Lexington Forum this morning, CentrePointe’s developer updated the public on the status of the faltering project in the center of our city.  As he has done in other venues, he laid much of the blame for any CentrePointe controversy at the feet of bloggers and the media.

In his presentation, he revealed a few new details about the secretive project, along with several layers of backup plans.  In this post, I’ll outline some of my notes and some questions which arise from the developer’s presentation.  In a future post, I’ll share more of my thoughts on the development in the wake of this morning’s presentation.

Plan A

  • The dead financier (call him Mystery Investor ‘A’ – or MIA, for short) was introduced to the developers by a pre-eminent, distinguished American
    who was heavily involved in the Justice Department.
  • MIA was committed to 5 such projects around the world involving some $800 million, including 3 in the US worth some $550 million.
  • He went into some detail on the reason that MIA’s estate was held
    up.  He characterized it as a chicken-and-egg problem.  The
    heirs aren’t sure they wanted access to the ‘numbered Swiss bank accounts’
    until they knew whether those accounts had enough to cover the estate’s
    liabilities (like CentrePointe).  The accounts and the liabilities seem to be a package
    deal, but the heirs are blind to the numbered accounts: They can’t know what the actual assets of the estate are unless they also accept the liabilities.
  • Question: If MIA’s heirs don’t have confidence that MIA had enough assets to cover these deals, then what makes CentrePointe’s developers so confident that the money is there?

Plan A Minus

  • If the developer’s ‘Plan A’ falls through, he has an intermediate plan (‘Plan A Minus’?).  In the last couple of
    days, he has talked with someone who happens to have 20 to 30 thousand cubic
    yards of dirt for free, so filling in the site is an option if the current plans
    fall through.  He also mentioned that he had talked with someone who
    hydroseeded strip mine sites who might be willing to help seed the
    place.
  • The developer claimed “It is not our intent to embarrass the community” for the World Equestrian Games.  He hates to do it, but is tempted to backfill the pit and plant seed “even for 60 to 90 days, just to shut those people up”.  The friendly crowd roared with laughter.  Later he said he thought about “putting in a liner and turning it into a lake”.  More laughter.

Plan B

  • CentrePointe now has a ‘Plan B’, complete with a Mystery Investor ‘B’ (MIB) who has recently come forward to
    express interest in the project (should ‘Plan A’ with MIA’s estate fall through). They are “ready to go” if ‘Plan A’ does fall
    apart.
  • Question: If MIB is so “ready to go”, then why not relieve the heirs of MIA’s estate of their burden and allow MIB to take over financing for the deal? 

Plan C

  • Even though MIB is ready to go, there is also CentrePointe ‘Plan C’
    involving a Mystery Investment Bank ‘C’ (MIC) who will put up $30 million, and
    the developer briefly mentioned some sort of ‘bond arrangement’ to finance the rest of it.
  • Question: If Plans A and B are really viable, then why does CentrePointe need a Plan C?
  • Question:
    What kind of bond issue supplies the other $220 million needed to build the project, if the investment bank is only ponying up $30 million?

Other notes

  • If one of the financing options lines up today, CentrePointe would begin construction in the fall.  15 months after the initial demolition began.
  • The developer claimed that 65 of the 91 condominiums at the top of CentrePointe had been committed to by many people, including horse farms in Ireland and Dubai.  (He didn’t mention Napa Valley wineries this time.)
  • He took pains to correct Herald-Leader writer Beverly Fortune for
    reporting that the 91 units had an average price of $1.2
    million.  “That’s just the average… The units will start at $600,000
    and go up from there.”
  • “Hard Rock Café was one of the first to call us” when they heard about the project, strongly implying that they were lined up.  (Since the meeting, I have learned that the developer really talked with ‘House of Blues’ – not Hard Rock – and that they are anything but ‘lined up’.)

The plethora of mystery investors and backup plans might have been intended to reassure his audience.  But they actually raise troubling questions about the future of the project, the developers’ ability to obtain financing, and the financial viability of the development’s business model.

Unfortunately. Private.

Rob Morris 3 Comments CentrePointe , ,

There were two common refrains at Tuesday’s Urban County Council confrontation between our vice mayor and the developers of CentrePointe.

One was the word “Unfortunately” continuously invoked by the developers.  While “unfortunately” led some 6 sentences in the developers’ prepared statement, it also led nearly every response from the developers to difficult questions from the Council.  Unfortunately, the developers didn’t foresee the economic downturn.  Unfortunately, things change in projects like these.  Unfortunately, bloggers and the press and rumor-mongers have pointed out immense and inconvenient flaws in our business case.  Unfortunately, it is apparently their free-speech right to do so.  Unfortunately, people die.

Well, um, unfortunately, REAL businesspeople are supposed to anticipate and overcome such circumstances (not be paralyzed by them).  Anything less amounts to sheer speculation.  Which is what Lexington has encountered with CentrePointe.

The second refrain was actually more worrisome and more puzzling.  It came from members of the Council who acted as apologists for the developers (developers whose actions can only be characterized as bumbling).  These same councilmembers – Lane, Stinnett, Myers, McChord, and Beard – felt compelled to offer apologies for forcing the developers to account for their continuous inaction.

The refrain they used was “private”.  Councilmember Myers asserted that this is private property assembled by private developers with private funds, that the developers could do whatever they wish with it, and that the council had no business forcing CentrePointe’s developers to explain their incompetence.

Balderdash.

Before more libertarian readers resort to labeling me a socialist, let me assert my firm belief in property rights.  Unlike some of my more radical friends, I believe that property and capital and money have driven the vast majority of improvements in our living conditions and overall social well-being.  To be sure (and as we have seen quite clearly of late), capitalism often has an ugly downside driven by unrestrained greed.  But the long term gains have far outweighed that downside.

The crater created by CenterPointe’s developers is certainly private property.  It belongs to them.

But here’s where the stalwart defenders of property rights are wrong: Private property always comes with civic responsibility.  Owners of private property cannot use their property in ways which destroy value for surrounding properties or surrounding businesses.

Let me illustrate this principle with a recent and vivid example:  A year and a half ago, in the Andover neighborhood, there was a private home that was infested with rats.  The community and the Health Department mobilized to eradicate the rats and eradicate the problem.  Nearby property owners (including yours truly) were rightly concerned for both our safety and our property values.

Apparently, these same councilmembers would claim that the rat-infested house was private property, and, thus, the community had no right to defend their health or their property values.  Would councilmember Myers sit on his hands if a rat-infested house was next door to his house?  Apparently so.  Would councilmember Lane approve of a neighbor’s right to spread pig manure (and noxious fumes) to fertilize their lawn in his Hartland Gardens?  Apparently so.  After all, it is their property, and they can do what they wish with it.  Right?

Of course not.  Private property comes with civic responsibility.

* * *

With CentrePointe, we have a rathole downtown.  The rats, while not physical, are more insidious and more destructive:

  • There’s the bulldozer rat that razed buildings, jobs, businesses, and revenue last July.  The rathole has produced no jobs, no revenue, no businesses, and no buildings.
  • There’s the ugly-city rat that an out-of-town visitor takes back to their home as tourism dollars and tourists mysteriously disappear from downtown.  I suspect there will be many of this breed of rats available for the World Equestrian Games next year.
  • There’s the blight rat which drains surrounding property values and sucks patrons out of surrounding businesses.
  • And, finally, there’s the developer rat, who repeatedly fails to deliver on public statements about CentrePointe’s timing, funding, and business model.

Councilmembers Stinnett, McChord, Myers, Lane, and Beard appear to sympathize with both the rats and with the rathole.

I do not.  And I don’t appreciate our representatives who do.  And I’m not alone.

Private property comes with civic responsibility.  We need leaders who recognize that fact.