Tag: Taxes

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.

::

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 ::

 

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Moving the Goalposts on CentrePointe

Rob Morris 2 Comments CentrePointe , , , , ,

In 2009, an analyst hired by Kentucky’s Cabinet for Economic Development evaluated the CentrePointe development project in downtown Lexington.

The analyst looked at whether the Tax Increment Financing (TIF) that the developers proposed using made any sense. At the time, CentrePointe was slated to be a $298 million project, and the developers wanted to use Kentucky’s new TIF law to help subsidize the project.

Under TIF, the state and city would issue bonds to investors, and pay those investors back (with interest) by using the incremental taxes generated by the new development over the next 30 years. The TIF law stated that projects like CentrePointe needed to invest a minimum of $200 million in capital to qualify.

The analyst expressed skepticism about projects like CentrePointe – the real estate market was imploding in 2009. CentrePointe’s developers assured the analyst that the project was a sure bet: there was a mystery overseas financier willing to front all of the cash needed to build the project; there were top-notch tenants lined up (“Hard Rock Cafe”, “J.W. Marriott”); 65 of the 91 million-dollar condos had already been sold in handshake deals; the office and hotel spaces would have exceptionally high occupancy rates (even though they would also have exceptionally high prices).

Taking all of the developers’ assurances into account, the analyst thought the project would generate about $93 million in new taxes for the public. Sounds great, right?

Except that the same analyst found that CentrePointe’s bonds would also cost the public about $96 million to finance.

Even with all of the developers’ optimistic “best case” assurances – all of which eventually proved to be false – the Centrepointe bonds would still lose $3 million. [Updated*]

::

 

CentrePointe, Version 12

Visions of CentrePointe, 6 1/2 years later…

As CentrePointe repeatedly evolved over the ensuing years, it also repeatedly shrank. From the nearly $300 million sizing used for the 2009 assessment, the project shrank to $250 million, then $200 million. CentrePointe was shrinking to the point where its TIF funding was at risk.

Then, early last year, CentrePointe’s developers successfully lobbied the state legislature to lower the minimum capital investment needed to qualify for TIF to $150 million. In June 2013, the developers re-applied for TIF subsidies with a new, scaled-down CentrePointe.

The state hired the same analyst to evaluate CentrePointe, which was then estimated at $193 million (over $100 million less than in 2009). In their estimates, the analyst now estimated that the new Centrepointe Jr. would generate about $49 million in incremental taxes – about $23 million less than in the 2009 estimates.

This makes sense. As the size of the project shrinks, the incremental benefit also shrinks.

The problem? The new proposal still required an investment of $93 million to finance the CentrePointe bonds.

According to the state’s own analyst, the CentrePointe TIF bonds would be an extraordinarily bad investment in which bond investors would hand over $93 million, only to lose $44 million in the process.

Despite this extraordinarily negative analysis, the state and city decided to approve the TIF application for CentrePointe anyway.

::

Earlier this year, the developers began digging and blasting for a proposed $32 million parking garage on the site.

With the huge hole nearly complete, the developers have returned to the state and city to request that the TIF bonds for the garage be issued now – before the developer has spent anything close to the $150 million capital investment that is required to qualify for TIF.

In essence, the developer is requesting that the city and state take on a $32 million bond commitment (with an additional $33.5 million in financing obligations – $65.5 million total) on the dubious promise that the yet-to-be-built CentrePointe will someday generate enough new taxes to pay off bond investors.

This simply isn’t how TIF works. You don’t get the tax-funded financing before you build the thing which generates the taxes.

::

The state’s economic development analyst says that CentrePointe bond investors will never get paid back. And the analyst is undoubtedly correct.

The developers and their representatives repeatedly contend that TIF financing holds no risk for the city, the state, or taxpayers. (I don’t believe this assertion, but let’s run with it…)

If there really is no risk to taxpayers, then why do the developers need the city’s help in issuing TIF bonds? Why involve the city at all? After all, the developers could always pursue financing through normal real estate investment markets.

The reason is that they need the city’s help in creating the impression that the bonds are a safer investment than they really are.

But CentrePointe bonds aren’t a safe investment at all. In fact, they are likely to lose money for bond investors, because the project will never produce enough new taxes to pay investors back.

But the developers can’t let investors know that. Savvy investors would look at the risky business model of CentrePointe and refuse to fund it.

So the developers want to use our good name and credit ratings to help them deceive and defraud those investors, to assure them that the public stands behind those bonds and that the bonds are safe.

Today, the Lexington-Fayette Urban County Council will consider whether to ask the Kentucky League of Cities to issue TIF bonds for CentrePointe. While this move ostensibly shields LFUCG from liability when bond investors aren’t paid back, it is really a shell game. The League of Cities is a non-profit which consists of Lexington and other Kentucky cities, and lobbies on their behalf. Whether the League or the city issues CentrePointe TIF bonds, the reality is that taxpayers are still ultimately liable when the bonds fail. (And they will fail.)

The developers have attempted to maintain a veneer of respectability in our community – frequently pointing to their many, many development projects around Lexington as proof of their virtue. And CentrePointe fits the developers’ well-worn modus operandi of privatizing gains while socializing risks throughout those projects.

CentrePointe represents the very worst of corporate cronyism. By using an obscure and ever-shifting financing scheme, the Webb Companies are attempting to commit state-assisted fraud, while lining their own pockets and hoping that no one notices.

They’ve hoodwinked the Cabinet for Economic Development. Twice. They’ve hoodwinked the Urban County Council. At least two times. Now they want to hoodwink the Kentucky League of Cities.

These aren’t the actions of upstanding citizens. These are the actions of con artists and swindlers. They should be treated as such.

* An earlier version of this post included a smaller, state-only estimate of the impacts of CentrePointe from the analyst’s 2009 report. I’ve updated the post to reflect the full impacts to both the state and city. (This correction resulted in an even bigger shortfall for the TIF funding.)

Kentucky’s Regressive Tax Reform

Rob Morris 0 Comment Kentucky, Taxes , , , , ,

I was pleased to be asked to comment for today’s story by Jack Brammer and Janet Patton for the Herald-Leader on the Governor’s tax proposals. They did a great job accurately representing my views. This post helps elaborate on my perspective.

Dubbed “Kentucky Competes“, Governor Steve Beshear’s tax proposal consists of more than 20 changes to our state’s tax code. The proposal contains a number of troubling components which place a disproportionate burden on Kentucky’s poor, while providing large annual tax breaks which are skewed toward businesses and the wealthy.

I have three major objections to Governor Beshear’s tax reform plan:

  1. It is a taxpayer-financed corporate tax giveaway.
  2. By relying on sales taxes, the plan hits the poor and middle class harder than wealthier citizens and businesses.
  3. By choosing which kinds of labor to include (and exempt) from the sales tax, the plan hits the poor and middle class even harder.

Let me step through each one in turn.

1) Corporate Tax Giveaway

Overview

Click to enlarge

Governor Beshear’s proposals would generate an additional $210 million for the state. But like many tax reform initiatives, Beshear’s plan contains a mixture of new taxes and new tax breaks.

The Governor’s plan contains approximately $487 million in new annual tax breaks, more than offset with about $697 million per year in new taxes.

That’s nothing especially disturbing, given that the reform plan is supposed to put the state on sounder financial footing, and raising taxes is one way to do that.

What is disturbing is how the mix of breaks and taxes are allocated. Nearly half of the Governor’s tax breaks go to businesses (amounting to $234 million per year). So what’s their share of the new taxes that Beshear proposes? Nearly zero:

 

Who benefits and who pays?

Click to enlarge

 

Businesses pay a lot less...

I say ‘nearly’ zero because there will be some businesses which pay the new sales taxes for covered categories like auto service or computer repair. But given the exemptions and restrictions on these new sales taxes, the business share of the almost $700 million in new annual taxes will likely be very, very small.

So businesses (some of them, at least) will get a collective windfall of more than $234 million per year under Beshear’s plan, while simultaneously contributing no new taxes to the state.

Throughout the documents Beshear’s office released yesterday, there is the notion that this corporate giveaway will help Kentucky “compete for quality jobs.” The underlying assumption is that if “job creators” are given enough tax cuts, that they’ll hire our way to prosperity. This notion is, at best, misguided; at worst, it is an outright lie.

As I have written before (more than once, in fact), business owners do not hire because they have extra tax-cut money lying around. We hire because we have work to do, and we need someone to get it done. We hire when there’s more demand.

...while Kentucky families pay a lot more.

Meanwhile, because businesses wouldn’t pay these new taxes, the burden is placed squarely on Kentucky’s families. When paired with the tax breaks for individuals, Kentucky households would pay about $444 million more in new taxes each year (or approximately $260 per household.)

While the Governor trumpeted the ‘relief to every working Kentuckian’ yesterday, the hard truth is that his scheme raises taxes on nearly every working Kentuckian in order to fund an enormous tax giveaway to select (usually large) businesses. This plan is a stunning, brazen, and inexcusable attempt to redistribute wealth from those who can least afford it to the already-wealthy.

2) Sales Taxes

Sales taxes are an incredibly regressive tool for raising money for Kentucky. They are regressive in the sense that sales taxes hit poorer people harder than wealthier ones.

Why are sales taxes especially burdensome for the poor? Because the extra tax takes up a greater portion of their income for the same product or service. The extra tax just hurts more.

Even though the Governor’s proposal includes some $72 million in Earned Income Tax Credits (credits for the working poor – generally a good contributor to the economy and job production), he bleeds those benefits away with new sales taxes.

And the proposed sales taxes are almost exclusively in consumer services, while sales taxes for business services are largely exempt.

Ordinary Kentuckians would not benefit under Beshear’s regressive plan.

3) Different Kinds of Labor

The Governor’s plan also targets only certain kinds of labor for sales tax expansion. In particular, it chooses to apply sales taxes to labor involved in the “installation, maintenance and repair of taxable personal property.” In other words, the repair and service of personal items (like cars or computers) would be taxed under Beshear’s plan.

But not all service labor is equal, under the Governor’s scheme. Other kinds of labor – say, accounting or legal services – would be exempt from the new taxes. And who disproportionately uses a lot of those exempted services? Businesses and the wealthy, of course.

Even within the “installation, repair, and maintenance category”, there are exclusions. Because these new taxes apply to ‘personal property’, they exclude repair and maintenance services for machinery, farms, and real estate properties — the kinds of services consumed in greater amounts, once again, by businesses and the wealthy.

By steering the new taxes away from services which impact the wealthy, Beshear hits ordinary Kentuckians especially hard.

::

Governor Beshear’s new tax proposal is an audacious attempt to take wealth from Kentuckians who are hardest hurt by our economy, and attempts to transfer that wealth to the already-well-off.

It is a colossally bad idea which will leave millions of Kentuckians worse off. And we shouldn’t let him get away with it.

After the jump: Backstory

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Anatomy of a Con

Rob Morris 1 Comment CentrePointe , , , , ,

Imagine, for a moment, that you build houses.

You’re a competent – and pretty crafty – builder, so you earn a profit of 10% of the sales price on each house you build.

You’ve found a cheap lot on the edge of town which is a decent prospect for a $125,000 home design. At your 10% margins, you’d usually stand to make $12,500 on this house.

Trouble is, your land is in the middle of nowhere: the nearest street dead-ends before it even reaches your lot.  You know that paying to extend the street will cut into your profits by $5,000, and you definitely don’t like that.

As you’re thinking really hard about how to avoid having to pay for the street extension, you hit upon a really crazy scheme: What if, you think to yourself, I could not only get our town to pay for the street extention, but I also got them to finance the house’s two-car garage!

But how could you possibly convince the townsfolk to fork over the $25,000 needed for the street extension and the garage? The town is already struggling with its finances, and you know your proposal won’t go over well. Why should the town pay for a private garage?

And here is where you get your craftiest.

You decide to focus more on what the town gets than on what they spend. So you play up ‘benefits’ the town stands to gain from your ‘economic development initiative’. Here’s your basic approach:

  • Building the house will generate higher property taxes for the town over the next few decades, where today there is just a vacant lot.
  • The construction will increase economic activity for the town as you pay for supplies and labor on the site.
  • The house will bring in working residents, who will generate new payroll taxes for the town.
  • The garage and street extension – ‘public infrastructure’, as you now call the garage and road that you need more than anyone – are essential to this future tax revenue.  You’ll point out that no one will buy a new house without a garage; and without the garage, the town won’t get the benefits of this project.
  • Yes, the town would have to borrow the $25,000 (and, over the years, pay another $25,000 in interest) to help fund the ‘infrastructure’, but you’ll point out that the new property and payroll taxes will offset those costs.
  • Finally, to sweeten the pot, you artificially inflate the price of your house by 20% to $150,000.  You know the project is really only worth $125,000, but boosting the price by 20% has the nifty effect of inflating the estimated ‘benefits’ by 20%, which makes the whole scheme easier to sell.

You know you are way out on a limb with this scheme, but – who knows – maybe the town will go for it.

And why would they? Because you’ve done the math, and you’re betting that they haven’t.

If you had paid for the street extension on your $125,000 house, you would have spent $117,500 and pocketed $7,500 – a tidy 6% profit. Not what you usually make, but a profit nonetheless.

But if you can get the town to finance the street and the garage, that removes $25,000 from your cost. Now, you can build the $125,000 house for just $92,500 out of your pocket (and another $25,000 out of the public purse), and you make a cool $32,500 profit for a 26% margin.

If you can get the town to go for your scheme, you’ve ‘magically’ quadrupled your profits.

::

So you package up your scheme and present it to the town’s economic development manager.  You brace for her to laugh you out of her office, but have decided that you can live with a little ridicule in exchange for the chance – however remote – to quadruple your income.

Instead, she just smirks.

She knows that you need the garage and the street extension more than anyone, and isn’t sure what valid public interest the town has in helping with the house you want to build. She know that you need to build something on the lot anyway even if you don’t get the town’s financial support. She’s not sure she believes that your project is really worth the $150,000 you are claiming.  Even if it is worth $150,000, she thinks your estimates on how much the town stands to benefit are extremely exaggerated.

She appreciates the ingenuity of your argument, but the whole scheme strikes her as farcical and not really worthy of being called an ‘economic development initiative’.

And yet, she also knows that you are close to several members of the town council. She seems to recall a picture of you with your arm around the mayor in the local paper. She suspects that you have contributed to several local political campaigns.

These connections intimidate her. So she decides to pass the whole suspect bundle (and the decisionmaking) along to the town council.

And to your delight, the council routinely passes your scheme with only modest resistance. They simply require that you spend at least $100,000 on your project to qualify for these incentives.

::

Just as you rub your hands in glee at the prospect of making so much money, the economy takes a nosedive. Banks aren’t willing to lend for housing construction, even for a ‘sure thing’ like your project.

After a long delay in lining up financing, you return to the town council with a proposed amendment to your initiative. You ask for a ‘hardship exemption’ to lower the total amount which needs to be spent on the project to just $75,000, even though you initially justified the town’s financial involvement based on the inflated $150,000 amount.

You hope that no one notices that a half-sized project would only generate half-sized benefits.

And, sure enough, the town council unanimously approves your amendment without debate. No one noticed. Or, more accurately, no one publicly objected.

At this point, another important revelation strikes you: The smaller your project gets, the more you come out ahead.

You now figure that you can finance and build an $80,000 house on your lot.

If you had built on your own, the house would have cost you $72,000 to build, plus $5,000 for the street improvments, which would have left you with about $3,000 in profit. At just under 4%, the margins are substantially less than you usually make, but the project is still profitable.

But the town is still on the hook for the same garage and street extension – even though the overall house has shrunk.  So you’ll really spend $52,000 to build your $80,000 house (while the town still pays $25,000), and you’ll clear a neat $28,000, or over 9 times as much as if you built the project on your own.

The town’s ‘public infrastructure’ commitment lets you multiply your profit as the overall project shrinks. You put in less money and get higher return on investment.

You are quite crafty, indeed.

::

Yes, this thought experiment is ludicrous, if intriguing. And no town would ever support such a ludicrous scheme.

Right?

Except that they already have.

The above fable is true. Mostly.

It’s just 2,000 times too small.

Multiply all of the dollar amounts by 2,000, and you have the fiscal outlines of the CentrePointe project in Lexington.

Just substitute ‘town’ with ‘The Commonwealth of Kentucky’ and ‘Lexington’. Then substitute ‘you’ with ‘The Webb Companies’. Substitute ‘house’ with ‘CentrePointe’. And substitute ‘incentive’ with ‘Tax Increment Financing’ or ‘TIF’.

CentrePointe started as a $250 million project in 2008. As it sought state and local support for $50 million in ‘public infrastructure’ (including a $30 million parking garage), CentrePointe’s cost ballooned to $300 million. After getting approval for Tax Increment Financing incentives from the state – based on that $300 million price tag – CentrePointe still couldn’t get financing, and stagnated.

CentrePointe, Version 5.0
After continual financing troubles and multiple revisions, last week CentrePointe’s developers got unanimous approval from both houses of the state legislature to drop the overall project size to just $160 million – while still receiving the full TIF incentives of the inflated $300 million version of the project.

In other words, no one noticed that a half-sized project only generates half-sized benefits to the state and city. No one recalibrated the incentives when CentrePointe shrank.

In the process, The Webb Companies multiply CentrePointe’s profitability with no additional risk to themselves.

::

We’ve often called Tax Increment Financing (or TIF) a scam or a con. While this sounds like hyperbolic exaggeration, we think what’s actually happening is sleazy enough to merit these labels.

TIF’s scamminess stems from several interrelated components:

First and foremost, the developers shouldn’t need public help. They benefit from this ‘public infrastructure’ more than anyone else, but have no financial stake in it. The theory of TIF is that the taxes stemming from new economic activity will pay for the infrastructure.  In return, the city gets the benefits of increased economic activity. That’s the theory.

But the reality is quite different.  The most aggressive, best-case scenario from the state’s economic development consultant showed the city and state tax increments not quite breaking even after 30 years.

All of the incremental benefits that the project is supposed to bring are plowed right back into debt and interest payments which benefit the developers.

So in return for taking on $50 million in debt and $50 million in interest on behalf of the developers, the public gets nothing after 30 years. Nothing.

And that was the best case?

Wait. It gets worse.  The consultant’s ‘not quite breaking even’ case was based on CentrePointe at its bloated $300 million apex.  Now, CentrePointe is a half-sized $160 million project. At this reduced size, CentrePointe can never pay the city and state back for the infrastructure investment.

The developers need the parking garage. The developers would benefit most from the parking garage. Even so, the developers have managed to offload their parking garage costs onto others, using public taxes to do so.

Second, this means that TIF allows The Webb Companies to socialize the many risks of CentrePointe while privatizing the gains. Bondholders and the public take on the risks that CentrePointe might fail to live up to the promised (and unlikely) stream of tax revenues, while the developers avoid (and pocket) the costs of a $30 million parking garage.  The developers get the benefits of a parking garage to serve CentrePointe, while someone else gets stuck with the tab.

Will bondholders or the public ever get paid back? Maybe. Maybe not. We’re pretty sure that they won’t. In any case, none of this is the developers’ concern. They get a big parking garage – essentially for free.

From a developer’s point of view, TIF offers all upside with no downside.

Third, this asymmetry in risk rewards the developer for, in essence, making stuff up. In order to win the profit-multiplying $30 million upside of TIF approval, the developers can (and did) say anything. “We’re building the state’s tallest building!” “We’ve got all-cash financing!” “We’re building a $300 million development!” “We’ve got handshake deals for 65 condominiums!” “Construction starts in 60 to 90 days!”

The fact that all of those statements were false is beside the point. There was little downside to lying or being profoundly wrong. And the developers were repeatedly, incredibly, and thoroughly wrong.

With no downside, their multi-dimensional wrongness helped the developers secure a $30 million windfall at public expense.

Fourth, as the nature of CentrePointe shrank and changed, the TIF funding stayed the same.

CentrePointe’s TIF was approved when the developers were proposing a $300 million project.  At that time, the developers also promised that they had financing in-hand. They promised 91 residential condominiums at a $1 million average price. They promised to begin construction in March 2009.

None of these overly optimistic assertions turned out to be remotely true. The project shrank to half its approved size. The size and mix of residential, retail, hotel, and office activity changed dramatically. The project slipped 4 years (and counting) past its promised construction start date. But none of these facts changed the city’s or state’s TIF obligations.

CentrePointe is a fundamentally smaller and different project than when it was proposed. Yet the developers’ rewards remain the same: The developers still get a $30 million parking garage, at public expense.

There appear to be no mechanisms at the state or local level to revisit the TIF commitments when a project fails to live up to its rosy projections. And CentrePointe certainly failed to meet those projections.

Worse, TIF actually rewards the developers for shrinking the size of the project: The smaller the project gets, the greater the developers’ return on investment.

The Webb Companies appear to be able to alter the project on every whim of the developers. They can and have overpromised and underdelivered. And the city and state appear to have no recourse – or desire – to reevaluate their support of the project.

Fifth, state law is maddeningly unclear about what happens if a TIF project fails to deliver on its promises. The law goes into great detail about how to subsidize the developers, but it does not make clear who pays when the project falls short of projections.

When a TIF project is approved, it allows the city and state to take on debt by issuing special TIF bonds. In return for $50 million from bond investors, the city and state promise to use a steady stream of taxes coming out of the new economic activity at CentrePointe to pay back the $50 million (with another $50 million in interest) over the next 30 years.

Under the original best-case assumptions from the state’s economic development consultant in 2009, taxes from CentrePointe just missed fully paying for the bond payments.

Since 2009, however, everything changed. The project got much, much smaller. Key assumptions justifying TIF for CentrePointe have crumbled.

In other words, it is not remotely possible for CentrePointe to generate enough taxes to pay back the bond investors.

Three years ago, we re-ran the consultant’s analysis for CentrePointe using (in our judgment) generous-but-realistic assumptions.  The result: Taxes from CentrePointe only generated 20% of what was needed to pay bond investors.

And that was before the project shrank another $40 million – rendering even our dreary projections too optimistic.

So the state and city issue TIF bonds. And the CentrePointe TIF can never pay the bond investors. Then what?

If the city and state default (i.e., fail to pay) on the bonds, whose credit rating takes a hit? Who is responsible for the shortfall?

Some analysts assert that bondholders would be on the hook for any shortfall. But then, any bond analyst looking at CentrePointe would recognize that they’d never get paid, and investors would flee. Then where do the TIF funds come from?

It is hard to look at the CentrePointe TIF without realizing that there is great risk of loss to state and local taxpayers, as well as bond investors.

It is also hard to look at the CentrePointe TIF without realizing that The Webb Companies incur no risk at all.

Finally, the fact that the city and state sanction TIF for CentrePointe doesn’t make TIF more legitimate; It makes TIF more despicable.

TIF is the worst kind of reverse-Robin-Hood welfare scheme for developers. At a time when the state and city are starving for money, TIF uses public tax dollars to help reduce the developers’ expenses and helps line their pockets. It transfers risk away from the developers and to the public and to investors. It literally takes from the poor and gives to the rich.

The CentrePointe TIF is a con.  The fact that the city and state assist in the con doesn’t make it any less of one.

::

We’ve often had fun at the developer’s expense with CentrePointe, pointing out their serial incompetence and their tendency to lie and exaggerate.

But the truth is that their ‘incompetence’ and mendacity have served them quite well. It has helped them dramatically compound their profitability and reduce their risk. All at public expense.

Quite crafty, indeed.

Five Years of Failure: Lessons from CentrePointe

Rob Morris 4 Comments CentrePointe , , , , ,

Five years ago today, the Webb Companies announced CentrePointe, a then-$250 million downtown Lexington development effort which planned to produce 900 jobs and the city’s tallest building on one block in the center of the city. Citing the urgency of the project, the developers moved quickly to demolish several neglected-but-historic buildings on the block.

Then, CentrePointe stalled.

The developers made some cosmetic efforts to clean up the site, ultimately transforming the pit of demolition rubble into a tiny pasture, complete with horse farm fencing.  But actual construction never began.

Today, CentrePointe is still stalled.

Centrepointe, Version 4.0Over the past five years, the developers have repeatedly revised their plans and their explanations for delay.  At every revision, construction was imminent, slated to begin “60 to 90 days from now”.

The financial and physical ambitions of the project have shrunk somewhat: the plans now call for a $200 million development which no longer includes the city’s tallest building.  Instead of the hulking monolith of the first three designs, the developers are now pursuing a less-imposing design which promises to blend with the surrounding city much more effectively.

But approval for the developers’ fifth major design iteration expires next week, and we’ve seen little progress on CentrePointe over the past year.

After five years, we have no economic activity on the site. No construction. No jobs. No building. No progress.

Over the years, we’ve been frequent critics of the CentrePointe project.  Those critiques have stood up well to history.

The fifth anniversary of the announcement of CentrePointe, as well as the expiration of the project’s fifth design, seem like a good time for us to take stock of what Lexington should learn from the five years of failure with CentrePointe.

Hopefully, we can apply some of these lessons to CentrePointe (and to other major development initiatives in the city).

::

The developers lied.
They lied repeatedly. And with no trace of shame. It isn’t a pleasant or polite thing to say, but Lexington needs to stop being polite to hucksters and charlatans.

They lied about their secret mystery financier. They lied about his death. They lied about his heirs and ‘numbered Swiss bank accounts’. They lied about backup financing. They lied about backup financing for the backup financing. They lied about the urgency of demolishing historic buildings. They lied about their schedule. They lied about tenant commitments. They lied about 61 (or 64! or 65!) ‘handshake’ deals for their condominiums. They lied with pretty pictures of ugly buildings. They lied with pretty pictures of pretty buildings. And they lied with overly optimistic financial projections.

They lied to the press. They lied to the public. They lied to the Urban County Council. They might have even lied to themselves.

And when their thick layers of lies wore thin, they resorted to insulting and bullying their critics instead of offering substantive rebuttals.

TIF is a scam.
CentrePointe has always depended upon tax-increment financing, or TIF, to support approximately $50 million of the project. TIF allows cities and states to allocate future incremental tax revenues to finance today’s public improvements related to new economic development initiatives.

The logic behind TIF is that the increase in economic activity which stems from a new project will generate taxes that will – eventually – pay back the state and city for improving roads, sidewalks, utilities, parking, or other infrastructure around the project.

Sounds reasonable, right? Build CentrePointe; generate new economic activity; generate new taxes from that activity; use future taxes to help pay for the “public” parking garage which CentrePointe needs to be viable.  The city issues CentrePointe TIF bonds to investors, uses the investors’ money to build the CentrePointe parking garage, and pays back investors (with interest) out of the tax revenues from all of the economic activity CentrePointe creates.

But here’s the core problem: CentrePointe never generates enough economic activity to pay back bondholders.

How’d this happen? CentrePointe’s developers used wildly inflated projections to qualify for TIF, and few city or state mechanisms were in place to effectively challenge the developers’ assertions.

And therein lies the problem with TIF more broadly.  Developers have every incentive to exaggerate their estimates of a project’s value to the community. If the project comes up short of their rosy projections, developers still reap the benefits of TIF (“Free parking garage!”), while taxpayers and bondholders assume all of the risks.

Those supporting TIF programs often assert that only bond investors bear the risk of project failure.  But that rarely happens. As LEO’s Joe Sonka meticulously chronicles with Louisville’s Yum! Center (another state-sanctioned TIF program), the reality is that taxpayers are the true backstop when a project fails to live up to its projections.

TIF amounts to little more than an elaborate corporate-welfare scam.

With no downside risk, developers have no motivation to be realistic in their projections in their pursuit of state and local support, while state and local governments provide few checks on that runaway optimism.

Further, TIF provides developers with their infrastructure goodies now, and in exchange taxpayers and bondholders get a trickle of unreliable and unpredictable tax revenues over the next 30 years.

So far, the saving grace for the CentrePointe TIF has been that the developers have been unable to secure financing for the rest of the project, and haven’t yet been able to invoke the state and city support needed to build the parking garage.

Financials trump design.
Perhaps because the design has changed so often, many CentrePointe critics – including us – spent much of their time obsessing on the project’s design.  This was especially true when the design got good following Jeanne Gang’s involvement in June 2011. Because the Studio Gang process was so inclusive, many in the community felt a sense of ownership of the resulting design.

But the reality is that the design of CentrePointe matters very, very little in comparison to the finances of CentrePointe.

Pretty pictures are nice, but pretty pictures crumble without viable financing.  (And they have crumbled several times without viable financing.) Pretty pictures don’t matter as much as pretty business plans.

And CentrePointe has never had a pretty business plan, even when it had pretty designs.

Big is fragile.
The state’s agreement with the city specifies that at least $200 million be spent on CentrePointe by 2016 in order to qualify for TIF.

And the project’s price tag has dutifully maintained that $200 million threshold over the past 5 years.

As a result, CentrePointe has always been big and complex; it contains residential, retail, hotel, and office components.  The viability of the project requires the success of all of these components – if any one fails, the whole project fails.

This is why the developers have had five years of trouble securing financing.  A project of this size and complexity is inherently fragile.

A smaller project (or collection of smaller projects) would likely be much more robust, but then it wouldn’t qualify for TIF funding.

When projects get bigger and more complex, there’s greater risk for something to go wrong. CentrePointe’s size is a liability, not an asset.

Speculation is just gambling.
Speculation is not economic development. Speculation is gambling.

The developers gambled. They gambled with historic buildings. They gambled that they could get financing before the economy crumbled. They gambled that they could get they city to help finance part of their project. They gambled with the center of our city.

And they lost.

And we lost, too. We lost a little of our city’s history. We lost economic activity. We might lose even more if the project goes forward.

::

These are just a few of CentrePointe’s lessons for Lexington. There are undoubtedly many more (for instance, I haven’t delved into the project’s many historic preservation failures here).

Feel free to add what you’ve learned over the past five years in the comments below.

The 1345

Rob Morris 0 Comment Kentucky, Taxes , , , ,

McConnell
Mitch McConnellYesterday, despite having support from a majority of the Senate, the $60 billion Rebuild America Jobs Act was blocked from even being debated on the floor of the Senate by Kentucky’s own Mitch McConnell and Rand Paul – along with every other Republican senator.

The Act included $50 billion in direct spending for roads, bridges, and other infrastructure, as well as $10 billion towards starting the National Infrastructure Bank.  Both ideas have traditionally enjoyed bipartisan support.

The bill would be paid for by a 0.7% surtax on incomes over $1 million.

The Department of Transportation estimated that the Act would create about 800,000 new jobs.

McConnell was unapologetic for blocking debate on the bill:

“The truth is, Democrats are more interested in building a campaign message than in rebuilding roads and bridges,” said Senate GOP Leader Mitch McConnell of Kentucky. “And frankly, the American people deserve a lot better than that.“

800,000 jobs seems like more than a campaign message.

But these national numbers are a bit hard to get our arms around.

It’s worth evaluating the impacts of this bill on a more local level.  What would the Act do here in Kentucky?

Over 200,000 Kentuckians are out of work.  That’s nearly 10% of the labor force.

And since September, one of two major bridges crossing the Ohio River in McConnell’s hometown of Louisville has been shut down after inspectors found cracks. Another bridge between Kentucky and Cincinnati has been deemed “structurally deficient”.

Paul
Rand PaulThe bill McConnell and Paul voted against would have spent over $450 million on roads and bridges in Kentucky, and would have created 5,900 jobs.

Why would Mitch McConnell and Rand Paul reject 5,900 jobs for Kentucky? Why would they oppose fixing Kentucky’s infrastructure?

Maybe they’re concerned with raising taxes.  As McConnell said on Meet the Press, “We don’t want to stagnate this economy by raising taxes” on those who make over $1,000,000, who Republicans are fond of calling “job creators” and “small business owners”.

So let’s take a look at who makes over $1,000,000 in Kentucky.  According to Citizens for Tax Justice [PDF Link via Greg Sargent] out of Kentucky’s 4.3 million citizens, there are 1345 Kentuckians who would be affected by such a tax, and they make an average of nearly $3.5 million.

And it’s worth noting that The 1345 are folks who don’t just have $3.5 million – enough to qualify them as multi-millionaires.  These are people who clear $3.5 million per year.

The 1345 are the ultra-wealthy.  And businesses which help their owners reap $3.5 million per year are not ordinarily considered “small”.

And what is the onerous burden the “millionaire’s tax” would place on The 1345?

Out of their $3.5 million in income, The 1345 would pay $17,409 more to fix Kentucky’s roads and bridges which they undoubtedly benefit from more than Kentucky’s other 4,338,000 citizens.

So: McConnell and Paul blocked the creation of 5,900 jobs and the improvment of roads and bridges for all Kentuckians in order to protect The 1345, a tiny group of ultra-wealthy Kentuckians who would pay only $17,409 to rebuild the infrastructure they use more than anyone else.

McConnell claims he doesn’t want to “stagnate the economy” by taxing The 1345, which raises the question: What have these ultra-wealthy “job creators” been doing with this money while they’ve kept it?

Because they certainly haven’t been creating jobs.

Mitch McConnell and Rand Paul chose to protect The 1345 at the expense putting 5,900 Kentuckians back to work.  At the expense of our crumbling roads and bridges.  At the expense of the other 4,338,000 Kentuckians.

And frankly, the American people – and Kentuckians – deserve a lot better than that.

The American Idea

Rob Morris 2 Comments Ideas, National , , , ,

My wife and I are one-percenters.

We have amassed a small fortune – built over some 20 years of climbing our respective corporate ladders, saving very aggressively, and making some favorable investments.

We worked very hard to build our wealth.

But we are also incredibly lucky.

We were both winners of what Warren Buffett has dubbed “the uterine lottery”: through no effort on our part, we were both born into safe, stable, American, loving family environments where hard work and academic success were built-in expectations.  We were granted this huge headstart in life and had no part in earning it.

That early headstart only snowballed as it helped us accumulate advantage upon advantage in our early lives.

We benefitted greatly from our society’s investments in all sorts of public goods, public works, and public innovations.

More bluntly, because of our unearned headstarts, we benefitted disproportionately as we often extracted more value and more opportunity from these public goods than did our less-advantaged peers.

In our youth, we both got into honors-level courses at great public schools.  We both had great professors at our public universities, where we both received advanced degrees.

In our professional lives, we continued our disproportionate wins, taking greater advantage of public investments in roads, airports, research, computers, the Internet, housing, and police and fire protection.

As a business owner, I continue to receive disproportionate share of the benefits from the public investments which deliver customers and vehicles and qualified employees into my shop.

My wealth is – in great part – the result of decades of personal hard work, constant learning and creativity, and deep thought.

But my wealth is also the product of decades of unearned advantage which allowed me to receive an undeserved greater share of our society’s prosperity.

For my disproportionate bounty, I owe a disproportionate debt.

::

This “disproportionate debt” is the basis of the American system of progressive taxation – the reason that those with higher incomes and greater wealth pay taxes at higher rates.  The wealthy owe more to the nation which co-produced their wealth.

As President Obama’s jobs proposals and the Occupy Wall Street protests have gained favor among independents and an increasing proportion of Republicans, the national conversation has begun to focus on the responsibility of the wealthy in creating, perpetuating, and resolving our current economic woes.

In polls, the overwhelming majority of Americans support greater public investments in infrastructure, education, and public safety in order to create jobs.  And they support raising historically-low taxes on the wealthiest Americans to do it.

And yet, an increasingly-prominent conceit of conservative ideology holds that every person is merely the product of their own singular efforts, and that those with success owe nothing (or owe very little) to the society which made their success possible.

Purveyors of this ideology live in a kind of denial – conveniently ignoring the significant roles of simple luck, coupled with public investments in infrastructure, education, and research, in improving their own lives and in enabling the lives of the wealthy. They contend that the wealthy pulled themselves up by their bootstraps, and everyone else should as well.

After Warren Buffett – history’s most successful investor – argued in August that the very wealthy have a duty to pay more in taxes, Harvey Golub – former Chairman and CEO of American Express and former Chairman of AIG – expressed the “bootstraps” mentality in his opening to an indignant Wall Street Journal screed [emphasis added]:

Over the years, I have paid a significant portion of my income to the various federal, state and local jurisdictions in which I have lived, and I deeply resent that President Obama has decided that I don’t need all the money I’ve not paid in taxes over the years, or that I should leave less for my children and grandchildren and give more to him to spend as he thinks fit. I also resent that Warren Buffett and others who have created massive wealth for themselves think I’m “coddled” because they believe they should pay more in taxes. I certainly don’t feel “coddled” because these various governments have not imposed a higher income tax. After all, I did earn it.

The corollary to Golub’s “I earned it” meme is that poverty and joblessness are presented less as a result of unfortunate circumstance than they are as a reflection of moral failings on the part of the poor or unemployed.

When asked about the Occupy Wall Street protests, for instance, GOP presidential candidate Herman Cain told the Wall Street Journal [emphasis added]:

“Don’t blame Wall Street, don’t blame the big banks, if you don’t have a job and you’re not rich, blame yourself!”

At a book signing in Florida one day later, Cain added that the OWS protesters were un-American and anti-capitalist for protesting against Wall Street banks because “they’re the ones who create jobs” – despite overwhelming evidence to the contrary.  At a Republican debate a couple of weeks later, Cain was asked if he stood by his remarks, and his affirmation garnered the night’s biggest applause from the partisan crowd.

Paul RyanBut perhaps no one in today’s politics defends the rights of the wealthy quite like Wisconsin Congressman Paul Ryan. Ryan, who requires his staff to read Ayn Rand’s Atlas Shrugged for its policy insights, is the chair of the House’s Budget Committee.

Ryan is well known – and mystifyingly well-regarded as a “serious thinker” – for his attempts to use the budget process to accelerate social inequality.  Ryan’s 2011 budget plan, dubbed The Path to Prosperity, was an audacious reverse-Robin-Hood attempt to slash safety nets for the most vulnerable even as it it further slashed taxes for the already-wealthy.

With the President’s jobs agenda and the Wall Street protests gaining popularity, and the national conversation now squarely focused on jobs and inequality, Republicans have been losing control of the political narrative they dominated during this summer’s debt crisis.

In a much-anticipated speech, “Saving the American Idea: Rejecting Fear, Envy, and the Politics of Division”, delivered to the conservative Heritage Foundation last week, Ryan attempted to recast that narrative with an ideological agenda nearly worthy of an Ayn Rand protagonist.

In that speech, Ryan outlined the American Idea as defined by the “principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense”.

After chastising the President for promoting his jobs initiatives while “sowing social unrest and class resentment,” Ryan laid out the contours of his new narrative.

The central problem of economic justice in America doesn’t revolve around a wealthy class which isn’t doing its part, Ryan asserted, but around a social welfare system which inhibits economic opportunity and economic mobility.  Ryan contends that progressives don’t understand this because they confuse “equality of opportunity” with “equality of outcome” [emphasis added]:

These actions starkly highlight the difference between the two parties that lies at the heart of the matter: Whether we are a nation that still believes in equality of opportunity, or whether we are moving away from that, and towards an insistence on equality of outcome.

If you believe in the former, you follow the American Idea that justice is done when we level the playing field at the starting line, and rewards are proportionate to merit and effort.

If you believe in the latter kind of equality, you think most differences in wealth and rewards are matters of luck or exploitation, and that few really deserve what they have.

That’s the moral basis of class warfare – a false morality that confuses fairness with redistribution, and promotes class envy instead of social mobility.

There are a couple of major problems with Ryan’s new “equality of opportunity” narrative.

First, the playing field is never level at the starting line. Unmerited inequalities exist, and they often grow exponentially over time.

Ryan would have us believe, for instance, that a child born some forty years ago with dark skin to an impoverished single mother in, say, inner-city Detroit had all of the same advantages and opportunities afforded to a child born some forty years ago into a stable, upper-middle-class white family in, say, Janesville, Wisconsin.

The circumstances of the starting line matter.  And it is all-too-convenient for those given headstarts to pretend they don’t.

Second, economic justice doesn’t stop at the starting line.  We must also assure that the race is run fairly.

Running the race fairly isn’t about insuring “equality of outcome”, as Ryan contends.  Most participants will not “win” the economic race. But it is about making certain – through establishment and enforcement of the rules – that participants do not cheat or exploit one another. It is about making certain that we flatten very real hurdles of race, gender, and income (to name just a few).

And asking the wealthy to pay disproportionately into the system which helped provide their disproportionate prosperity isn’t “redistribution” – it is merely the repayment of a disproportionate debt. It is fairness.

::

I’m sure that Harvey Golub, Herman Cain, and Paul Ryan all worked incredibly hard to achieve their successes.  But somewhere along the way, as they deified their individual efforts and accomplishments, they forgot – if they ever recognized in the first place – the enormous and undeniable roles that luck and public welfare played in their successes.

In a town hall two weeks ago, for example, Ryan told a student that the Pell Grant program (federal assistance for lower- and middle-class students) was “unsustainable”, and Ryan noted that he worked three jobs to pay off his student loans.  Good for him.

But Ryan also leveraged his public school and public university education to get his start in Washington.  And while he promoted his private sector student loan as some sort of ideal, Ryan failed to mention that he also used his father’s Social Security death benefits to help pay for college. He went on to a taxpayer-supported career in Washington, including the last 13 years as an employee of the very government he regularly demonizes.

With no trace of apparent humility for their remarkable good fortune (nor apparent blush for their remarkable hypocrisy and greed), these successful men promote the mythology of the completely self-made success.

But no one with wealth got that wealth solely on the basis of their own virtues.  On their paths to success, each got help – sometimes deserved, often not.  To ignore the help we have received is to ignore our obligations to one another.  Worse, it betrays an unfortunate ungratitude.

The wealthy and successful extract greater value (and wealth and success) from our public goods, and thus owe a greater debt to the communities which contributed to their successes.

::

Paul Ryan is right, but inadequate: the American Idea does revolve around rewarding individual merit, effort, and ingenuity. But that isn’t all.  That isn’t nearly enough.

The American Idea also revolves around our ability to work together to do and build great things. Our civic commitments to greatness – especially in times of crisis – mark our national identity and our national success every bit as much as (maybe even more than) our individuality does.

Many of our nation’s greatest accomplishments – Social Security, Interstate highways, successes in World Wars I and II, the Civil Rights Act, National Parks, and even the free enterprise system itself – are built upon a foundation of mutual cooperation and mutual sacrifice.

The American Idea is simply not the either-or cartoon presented by Paul Ryan.

We are a great nation because of our individual efforts, of which we are justifiably proud.  And we are a great nation because of our mutual commitment to one another, of which we are profoundly humbled.  We must ensure both to build upon our greatness.

That is an American Idea worth saving.

::

One final note: I find it increasingly difficult to tolerate condescending, one-sided lectures on the virtues of individual effort and private enterprise (and on the evils of “redistribution”) when they come from political mercenaries who have financed their professional careers with public money.

And, yes, I’m looking at you, Paul Ryan.

Confessions of a Job Creator

Rob Morris 1 Comment Jobs, National, Taxes , , , , , ,

I’m a job creator.  And job creators are important.

At least that’s what we’ve been hearing from Republicans lately.

House Speaker John Boehner cited “job creators” and “job creation” 26 times in a speech about the economy last week.

And in that speech, the Speaker invoked us job creators to attack the Republicans’ Unholy Trinity: taxes, regulation, and government spending:

Private-sector job creators of all sizes have been pummeled by decisions made in Washington.

They’ve been slammed by uncertainty from the constant threat of new taxes, out-of-control spending, and unnecessary regulation from a government that is always micromanaging, meddling, and manipulating.

To hear Boehner’s version of events, the government stands as the sole obstacle to us job creators as we valiantly attempt to create more jobs.

Indeed, the entire Republican establishment keeps talking about the special role we job creators play in our fragile economic recovery.

In their “House Republican Plan for America’s Job Creators” – a 10-page, large-type tome [PDF link] about the same length as this blog post – the House Republican leadership repeatedly promise to slash the Unholy Trinity of tax, regulation, and spending.  On Sunday talk shows, more of the same.

If only we job creators paid less money in taxes, Republicans say, we would hire more.

If only we were free from government regulation, we would hire more.

If only we were less concerned about government spending, we would hire more.

As much as I appreciate Republicans’ apparent concern – their willingness to dump money in my pocket, their longing for my freedom to pollute with abandon, their eagerness to drive the nation to the edge of default to keep government spending in check – here’s the thing:

Their efforts won’t help me create a single job.

Not one.

In fact, Republican attacks on taxes, regulation, and spending do quite the opposite, because Republicans are thoroughly wrong on the mechanics of hiring.

I don’t hire because I have extra jingle in my pocket.  I don’t hire because I can avoid complying with some regulation or tax.  I don’t hire because the government is spending less.  I hire because there’s more work to do.

No responsible businessperson is going to hire simply because they have extra money lying around or because they can dump motor oil in the sewer. As generous as I might be, I won’t hire out of charity.

Entrepreneurs hire because they have work to do, and a new employee can help them get that work done.  They hire to help meet demand. And demand is fueled by customers who have money to spend.

And that’s the fallacy of the Republican job creator mythos: Job creators don’t “create” jobs.  Our customers do.

And the evidence proves the Republican fallacy. Taxes are at historic lows [PDF link]. Corporate profits are at record highs. Government spending has collapsed.  These are the very conditions under which, according to Republicans, we job creators should be creating jobs.

But we aren’t.

Despite these supposedly wonderful conditions for job creators, one in six Americans remain unemployed or underemployed. Income and household wealth has stagnated for over a decade. Instead of hiring in this environment, corporations are hoarding record stockpiles of cash in the face of weak demand.

No demand, no jobs.

That’s not to say that we entrepreneurs – let’s just drop the “job creator” garbage – are powerless.  We can foster conditions which promote growth (the right business model, the right service, the right people); but we need customers with a willingness to spend to make our businesses grow and to create an environment where hiring is possible and profitable for us.

Bottom line: Give me money, and I’ll sock it away in the bank.  Give me customers, and I’ll give you jobs.