Taxes – Page 2 – CivilMechanics

And now for the hard part…

July 18, 2011October 10, 2015 Rob Morris 0 Comment CentrePointe, Local Business, Community, Design, Economic Development, Plutocracy, Taxes, TIF

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

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

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

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

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

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

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

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

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

It was a great design.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But great ideas are the easy part.

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

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

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

The future of downtown might rest on the answers.

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

The Promise (and Predicament) of CentrePointe

June 3, 2011March 3, 2016 Rob Morris 3 Comments CentrePointe, Local Community, Design, Economic Development, Plutocracy, Taxes, TIF

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

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

Create a vibrant destination which attracts residents, workers, and tourists.

Make that destination a distinctive place which no other city has.

Create public and private spaces within the destination.

Balance the types of uses within the development.

Ensure local businesses have significant presence.

Ensure that the space is well-integrated with the surrounding community.

Build it soon.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On Compromise

December 17, 2010March 3, 2016 Rob Morris 0 Comment Ideas, National, Taxes Community, Ideas, Taxes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But it is the very heart of a functioning democracy.

A Small Business Perspective on Jobs and Tax Cuts

November 16, 2010October 10, 2015 Rob Morris 6 Comments Jobs, National, Taxes Business, Community, Ideas, Republicans, Taxes

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

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

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

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

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

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

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

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

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

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

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

Unfortunately, they’re wrong.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lose the tax cuts. Give me customers instead.

The CentrePointe Scam

June 17, 2010March 3, 2016 Rob Morris 10 Comments CentrePointe Business, Community, Economic Development, Fraud, Plutocracy, Taxes, TIF

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

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

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

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

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

These public initiatives would include:

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

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

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

But is this a good investment of taxpayer dollars?

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

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

We have two major concerns with the CentrePointe TIF:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Zero.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In evaluating the entire project, ERA says

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

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

Not well, we suspect.

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

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

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

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

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

CentrePointe is a private development on private property.

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

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

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

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

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

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

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

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

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

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

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

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

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

The Tombstone at CentrePointe

June 10, 2010March 3, 2016 Rob Morris 3 Comments CentrePointe Business, Community, Design, Economic Development, Fraud, Plutocracy, Taxes, TIF

We last wrote about CentrePointe one year ago this week.

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

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

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

Time would tell.

New v. old CentrePointe designs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now is their chance to undo those mistakes.

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

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

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

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

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

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

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

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

The old design of CentrePointe didn’t do that.

The new one still doesn’t.

The CADRB should reject the application for extension.

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

To-Do List for Lexington: An Overview

November 2, 2009November 20, 2015 Rob Morris 11 Comments Local Better Lexington, Business, Community, Economic Development, Ideas, Jobs, Taxes

On November 8th, this blog will turn turned one year old. It has been an interesting year, and the blog has turned into something very different than what we initially conceived.

One of the surprises: how much we ended up focusing on issues and ideas of local interest, especially those related to downtown Lexington.

We’ve not been shy about offering our opinions on CentrePointe, on South Limestone, on Lexmark, on our local government, and on the future of our city, just to name a few. And you’ve not been shy in offering your (often very different) opinions in return.

We believe that Lexington is a really great city. But we also believe it needs to be much better. And we’ve got some ideas on how to get to that better future.

So, as we end our first year of blogging, we thought it might be good to put together an agenda for our city. Over the next several posts, we’ll share ideas on improving Lexington. Some will be ideas we’ve touched on before; some will be brand-new. We’ll focus a lot on our city’s economic and urban development.

As we build out this list over the next week month or so, please add your thoughts and comments. We believe that an open discussion about our city is vital to crafting a better future for Lexington.

So think of this series as a conversation-starter. Think of it as a love letter to what our city could be. Think of it as the rantings of your local mechanic.

Think of it as a to-do list for Lexington.

To-Do List for Lexington

Postscript (12/15/2009)

This series is dedicated to my son, Carson, and to the future Lexington that he and his generation will inherit.

An update on CentrePointe

June 4, 2009March 3, 2016 Rob Morris 5 Comments CentrePointe Business, Community, Economic Development, Fraud, Taxes, TIF

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

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

Plan A

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

Plan A Minus

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

Plan B

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

Plan C

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

Other notes

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

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

The UnTower Manifesto: 2. Consequences

April 17, 2009March 3, 2016 Rob Morris 3 Comments CentrePointe Business, Community, Fraud, Taxes, TIF

[Note: The UnTower Manifesto is a three-part series about responding to the failure of CentrePointe. You can read the full story of that failure here.]

The consequences for UnTower should rest on the people who perpetrated the scandal: The mayor, some council members, and the developers. Let’s start with the mayor.

In other venues, I’ve seen the mayor talk with his skeptics with apparent openness and graciousness. He was quite articulate. He listened to their concerns and seemed to hear them.

But the last several months have shown a repeated abdication of his duties in the face of scandal. This pattern first emerged with the airport staff’s misappropriation of public funds in their credit-card-and-travel scandal, where the mayor displayed a perplexing tendency to drag his feet. Now, as CentrePointe devolves into the UnTower scandal, the mayor has shown a similar lack of initiative to lead on his citizens’ behalf. Instead, he has resorted to ‘happytalk’ to defend what is clearly a failed project.

Meanwhile, the vice mayor has been active and vocal in challenging both scandals. The effect: a grassroots effort to draft him to run for mayor in 2010, complete with its own Facebook fan page and glowing coverage in local media. The current mayor seems to have no such dialog with the citizens he serves, and seems to have generated little enthusiasm for a 2010 run.

The mayor needs to begin to lead with candor, action, and transparency – beginning with complete clarity around what happened to create UnTower – or his constituency will chase him from office.

The same can be said for the members of the Urban County Council – especially those who rubber-stamped the UnTower project without adequate scrutiny or analysis. They must assume a more actively transparent posture – including using the tools and technologies to have conversations with the people they serve – or they, too, will be removed from office by their increasingly-informed electorate. Their citizens will no longer tolerate the kinds of hijinks and misdirection that characterized UnTower.

Finally, there are UnTower’s developers. What should happen to them?

The scar in the middle of town is their property. But the destruction of the block and the special tax status endowed on the block were public events, with public investments and public impacts. If anyone doubts the public impacts, just talk with businesses bordering the UnTower eyesore about its effects as a customer-repellent.

So here’s my modest proposal for penalizing their deception.

First, the council should explore all options for rescinding the block’s special Tax Increment Financing (TIF) status. TIF was granted under conditions which no longer seem to apply, and the developers no longer appear to have earned that special status.

Second, the council should – to the extent it is able – strictly re-define acceptable future uses of the property in light of the UnTower scandal. Given that the developers contributed to the scandal with their hollow promises and continual lack of disclosure, I would hope that our council would be particularly stringent with requirements for how the property functions as part of our community and that they would set a strict timetable for the developers to act.

The developers misled us to gain advantage; now they should pay the price.

[Continued in: The UnTower Manifesto: 3. Beyond UnTower]

[where: E Main St & N Limestone St, Lexington, KY 40507]

Why CentrePointe will fail

April 10, 2009March 3, 2016 Rob Morris 7 Comments CentrePointe Business, Community, Economic Development, Fraud, Taxes, TIF

A few months back, I openly wondered about the viability of the CentrePointe project, which thus far has only managed to crater an entire city block of historical buildings.

Since our post (which came long after the controversy started), there has been a continued flurry of discussion around CentrePointe in the community. But nothing has happened on the construction site.

In all of this turmoil, one fact has become crystal clear: CentrePointe will fail.

The project will fail in one of two ways:

The project will fail to be constructed, or
The project will be constructed, and then fail financially

I say this not out of emotion or disgust aimed at the project, the developers, the mayor, or their conduct (although all may be worthy of disgust) – but because the justifications for the project fail to stand up to basic business logic.

Instead of acknowledging the flaws in their business plans, CentrePointe’s developers have continually invoked wishful thinking to rationalize their actions.

I’ve seen this kind of fatal optimism in business many times before. Business executives often think they can make a project succeed by just wanting it badly enough. (Unfortunately, optimism isn’t a viable business strategy.) In their blind pursuit of their goal, they disregard the facts.

So, lets explore the facts around CentrePointe (‘CP’ from now on), which really can’t be ignored any longer. (Read more from the Herald-Leader here, here, and here.)

CP has had an unnamed international financier who committed $250 million to the project. This week, we learned that the mystery investor died. Without a will. The project certainly won’t commence until a) the financier’s estate goes through probate court, and b) the heirs agree to continue support for CP. Odds the financier ever existed: Iffy. Odds heirs will support CP: Doubtful.

CP is supposed to house a J.W. Marriott luxury hotel. Meanwhile, Marriott’s CFO (who is their soon-to-be CEO President and COO [correction]) has repeatedly announced that even the best projects – a group that CP cannot possibly belong to (see more below) – are stopped in their tracks. Odds Marriott will end up in CP: Doubtful.

The Marriott would have 250 rooms going at $190 per night. The price is 50% higher than competing hotels, yet the developers’ analysts estimate occupancy rates at startup which are better than those (less expensive, more established) hotels. Odds of getting higher occupancy at a much higher price: Very slim.

There are 91 luxury condos at the top of CP, which would sell for $1.2 million each and which would generate over $100 million for the project. The analysts estimated that 45 of those would sell before construction starts. And all 91 condos would be sold in 3 years. In all of Lexington, there were 31 million-dollar properties on the market at the end of 2008, and only 10 such properties sold during the entire year. So… CP’s developers would flood the market with luxury properties — essentially quadrupling the number that are on the market — and expect to sell them faster than historical rates. Odds that Lexington could absorb a 300% increase in ultra-luxury properties in only 3 years: Zero.

CP’s developers have to sell 4.5 years (45 condos at 10 condos per year) worth of luxury property inventory before construction starts. And that assumes that every million-dollar prospect would prefer to live in a 2700-foot high-rise condo instead of a country estate. Odds that CP’s developers can sell 45 million-dollar condos before construction starts: Zero. (Note: This week, CP’s developer claimed that 61 of the 91 condos were ‘spoken for’. This is patently false, and reveals a worrisome desperation from the developers. Unless ‘spoken for’ means that someone said “I wish that I could live in a place like that…” Which is also worrisome.)

CP’s analysts assumed that the $1.2 million condo buyers would have an average income of $220,000. That’s an incredibly aggressive price-to-income ratio of nearly 6, which ranks with inflated San Francisco, New York, San Diego, and Los Angeles averages – before the real estate bubble burst. Snakebitten banks are much more critical of an applicant’s ability to pay in this economic environment. Lexington’s average price-to-income ratio: 2.35 – indicating an income of over $500,000 to afford the condos and drastically limiting the pool of eligible buyers. Odds of finding enough eligible prospects in Lexington: Very slim.

So what are we to conclude about CentrePointe from these facts?

The developers’ tendency toward secrecy and intrigue are unacceptable in light of the public investments in and public impacts from this project. We deserve transparency.
The project is not financially viable.
The primary financing (if it even exists) is shaky at best.
The analysts’ projections are unrealistic and misleading.
The project cannot generate the promised tax revenues.
The developers are prone to either fantasy and/or outright deception; either case bodes poorly for the feasibility of the project.
CentrePointe will fail. Miserably.

Lexington must now accept the failure of CentrePointe and begin to move beyond the CentrePointe fallacy. We must hold accountable those who recklessly ramrodded the flimsy development through our city council. We must prevent future irresponsible allocations of our common wealth. And our community and our public officials must begin carefully contemplating what’s next for the block that CentrePointe obliterated.

Update 4/13: Crossposted to Ace Weekly as “Optimism is Not a Business Strategy”

Update 4/14: Tom Eblen did an excellent parody of the CentrePointe situation here. Very cool.

Update 4/17: OK. Let’s just get the whole story out on the table. The UnTower Manifesto: What went wrong, what to do about it, and what to do about the scar it left on our city.

[where: E Main St & N Limestone St, Lexington, KY 40507]

Taxes, Taxes, Taxes

January 23, 2009October 10, 2015 Rob Morris 0 Comment Taxes Business, Community, Rants, Taxes

I’m quite a bit different than my business-owning peers — I actually don’t mind paying taxes. I get a lot of benefit from those taxes: providing for our common defense, local police and fire protection, and a pretty great infrastructure (by world standards), among many other services that our governments provide. It is my duty as a citizen to financially support the governments that protect and enable our freedoms.

I feel this way even though those services and those governments should be much more efficient and much less bureaucratic than they are. So I’m not a typical all-taxes-are-evil type of business owner…

But I hate dealing with taxes.

When I bought this business, I knew that I was going to have to deal more with taxes and payroll issues than when I was an individual employee of a corporation. (Unlike many businesses, we don’t send our payroll or most of our taxes out to other professionals. Yet.)

But I totally underestimated the crushing administrative burden of the variety, frequency, and complexity of tax payments. Besides dealing with federal, state, and local governments (which I expected), I quickly learned that each entity had many different types of taxes, each with different weekly, monthly, and quarterly schedules, and each out-of-sync with the others. There were many taxes which we paid and documented on a regular basis which had to be re-documented periodically. Then, in January, the schedule gets jumbled from every other tax period. It is needlessly complicated and time-consuming.

Again, I’m a willing taxpayer (although I’d always welcome paying less). But I don’t want to be a tax expert. And I don’t want to be forced to hire one. And I don’t want to spend so much time managing our taxes when it should be spent managing our business…

There must be a simpler way for businesses to contribute to their governments.