Backgrounder: We’re Rebar Rich
by JASON ARP
When a political machine runs your town, you get results that may not make much economic sense but are nonetheless predictable — predictably bad.
Who, for example, would spend the equivalent of $220 a month to lease a space for which they intend to get revenue equivalent to $65 per month? The Fort Wayne Redevelopment Commission, that’s who. During its Feb. 10 meeting, this group of city planners and overseers voted to approve a pair of long-term leases on two garages encapsulated within mixed-use buildings that include retail, office and residential units along the city’s riverfront.
On paper, these will be beautiful facilities that should enhance the heart of the downtown corridor replacing vacant lots where 19th century factories once stood. But a financial detail of the two projects is not so rosy.
Project 1 Estimate — $68 million
12,000 sf commercial
651 parking spaces
Project 2 Estimate — $89 million
7 town homes
27,000 sf commercial
913 parking spaces
The terms of the leases on these projects are non-economical, ludicrously so. The city, through the Redevelopment Commission, will pay $2.4 million in year one for the larger project and $1.675 million for the smaller, where these amounts are tied to a 2 percent per annum scaler. That means the total payment for the base rent is $4.075 million in the first year, where it increases by 2 percent a year until reaching $6.55 million in the 25th and last year of the contract. These payments accumulate to $130 million in total over the 25-year term.
Moreover, this is a “triple-net” lease, so the city pays utilities and taxes on the facility as well. The expected revenues (many locked in as long-term leases to the developer-apartment owners) are about $1.2 million a year. These revenues also scale at 2 percent, so it will be $1.9 million by the final year, totaling about $40 million. The nearly $3 million contractual annual loss grows to $4.5 million by the final year of the lease. Over the term of the lease, the city is paying $91 million more than expected parking lease rates. Discounting these payments at 5 percent at the end of year the totals come to a present value of $72 million in payments over 25 years, with a present value of $21 million in revenue in the same time period.
To summarize, there is an overall loss of $51 million in today’s dollars. Nearly one-third of the $157-million project package is funded by taxpayers through property and income taxes making up operating losses over the 25-year period. The developer has minimal risk, bonding for a 25-year loan for only the present value of the lease proceeds. The rest is funded by a combination of additional bank loans, state tax-credits and developer equity.
The cash flows of the projects, then, at market prices with standard expense assumptions and a generous 5 percent discount rate, support a market value of a mere $90 million. While this is not the most egregious overpricing of a project we’ve seen, it reflects that the over spending is made up for with government subsidies in the form of a wildly overpriced pair of garages and a state tax-credit.
The garages are just another venture in a long line of examples of how a group, a political machine, gaining control of municipal government, can meddle in the local economy, trying to force outcomes that may be superficially appealing but that no entrepreneur would be willing to finance on his or her own.
Another, more recent, example of such machination is the subsidized restoration of the former General Electric site in Fort Wayne. There, a combination of nearly $200 million of local, state and federal subsidies are being used to facilitate the move of a company headquarters a short six miles from adjacent New Haven.
Is that an appropriate use of taxpayer money? The end result is that taxpayers made it possible for a politically selected developer to construct and own apartments, commercial offices and garage space that may be lucrative at a level of cost that free markets would not otherwise support. Again, no private commercial property owner would rent space for more than three times what they expect to receive in revenue.
But this is what we have come to expect. The cabal that runs the city rewards political contributors and key “stakeholders” in the industries that benefit the most from over-spending on mal-investment in downtown real estate, namely law firms that represent the participants, architects-engineers, construction management firms and the various suppliers of concrete, rebar and the like.
As long as the music keeps playing, all is well for those included in the game. For without an honest mass media, the public will be no wiser. However, when the economy eventually slows and the mal-investments are laid bare, it will be the taxpayer who suffer.
The long-term capital leases and bonds, regardless of declining tax revenue in a cyclical recession, will need to be paid. That means either a tax rate increase or fewer police and firefighters, and fewer street repairs, as the city cuts essential services.
There will be political turmoil but a new council and a new administration won’t be able to fix it all. The attention of prosecutors and grand juries may be needed to keep this kind of racketeering from reoccurring.
Jason Arp, for nine years a trader in mortgaged-backed securities for Bank of America, was recently reelected to a second term representing the 4th District on the Fort Wayne City Council. Arp has served on the Redevelopment Commission, the Community Legacy Investment Committee and as co-chair of the Finance Committee of the Common Council.