The Data Port

Politics, Literature, And The Little Disturbances of Man

by dataport on Jun.18, 2009, under Development, Rialto, Rio Nuevo

Stiteler and The Economics of Development

There is an issue with the Stiteler development that has gone unreported. I suspect that’s because, like so many economic issues, it hasn’t been understood. It surely hasn’t been understood by the City Council.

I will now perform the death-defying feat of trying to explain it. Before I do, let me remind you that a great deal of development and improvement has gone on downtown fueled by purely private investment. I.E: with little or no public support.

Mr. Private Developer, henceforth PD, sees a downtown property he thinks is ripe for re-development. He buys it, and does all the preparatory and clean-up work to start building his lofts, or studios, or restaurant space–whatever his plan is. Let’s say that he invests a million bucks in all that, in buying the property and in development preparation. Now PD goes to the bank. He needs a two million dollar loan for his project.

Mr Banker, henceforth MB, takes a look at the projections, PD’s pro-formas and so forth.

MB: See here, PD, you have a cost basis of a million dollars in this project and now you want a two million dollar loan. That means you’ll be into the project for a total of three million bucks. In order for it to cash flow you’ll have to charge rent at so-and-so many dollars a square foot.

MB: Now here’s my problem. There’s another developer in the neighborhood who has been given his land by the City. His cost basis is zero, zip, nada. He’s come to me for a loan, too. Like you he wants 2 million. In order to cash flow he could charge fewer dollars per square foot than you. But even if he charges what you plan to charge, he is a better risk because he’ll be into the project for only two million.

He’s a better risk and I have limited resources so if I make your loan at all it will have to be for a higher interest rate.

Hence it is at least arguable that giving away City property makes it harder for private developers, not easier. In the attempt to spur development the City Council has placed all other development at a disadvantage.

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5 Comments for this entry

  • Mike B
    June 18th, 2009 on 11:33 am

    You are right on Data Man. Hence the statistical fact that every major developer downtown has boogied or sold out after their first project. Having spent 20+ years working with pro-forma’s as both a manager and a Receiver for the Bankruptcy Court, the only way the numbers crunch for this deal is with pure unadulterated charity from the City, meaning us.
    The salaries of just 2 staff who work on Economic Development issues could be eliminated and applied to the project. It may then cash flow, and those same City employees could work for the PROJECT! That would be called development in a free enterprise fashion. The old fashion way–earn it!

    Reply
  • Donovan Durband
    June 18th, 2009 on 12:56 pm

    Thank you, Data Port, and also it is very difficult for downtown developers to get loans on real projects when there are no “comps” for the land values when the City gives the land away. How is the bank supposed to value the land for the next deal that comes along?

    It’s a disadvantage for all subsequent development. They should sell the City land at market value and if they want to offer incentives, find another way to do it.

    Reply
    • dataport
      June 18th, 2009 on 3:11 pm

      Donovan,

      The point about the comps is very well taken, thanks.

      Another is this: When Mr. PD buys his property, usually with a loan, his interest and other holding costs begin immediately. It is very much to his advantage to start his project and get the job done.

      The recipient of free property has no such incentive. He can hold the land at no cost and profit from increased land values without ever developing anything.

      Bourne was sold a piece of property for a buck, the City tore down the building there, and nothing was built. (In fairness Bourne missed the window of opportunity, when the market turned)

      Art Jacobson
      The Data Port

      Reply
  • Donovan Durband
    June 18th, 2009 on 9:03 pm

    Yes, I think Bourn made an honest effort to make The Post happen before the economic window of opportunity closed. Most of the fault for that project not happening lies with the City. Bourn was awarded the deal because of an ambitious and complex plan that required that they acquire a parking lot on Broadway from Chase Bank. The City should have revisited the award of the deal within a reasonable period of time for Bourn to have acquired that property and then re-evaluated whether it made sense to continue with Bourn. Instead, they let Bourn pursue it for 18 months when Chase was in the middle of a merger and wasn’t interested in making a deal for a small property in Tucson, Arizona.

    Mr. Buck Baccus, who used to be the largest property owner in downtown, and still owns some properties there, had every right to be upset that he was passed over and then his rival was not given a deadline to consummate the deal that had given his rival the advantage in the competition.

    We’d be better off today had the buildings not been torn down until there new construction had been ready to go. We’d be better off if we just had a new bar in the Talk of the Town and leaving the Indian Village store in the building on the corner.

    The recipient of free property who has no performance requirements can also hold onto the property and flip it when it suits him, which memorializes the amount of the foolish public subsidy, and again, perhaps with nothing being built.

    And, in the case of DTDC, there is an assumption apparently by those who wanted to approve this deal that the developers WON’T develop their own property unless incentivized by more free land, which doesn’t make any sense. They have plenty of incentives to fill up their retail space at One North Fifth. Besides simply bringing in the income that would be nice to have, they have to repay their construction loan and hold off the bank which has its own performance requirements. I don’t know about you, but I don’t need additional incentive to pay my bills.

    From what I read in a mass email I received today, apparently it is all the greedy Rialto’s fault that we’ve driven off these developers. This story is not going away any time soon.

    Reply
  • Mike Brewer
    June 18th, 2009 on 10:58 pm

    Ahhh, the beauty of blogging…it is like an ongoing segment of Paul Harvey’s “The Rest of the Story.” So, Don and Art are really touching upon subject matter that none of the dailies have ever addressed. That subject matter is the impact of Municipal incentivized developement and its long term impact on the immediate ancillary development. There are many, many untold truths in this arena. Durband with his background in Downtown Economics knows full well that often the incentivized project does not catalyze any further development, especially when it is done in such a piecemeal fashion, as is the case in Tucson. Projects with 5 year chasms in between is not called Downtown Development. In fact, in our case it has only created a waiting list for the next handout, and a prolonged eminent domain game. No critical mass, no lending. No Comps, no lending. It is really pretty black and white to the lenders. Remember, Developers do not have the money themselves for these projects, that is why they are called Developers. With commercial lending being near dry and REITS taking no risks, the scenario that Data Port and Durband suggest is at the genesis of our languishing Central Business District. It is however a real catch-22, because at this stage any further stalls in incentives will kill off any viable Developer from entering a downtown that has had the clutch in for 25 years.
    One might add to the land comp dilema the fact that Pima County and the City of Tucson compete head on head with the private sector office leasing market and have for years. With the County owning two major high rises who lease space to private sector tenants at less than market rate, it makes the development, or even upgrade of existing office space a very dicey prospect.
    The State of Arizona is a culprit also. Even as far back as 1988 when ADOT took 240 N. Stone, in anticipation of the new State Route and paid for the move of the DiConcini law firm, we not only lost professionals in the CBD but we had the addition of non-tax paying competitive space enter the market place and lower the cost-per S/F overall, which in turn does not support new development in the proforma world of a lender. The irony here being that we would have been better off just leveling the building and attracting new blood. This of couse was the role of DDC dating back to 1980. We are repeating the cycle. No lenders with risk ability, followed by local small fry developers who need a boost, followed by a loss of major name brand developers like Williams and Dame. In the interim we have economic development theologians who thrive on faith, hope and charity, and pull down millions in municipal salaries while we wait for the market to turn.
    I know this sounds like a development anarchist, but it sure would be fascinating to see what would happen if we truly trusted the free market.
    Give them; developers, a decent template, which we have yet to do in ths 8×8 block smallest of all downtowns. Clean, crisp, safe, stretscapes. Attractive landscaping and pedestrian malls. Lighting that works, trash that is gone. Do this FIRST, show some pride in the present, and watch who comes to town.
    A million here and a miillion there dropped from Salvation Army buckets of City money in a segemented and piecemeal fashion is not going to get Tucson to the next level.

    Reply

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