To hear Western & Southern describe their relationship with the City, they are the white knight on the horse who always comes to Cincinnati’s rescue, regularly pulling us back from the brink of disaster. Lytle Park wouldn’t be here today if they hadn’t paid for their part of the slab that covers the I-71 tunnel. The Western-Southern tennis tournament – a world-class event – wouldn’t exist without their advertising sponsorship. According to Western & Southern they stepped up and built a 41 story garage/office tower that provided jobs and got us through the Great Recession of 2008.
Let’s take a look at what Western & Southern is getting out of their relationship with the city on a single project, Queen City Square.
Western & Southern contributed somewhere between $40,000,000 – $57,000,000*, $21,000,000 of which was the value of the land, the remainder a cash contribution due to construction cost overruns they had agreed to cover.
(They purchased all $225,000,000 – $259,000,000* of the Lease Bonds issued by the Port Authority to finance the deal as an investment for their insurance portfolio and this debt is paid down by rents. The City reached into their wallet for $3,750,000 and another $54,000,000 of the building is financed through project-based TIF bonds to be gradually paid-off by income from the parking garage.)
These are the financial benefits to Western & Southern:
1. Eagle Realty received $6,000,000 in development fees on the Tower structure, $1,820,000 on the Broadway building and 10% of the work they did on city-funded improvements, totaling approximately $8,195,000.
2. Western & Southern receives 5% of the total annual leasing fees and revenue from the parking garage (currently around $40,000,000 a year): approximately $2,000,000 a year.
3. Even though commercial real estate is not listed with an asking price, word on the street is that Western & Southern is looking for around $350,000,000 for Queen City Square. According to Section 9.1 of the Master Lease Agreement they have the option to terminate the lease by paying off the outstanding Revenue bonds and take full ownership of the property. With a total investment of $265,000,000 – $316,000,000*, Western & Southern’s profit two years after completion would be approximately $34,000,000 to 85,000,000.
4. Value of abated property taxes that go to paying interest and principal on the bonds instead of paying for city services: $8,504,029 annually for 30 years. ($255,120,870 over 30 years if the value of the building stays the same)
5. All sales tax on construction was waived because the Port Authority is a public agency. Assuming 33% of total financed: around $7,000,000
6. Even though tenants began moving into the building in late 2011/early 2012, the first payment on the lease bonds was not due until June of 2013. Unless the majority of tenants were enticed to move from other buildings in the central business district for a period of free rent, Western & Southern would benefit.
You have to admire the deal from the Western & Southern perspective. Their risk is that tenants move after their leases expire, vacancies remain permanent and there isn’t sufficient revenue to cover service payments on the bonds. But most of the risk of long-term ownership is the city’s. Regardless of how the economy and tastes in transportation change for future generations, Queen City Square is a permanent fixture on our skyline and we’ll be the ones who have to make it work if demand for this type of commercial office space declines or parking projections turn out to be overly optimistic. And of course, the 20% of the building paid-for through Tax Increment Financing will remain outstanding even if the building is sold. That’s money that could have gone into other public improvements in the city – maybe even in truly blighted neighborhoods where they really need it.
* The reason for the wide range in these figures is due to conflicting numbers in documents supplied by the Port Authority.