Tag Archives: Eagle Realty

A Primer in Garage Building in Cincinnati

There’s no such thing as too much parking in Cincinnati, Ohio.  According to current public policy in this city, every problem we have can be solved with a one-size-fits-all answer: taxpayers pay for more garages.  Taxpayers paying for more garages will result in more jobs.  More jobs will generate more income-tax revenue to pay for basic services to fill our pot holes and hire more police which will make middle class homeowners happy “customers” (that’s what the City Manager calls us these days). More jobs will apparently alleviate poverty, reverse our absurdly high incarceration rates, stop violence and get people off drugs.

Since we are making these infrastructure investments as fast as we can – and they are very expensive – it behooves us to become garage literate, Citizens.

image (8)Here are the costs for three of our most recent garage projects.  But the figures are not entirely apples-to-apples fair.

Western & Southern’s Queen City Square figures are inflated due to the fact that I did not try to back out non-garage costs from the total $65,000,000 Tax Increment Financing package.  We didn’t just get garage space.  We purchased a multi-storied pedestrian promenade, two giant escalators, a plaza and quite a bit of ground level retail for our money.  It’s a pretty sophisticated set-up and Eagle Realty probably did a very decent job of holding garage costs to within 10-15% of the national average.

Of course, Oakley Station’s $6,200,000 structure hasn’t broken ground yet.  We can see that our development professionals must have used the same national average costs for garage construction I did for their projections.  New construction always costs more than we think it will and this project will probably be no different.  Let’s just hope it comes in close.

That leaves the mysterious dunnhumby, now known as 84.51, a 3CDC public-private partnership with Kroger’s latest acquisition.  I contacted Anastasia Mileham, VP of Communications, five times over the past three months asking for a clarification on why construction costs were so high.  At dunnhumby taxpayers bought 1,003 spaces for somewhere between $60,000,000 and $70,000,000.  (The figure tended to float a bit as we talked.) She explained that only the top four floors of the 9 story structure are currently needed for offices, but they anticipate significant growth and it was decided to build the lower floors so that they could someday be converted. Ramp design was complicated, ceiling height had to be 12 feet as opposed to the normal 10, and two floors of the garage were built below ground.

Call me annoying – but that didn’t seem an adequate explanation for costs more than three times the national average.  So I did what I always do – kept asking questions.  I asked super-smart staff members of City Council.  I mentioned my concerns to other developer friends.  I even called Robert Bertsch, Sr. (otherwise known as Bob), the guy who is in charge of development projects for this area of town in city administration.  He called me back within 5 minutes, was funny and charming and forthcoming. But he couldn’t tell me why the project cost so much more than anticipated when Council approved the deal in June of 2012. (They voted on $88 million.  It came in around $140 million.)  “You’ll have to ask 3CDC,” he said.

So I sent my little-Kathy charts to Anastasia and explained why I was confused.  More than 2,200 spaces at Queen City Square cost us about the same as 1,003 at dunnhumby.  I told her I would have to start to ask publicly why this building cost so much for us to build.  And I heard nothing.

I hate to write this post.  Because I’m a 3CDC fan.  I think they’ve done about as good a job as is humanly possible in Over-the-Rhine and on Fountain Square.  But since City Hall clearly intends to use 3CDC as their preferred developer on parking garages in the city center and we are building them as fast as we can, it’s important that we honestly evaluate our garage-outcomes.

The History of Tax-Increment-Financing in the Queen City (Oh my!)

Tom Stapleton (Senior VP from Eagle Realty) and I exchanged a few emails recently and I happened to mention that I thought Great American Tower was the first use of TIF project bonds in Cincinnati and “there is no other way for citizens to critically examine this financing structure without citing specifics about Great American Tower.”

Tom responded, “What do you mean by the statement “this was the first use of TIF project bonds”?  Project-specific TIF financing has been around for a long time, so I don’t understand your comment.”

He was kind enough to follow up with a link to the Ohio Development Services website that lists all the active Tax Increment Financing Districts and Projects in the state.  Tax Increment Financing is a type of financing structure that uses tax payments (that would have been used for basic services like police and trash collection) to pay down debt associated with a specific building project instead.

Of course, Tom’s right.  He’s the pro.  TIFs have been used for quite some time, 32 currently active within city limits.  19 of those are Districts that benefit a wide variety of businesses.  The other 13 were established for specific projects, usually pretty big ones.

Our oldest TIF was for Fountain Square South parking garage in 1980.

In 1984, we used the TIF tool to build Hyatt/Saks.  Partners that owned the Hyatt filed for bankruptcy protection in 1994 and a foreclosure action was sought on the property in 2008. The hotel was sold in 2009 at sheriff’s auction after years of financial woes.  The TIF, however, remains outstanding and benefits the current owner of the property.

10 years later in 1994 we used another project TIF to finance the  square and parking garage at Fountain Square West.

A TIF was used again in 2001 for the Center of Cincinnati Milicron project in Oakley, a Neyer development.

In 2004 we established a project-based TIF for the first phase of Tom’s project: Queen City Square, now owned by the Port Authority with Western & Southern named in the Master Lease Agreement.  The second phase was established in 2008.  Total financing amounts to over $323 million.  Redirection of property tax payments to pay down the debt of both buildings and their garages will continue until all the bonds have been paid off, probably around 2038. (Cincinnati Public Schools still receive 25% of the payment and another part of the payment goes to finance other development.)

The Baldwin Building just purchased by Neyer was originally granted a TIF project in 2007.  They will most likely continue to benefit from the arrangement as they reconfigure the property into apartments.

Neyer was awarded a project TIF to develop the Keystone Park Project, a $100,000,000 office campus in Evanston in 2008.

The dunnhumby garage received the benefits of TIF financing in 2013.  3CDC holds the master lease on the $70,000,000 garage.  (The headquarters portion of the building will receive a 15-year Community Renewal Act abatement.)

5 new TIF projects have also been recorded as of 03/02/2015:  3D Color Project Development, Centennial TIF, Emery Pineapple Project Development Public Improvement,  P&G June Street access, and Rumpke Project, Public Improvement.  No details have been provided for any of these new Tax Increment Financing deals.

So – Tom –  thank-you for correcting me.  Tax Increment Financing has been used for projects in Cincinnati since 1980.  But it’s been a fairly rare occurrence, Queen City Square/Great American Tower was the largest private financing to date three times over, and we have used this 30-year arrangement for only a handful of companies.  I stand by my statement that your financing structure is one-of-a-kind – no other building is owned by the Port Authority with the developer holding a master lease – and it is important for citizens to study this particular example and understand it.

It’s especially important right now, as the use of this highly advantageous, 30-year tax subsidy is apparently gathering steam in the city of Cincinnati – all this while we project at least another five years of budget deficits.  Let’s hope our elected officials don’t get so greedy for growth that they forget what can go wrong and cripple the next generation of hard-working middle-class taxpayers who will have to cover the costs of their great expectations.

One Small Step for Cincyopolis – one giant leap for transparency

Yesterday’s letter from Tom Stapleton, Senior Vice President of Eagle Realty Group, marks the beginning of a new era in Cincinnati.  The tone was co-operative, the information, a helpful and specific record of the logic behind public subsidy on one of the biggest for-profit projects Cincinnati has ever under-taken.  My only frustration is that it took 9 months of relentless arm-twisting to get to these numbers in a format that is easy to understand and can be shared.

Yet Tom and his boss, Mario San Marco, would tell you that those 9 months were completely unnecessary.  “Why didn’t you just ask us?” Mario said during our conversation last week. And maybe he’s right.  Maybe I should have just picked-up the phone and asked.

Except for two things:

(1) There’s a steep learning curve involved in commercial real estate development, especially the financing part of it – and in the beginning I didn’t even know what I didn’t know, much less what questions I needed to ask.

(2) You don’t really want to ask the people who are making the money off the project for independent and complete analysis of their building.  I thought the government entities that facilitated this mega-Tax-Increment-Financing Project should – in a perfect world – be the keepers of record and my best source of verifiable data.

But the world is not perfect, Citizens. The only page on the internet dedicated to public involvement on Great American Tower is on the Port Authority web site, a couple of paragraphs that are more public relations material than accurate and complete financial data with measurable benefit-expectations clearly spelled-out.  When I pushed for more information about the “whys” of city involvement early on, one of the most knowledgeable public employees associated with Queen City  Square admitted, “We did it because City Hall told us to do it and you’ll have a hard time finding anybody there to talk to since those people are all gone.”  This is a building that opened 4 years ago – not 30 – and we should have a written, on-line record accessible to the public in a format that is easy to understand – not 50,000 pages of documents in boxes in storage.

Let us rejoice, Cincinnati.  In the scope of world problems, this one is relatively easy to solve.  It’s not poverty.  It’s not the Middle East or global warming.  This is numbers on a page and all it takes to fix it is commitment and some focus.  We’ve even got a model to use – not a perfect model – but a darn good start:  3CDC dedicates a page to every single one of their projects complete with financing details and links to informational videos for people who want to learn more.  (Wouldn’t it be nice if they could add information about how these deals impact property taxes?)

Screenshot 2015-04-09 at 8.55.38 AM

Tom and Mario, I have a lot to learn about how a city gets built – but here’s one thing I know for absolute sure:  If we discipline ourselves to do our homework and ask the important questions before we make investments that will be with us for generations, and if we put our assumptions out in public where everybody can see what we are doing and why we are doing it – we will make better decisions.  I learned that as a financial consultant and the principles of good investment are the same for families as they are for cities.  Public scrutiny is not a cumbersome evil to be avoided.  It’s a crucial step in the decision making process that will help politicians, public administrators and – yes!  – even private, for-profit developers build a really, really great city where everybody wants to live.

Thoughts from Katherine Durack about this morning's Port Authority Board Meeting

SAN_MARCO_MARIO_Eagle_WS_0662

“You have to overpay to do something good.” – Mario San Marco, President of Western & Southern’s Eagle Realty, during this morning’s meeting of the Port Authority.

I thought this was a very interesting comment coming from a business professional charged with expending taxpayer dollars for development intended ultimately for public benefit.  Can you imagine the response if Mr. San Marco had made this same statement to John Barrett in discussions, for example, of the purchase of some church-owned land in Northern Kentucky?

But in that case, the Business Courier reported that W&S / Eagle Realty purchased Marydale (valued at +$15.6  million) from the Catholic Diocese of Covington for a mere $3.9 million. I’ll guess nearly $4 million will help the diocese out a great deal…and I hope that Mr. San Marco uses his fine business acumen and public spirit in any deals he promotes or approves as a new member of the Port Authority.

In all fairness, I really don’t know exactly what Mr. San Marco meant by his comment, and the comment was made as part of a discussion about a $5 million markdown on a couple of properties that had been acquired and then improved through activities such as demolition. The goal of those activities was to “revitalize sites that were unable to attract the private sector in order to make them job-ready.”

I will be waiting with bated breath to see how many new jobs Port Authority investments in Techsolve II and Midpointe yield – I’d love to see better-than-minimum-wage jobs with benefits plus truly new employment opportunities for residents (a win-win) rather than just a shift of jobs and existing employees from some other area (win-lose). Would it be reasonable to expect an ROI of at least the value of the markdown?

And speaking of “ROI” — there was lots of jargon flying around at the meeting, my two favorite terms being “return on investment” and “return of investment.” Not really sure how changing that 1 letter really changes meaning, but I’m guessing it has to do with whether an outcome is profitable or break even. No doubt about it, I’ll not simply accept the acronym without first checking a glossary to see if we’re talking “of” or “on.”

I’m also going to be paying attention to how the Port Authority looks at transportation (crucial for access to those jobs that are the payoff it seems the public should expect). From these first observations, it seems they may be pretty car-centric in their thinking. I’d like to see that expanded to roads, rail, and river (they are, after all a PORT Authority).

Thanks, Kathy Holwadel, for letting us know when and where the Port Authority meets, and for encouraging members of the public to come and listen. It’s going to be an interesting time, and I’m hopeful that with public interest and support, they’ll do some amazing things for the region.

Thoughts from Katherine Durack about this morning’s Port Authority Board Meeting

SAN_MARCO_MARIO_Eagle_WS_0662

“You have to overpay to do something good.” – Mario San Marco, President of Western & Southern’s Eagle Realty, during this morning’s meeting of the Port Authority.

I thought this was a very interesting comment coming from a business professional charged with expending taxpayer dollars for development intended ultimately for public benefit.  Can you imagine the response if Mr. San Marco had made this same statement to John Barrett in discussions, for example, of the purchase of some church-owned land in Northern Kentucky?

But in that case, the Business Courier reported that W&S / Eagle Realty purchased Marydale (valued at +$15.6  million) from the Catholic Diocese of Covington for a mere $3.9 million. I’ll guess nearly $4 million will help the diocese out a great deal…and I hope that Mr. San Marco uses his fine business acumen and public spirit in any deals he promotes or approves as a new member of the Port Authority.

In all fairness, I really don’t know exactly what Mr. San Marco meant by his comment, and the comment was made as part of a discussion about a $5 million markdown on a couple of properties that had been acquired and then improved through activities such as demolition. The goal of those activities was to “revitalize sites that were unable to attract the private sector in order to make them job-ready.”

I will be waiting with bated breath to see how many new jobs Port Authority investments in Techsolve II and Midpointe yield – I’d love to see better-than-minimum-wage jobs with benefits plus truly new employment opportunities for residents (a win-win) rather than just a shift of jobs and existing employees from some other area (win-lose). Would it be reasonable to expect an ROI of at least the value of the markdown?

And speaking of “ROI” — there was lots of jargon flying around at the meeting, my two favorite terms being “return on investment” and “return of investment.” Not really sure how changing that 1 letter really changes meaning, but I’m guessing it has to do with whether an outcome is profitable or break even. No doubt about it, I’ll not simply accept the acronym without first checking a glossary to see if we’re talking “of” or “on.”

I’m also going to be paying attention to how the Port Authority looks at transportation (crucial for access to those jobs that are the payoff it seems the public should expect). From these first observations, it seems they may be pretty car-centric in their thinking. I’d like to see that expanded to roads, rail, and river (they are, after all a PORT Authority).

Thanks, Kathy Holwadel, for letting us know when and where the Port Authority meets, and for encouraging members of the public to come and listen. It’s going to be an interesting time, and I’m hopeful that with public interest and support, they’ll do some amazing things for the region.

Happy International Plain Language Day! (Tips from a real PhD on how the Queen City Square contract could be improved for transparency)

katherine

cincyopolis is more than one person. Today’s post is contributed by Katherine T. Durack, PhD.

On this day four years ago, President Obama signed Public Law 111-274, the Plain Writing Act of 2010. The purpose of the law was “to improve the effectiveness and accountability of Federal agencies to the public by promoting clear government communication that the public can understand and use.” The law applies to a wide variety of documents of direct interest to members of the public, specifically those that are necessary for obtaining benefits or services for filing taxes, and for complying with regulations. By law, such communications must be written in clear, easy-to-understand, plain language. A handful of states have, since the 1980s, passed their own plain language regulations—California, Connecticut, Florida, Minnesota, and New York variously require that disability insurance and administrative regulations, consumer contracts, insurance policies, health benefits, and consumer transactions use plain language.

But what, exactly, is “plain language”? It may be easiest to understand what “plain language” is not than to describe exactly what plain language is. This passage, which describes who benefits from a sale of Cincinnati’s Queen City Tower, illustrates what plain language is not:

Section 9.1  Lessee’s Option to Terminate and Acquire Fee Title:

The Lessee shall have the option to terminate this Lease (i) at any time on or after October 1, 2015 (or earlier if permitted to do so pursuant to Section 11.1 (d), and (ii) at any time upon a “City Violation of the Building Code Agreement” (defined below), which option shall be exercisable by the Lessee provided that as a condition of such termination, the Lessee shall either: (A) pay to the Lessor the Lease Termination Payment in immediately available funds; or (B) pay to the Lessor the Lease Termination Payment (except for the Bond Prepayment Amount) in immediately available funds and tender “Exchange Bonds” in substitution for the Lease Bonds, as specified in the Lease Bond Indenture and the Lease Bonds.  In the case of a City Violation of the Building Code Agreement, the written notice termination shall include a written certificate by the Lessee that a City Violation of the Building Code Agreement has occurred, with enough specificity (and, if requested by the Lessor, any additional documentation reasonably required) to support that written certification.  Simultaneously with the termination of this Lease and payment of the Lease Termination Payment pursuant to this Section 9.1, the Lessor shall transfer and convey the fee simple interest in the Project to the Lessee (or the Lessee’s designee as stated in writing by the Lessee at the time) in accordance with Section 9.4  In no event shall this Lease be terminated pursuant to this Section 9.1 without the Lessee paying the Lease Termination Payment and the Lessor transferring and conveying the fee simple interest in the Project to the Lessee (or the Lessee’s designee) in accordance with Section 9.4.

If considered solely from the standpoint of plain writing technique, this passage illustrates how legal language can be written in a way that that seems intended to confuse, to obscure and thereby, to conceal. To illustrate how this occurs, I describe three plain writing guidelines this passage violates.

Plain language principle:  Keep it short.

Readers can take in only so much information at a time; one rule of thumb is that sentences should not be longer than 25 words, and should be on average about 15 words in length.  How does the Queen City Square contract language stand up to this guideline?

  • The first sentence in this passage is 122 words.
  • The second sentence is 54 words.
  • The third sentence is 54 words.
  • The last sentence is a mere 46 words.

Plain language principle:  Keep it simple.

When you have complex ideas to communicate, use lists to reveal and organize information. There are several lists embedded in the Queen City Square contract language—you can identify these by the enumerations (i, ii, A, B, etc.).  The problem is that a single sentence—that first one of 122 words—includes not one but two lists. Using indentations and line spacing helps reveal the structure:

spacing

Two actions—using spacing to reveal structure and breaking the passage into two sentences, each of which includes its own list—would make this language easier to understand.

Plain language principle:  Avoid or explain technical terms.

The terminology used in any communication often identifies who the real audience is: gaining a grasp of specialized terminology is how any professional gains access to and demonstrates command of knowledge in his or her field. There is a great deal of technical terminology in the passage primarily identified by use of capital letters: Lease, Lessee, Lessor, Lease Termination Payment, and Fee Title among them.  I would hazard that most adult members of the public have some understanding of the first four of these terms by virtue of having rented an apartment or a storage unit. The usage and meaning of Fee Title is much less common.

According to answers.com—for those of us members of the public who do not live and breathe real estate contracts and development deals—Fee title means

…the greatest possible estate in land, wherein the owner has the right to use it, exclusively possess it, commit waste upon it, dispose of it by deed or will, and take its fruits. A fee title represents absolute ownership of land, and therefore the owner may do whatever he or she chooses with the land. 

Now, in all fairness to the Port Authority and those who negotiated this deal, even the federal plain language guidelines exempt real estate transactions dealing with very large amounts of money as well as communications that do not directly affect consumers. But even if such government contracts are exempt from plain language guidelines, surely the principles of transparency and accountability still apply.

Never mind that it took almost six months, multiple public records requests, several phone calls and eventually a very tense meeting with the primary negotiator for the project (carefully observed by the Port Authority’s chief counsel) in order to identify where this information could be found. Never mind that this crucial short passage regarding the lease-purchase option on Queen City Square is tucked on page 33 of a 68-page contract. Never mind that the contract is one of more than 50,000 pages of documents related to Queen City Square. Never mind—apparently—that the public, who provided crucial funding for the project, has a right to know where tax dollars are being spent and how the public—and the developer—will benefit from the public support the developer received.

So what is the answer to the question that started this whole inquiry…  Who receives the profit in the event Queen City Square is sold?

It looks very much like the major direct beneficiary of this development is Western and Southern—but it seems only a lawyer can tell for sure.

Queen City Square a 'Grand Slam' for Western & Southern

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.

Queen City Square a ‘Grand Slam’ for Western & Southern

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.

The Other Burning Question on Queen City Square

There are two important questions I can’t get answered about The Great American Tower, AKA Queen City Square, AKA the Tiara Building on East Fourth St.

Question #1 (just in case you haven’t been paying attention) Does Western & Southern retain any equity ownership in the building even though the Port Authority is listed as the owner?

This is particularly important in light of the fact that less than two years after completion, our tallest skyscraper is on the market to be sold at a profit.  We should know where those profits would go if and when a sale were to take place.  Will they help fund the future salaries of the Port Authority. a development arm of city government?  How much will go to the for-profit developer that has already been paid a development fee, pays no property taxes, didn’t pay any sales taxes on the materials or services to build the building, leased the space to tenants who were already located in the central business district and receives a substantial fee for managing the building.  As of yesterday I have made an Ohio Public Records request for all documents related to the project including emails and correspondence.  Whereas my previous dealings were with an associate, my requests have now been reassigned to senior staff and nobody at the Port Authority is very happy with me.

Question #2:  The agreement the developer signed with the city states that 25% of the payments they make in lieu of property tax will go to the Cincinnati Public Schools to help educate our city’s children.  If you check your own property tax bill you will see that the standard percentage that goes to the schools is around 65%, but the school system has agreed to take a lesser amount on these big development projects.  The remaining 75% of payments go to pay down debt on the building.

The Auditor’s site states that the property owner paid a total of $7,500,324 in lieu of property taxes over the last 12 months.  According to my calculations 25% of that amount is $1,875,081 or 2 semi-annual payments of $937,540.50 and yet – according to the Auditor – only $21, 106.03 was paid to the schools – a discrepancy of $916,434.47.  (and this is just for one payment – I hope we don’t have to multiple this by 30 years)

This project was built in 2 parts – and records for 303 Broadway are consistent.  Semi annual payment is $501,849.  25% of that amount is $125,462.25.  And the Auditor shows $2,205.16 going to the schools.

For a single payment period  – according to the Hamilton County Auditor – the Cincinnati Public Schools are missing a grand total of $1,041,896.70.

So far I have asked:  Dusty Rhodes, his chief of administration, the Treasurer of the Cincinnati Public Schools, the superintendent, and the staffs of several members of City Council.  It could just be a mistake (due to the fact that the Master Lessee was not required to start paying back any money until the middle of 2013).  But nobody can answer my question.  After several months I feel like I must be a little bit crazy – because it doesn’t seem to bother anybody else.  Like I’m just being picky.

A million here, a million there – pretty soon it adds up to real money that could help a lot of kids and you’d think the city might be somewhat curious as to where all that money has been going.

Boon or Long, Slow Bust, Tom Demeropolis?

A couple of weeks ago I read an article in the Cincinnati Business Courier by Tom Demeropolis about a big firm looking for a new office.  (http://www.bizjournals.com/cincinnati/search?q=tom+demeropolis&s=1&pl=5 ) He said they might not be able to find a space that works in existing buildings and could opt for new construction instead.

One line of his article haunts me and I’ve been arguing with Tom Demeropolis in my head ever since.

“A new office tower in downtown would be a huge boon for the city.”

If Tom were in the room with me right now, here’s what I’d say to him:

Real estate is a long term investment, Tom. What we build today has to be relevant to the way we live our lives in Cincinnati for at least the next thirty or forty years – hopefully longer.  We can’t base expensive decisions about our built environment  – ones that usually involve significant public subsidy – on the tastes of successful men in their sixties who are nearing retirement.  We have to build for the young.

And young workers don’t want to drive cars everywhere, live in the suburbs like their parents did, play golf, join private clubs, wear Rolex watches, sit in private offices with the door shut while their secretaries screen their calls, get their news from a 6 p.m. broadcast, or work for the same big corporation for their entire professional careers.

One of the two possible new construction candidates you mention in your article, Eagle Realty, envisions using their properties around the Lytle Park Historic District as a “corporate campus.” Notice the terminology, Tom.  The same way we tried to reinvigorate downtown with retail concepts borrowed from malls with their anchor-tenants, that idea is borrowed from the rush of big corporations to Mason and Blue Ash for tax advantages and free parking in the Eighties.

Tomorrow’s economy is a different, internet-based animal.  It’s about decentralization, being light on your feet, rapid adjustment to change, and collaboration.  Isolation – be it out in the suburbs on a corporate campus or high-up in the sky in a vertical fortress is a major miscalculation.  Look at Dunnhumby, one of the fastest growing new companies on the local scene and what they are building for their new corporate headquarters at 5th & Race.  Modest, natural light, environmentally friendly, lots of interactive spaces where employees regularly share. That’s tomorrow.

The average square feet a company leases per employee has declined from 250 square feet to 180. Today’s best workplaces favor shared spaces and flexible, off-site work arrangements.  Procter & Gamble is selling one of their downtown office buildings as they continue to streamline their operations.  Look at the success of the Brandery if you want to understand the rising influence of entrepreneurs in the economy.   Then there’s the fact that the vacancy rate for commercial office space was 12.4% in 2004 and today it’s still over 20%.  We aren’t using what we already have.  The writing is all over the walls if we question accepted wisdom that bigger is better and success looks like another tower on the skyline.

Developers might be able to put together a financing package  that works for them and even get a new skyscraper leased initially, but shortly after the guys who built it have retired, it is highly likely that Cincinnati will be trying to figure out how to rearrange the pieces of a giant monument to yesterday’s America into something that’s useful for us today.

Thanks for listening, Imaginary Tom.  And, by the way, Real Tom Demeropolis, thanks for making me think.