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At this week's City Council meeting, the first 100 developers through the door will get a free bobblehead doll of Frank Duke, Durham's City-County planning director.
Well, not really. But given what this week's agenda looks like, it's not a bad thought. Of course, with this many projects on the docket, I don't think it'll take bobbleheads to get the development teams, or at least their attorneys, into the chambers. Let's see, we have:
Continued public comment and a vote on the East Deck deal for American TobaccoFinal approval for the Triangle Metro Center project, a la Davis Park mixed-use development down in RTP, if you've seen the groanworthy (laptops, iPods, so cool!) TV ads
A rather puzzling buried-at-the-end item from Alan Delisle's team, stated as follows... I can only assume at this time that this is a way to offer follow-on economic incentives to projects that have already gotten them but are going into future phases?
"City Council has had an economic development incentive policy in place since 1998,
which has been adapted a number of times in order to meet current economic
development challenges and strategies. The change being recommended for Council approval at this time would allow those major catalyst projects of $45,000,000 or more, that have already received an incentive under the Policy, to receive an additional incentive under the Major Property Investments in a Community Development Area so long as the additional investment equals or exceeds $20,000,000." (emphasis mine)
Approval of City incentives for the Heritage Square and Golden Belt projects.
I'd like to focus on the last point, given the attention paid of late to the incentives for Heritage Square. Most readers have probably already seen Gary's posts this week on the Heritage Square (Related) and Golden Belt (Related) projects. I agree wholeheartedly with Gary's conclusions on this -- both in terms of the benefits of moving forward with public dollars on the projects, as well as with the concerns over the orientation of the Heritage Square project. Incidentally, one nice-to-see feature in the Heritage Square project is
the set aside of 10% of the units in Heritage Square as affordable rental housing. Good to
see a project including this, given the importance of integrating
affordable housing into market rate housing as a best practice wherever
possible.
I think a discussion of the 15% return rate for the developer that's been bandied about of late is worth a deeper look. There's been some concern as to whether incentives make sense given that they're predicated on the financing required for the developer to earn a 15% rate of return on the project. Personally, I don't think that's an unreasonable number, at least not from the perspective of a developer or their investors. The key to any investment decision is risk/reward -- am I being compensated enough for the level of risk I'm taking on? The 15% desired internal rate of return (IRR) is a back-of-envelope way of comparing the return to what you could get out of a mutual fund, or T-bills, or hedge fund, or what-have-you.
An investor in real estate is making a long-term play, so what are
their other options? If they'd been lucky enough to hold a simple
mutual fund tracking the S&P 500 for the last 30 years, they'd have
earned an average return of about 12% a year -- higher than that over the last
few years, only about 8% over the past ten. Heck, if you held the
S&P's composite index of REITs (real estate investment trusts) over
the past 10 years, you'd have an annual average return of 14.825%.
Of course, if you owned that composite REIT index, you'd sleep
soundly at night knowing that your dollars aren't tied up in any one
investment, but in a range of properties in various cities and
submarkets, covering diverse real asset types. As opposed to, say,
investing in a single redevelopment project in Durham, NC in an area of
that city's downtown that doesn't have a strong track record yet for
successful development... with your gains or losses falling on a single
project without diversification.If you're investing in Heritage Square, your eggs
are in one basket, and you're going to sink or swim as an investor
based on how well the Scientific Properties team performs. Would a typical investor be happy with the same rate of return they'd get in a REIT or
mutual fund? Not a chance.
Lest it sound like I'm poor-mouthing our dear developers over at
Scientific Properties, let it be said I haven't seen the pro formas for
the project and I'm relying just on the summary estimates in the
economic analysis presented to the City Council. There's no way for me
to know whether (say) the assumptions underlying the public investment
needed aren't overly pessimistic such that the project could succeed
without incentives.
All I am saying is that, if we're talking about whether 15% IRR is reasonable for a developer to earn on this project -- if I were personally looking to invest money
in a single development project, I'd want a return rate pretty close to
15% anyway in a proven submarket like RTP or the Southpoint area. I
think I'd probably want a rate higher than 15% for Heritage
Square/Golden Belt.
So to me, the question of whether it's appropriate for local governments to throw in incentive dollars for the sake of a developer hitting a certain targeted return is not a prima facie case of developers soaking the public. The financial questions from the City's perspective should be: (1) how does this developer's expected return match up against other projects that have received public investment, (2) will the captured gains from property and sales taxes on this project and from the ripple effect it would have on nearby properties make this a winner, and (3) will investment in this project make the forthcoming redevelopment of Rolling Hills and the current Hope VI redevelopment more likely to be successful?
Financials aside, the broader public policy questions on projects like this are, where is the line on providing this kind of public investment and injection on projects? Can the City find a way to tailor the incentives to the project return (e.g., participation in above-expectation returns on the project, or a reduction in the tax incentives over the ten-year period if the project surpasses certain thresholds)? And can this investment be leveraged to help improve the neighborhoods that border the projects -- without creating wholesale changes and economic disruption to the historic communities that are there?
The Heritage Square/Golden Belt incentive "deal points" are on the consent agenda, so barring any surprises this moves forward -- albeit with the caveat that Rothschild is still looking to the County to help out on the project, too. Though the Capitol Broadcasting deal is on the general business agenda, I'd be shocked if that didn't move forward with full support.
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Continued public comment and a vote on the East Deck deal for American Tobacco
What were they voting on, who owns the deck?
Posted by:
Dave S. (Related) |
May 07, 2007 at 11:56 PM (Related)
They were voting on restructuring the deal; apparently, the initial deal called for a more complex ownership and financing arrangement for the decks (including, if I heard this right at the meeting, separate City and County decks.) There were also lots of cross-payments and City/County joint ownership issues on the existing deck structures. Essentially, now, Capitol owns the decks and gets City and County money, with the deal coming out cheaper for both governments from a cash flow perspective, in part thanks to the decks now being private property throwing off property tax.
Posted by:
Kevin Davis (Related) |
May 08, 2007 at 07:27 AM (Related)