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14.8.05

Why did Bossier City hand over $21.5 million for little gain?

The good news is Bossier City has taken in around $1.7 million in sales taxes from Bass Pro Shops and the rest of the Louisiana Boardwalk since the former opened. The bad news is, we don’t know how much of that was beggared from the metropolitan economy and Bossier City paid $21.5 million for that privilege.

Since the Boardwalk opened roughly three months ago, it’s my guess, given that Bass Pro Shops generated $852,000 in sales taxes in 2004 that about $1.4 million of the total is attributable to it. Better, probably a few hundred thousand of that represents sales that came from outside the metropolitan area. This means created revenue for the city.

Estimating then that the Boardwalk has contributed $300,000 that means it’s bringing in about $3,500 a day in sales tax revenues. Unfortunately, the large majority of that probably does not come from outside the metropolitan area – that is, there’s really nothing at the Boardwalk that could not be substituted for elsewhere in the area unlike Bass Pro Shops – leaving only the small portion of visitors from outside the area who came expressly to hang at the Boardwalk as the only source of newly “created” sales tax revenue.

However, for the moment let’s ignore the fact that beggaring Shreveport’s economy is harmful to Bossier City (in fact, probably more Bossier workers cross the river to go to their jobs every day than stay on the east side of the Red) and assume that $2,000 a day of that money comes from people who otherwise would not have patronized a Bossier City establishment. Also ignoring investment and interest rate factors, and also eliminating the $20 million Bossier City spent on improving the infrastructure in and around the Boardwalk that means the $21.5 million Bossier City plunked down to give a parking garage to the private sector will take nearly 30 years year to be paid back out of additional sales taxes! (Not being so generous and more realistic with these assumptions potentially adds decades more.)

Which leads to the question, just what was Bossier City’s elected officials smoking when they agreed to this? And another – why didn’t the developers themselves pay for the parking garage whose only benefit is for their sakes?

Or, another way of putting this, the developers were willing to invest $150 million into this project; why not increase that by less than 15 percent by building a parking garage, too? Using another metric, assuming a 30-year note at a high 6 percent interest rate on the $21.5 million, the total interest and principle due each year on that amount equals a shade over 1 percent of the $150 million. This relatively trivial amount the developers couldn’t afford?

Because only if financing a parking garage would make the entire project unprofitable would this justify the developers asking Bossier City to foot the bill on the garage (after already asking he city to do the $20 million in infrastructure improvements). Somehow, I don’t think things played out that way. But if somehow it did, if the developers honestly could go to the city and say, “If you pay for the garage, that’ll push us past the breakeven point and we’ll make money; otherwise, we’re going to walk away,” then the city’s answer should have been, “Fine, come back when you think you can make a profit” because it has a responsibility not to spend so much taxpayer dollars on such a low-yield project.

In short, I seriously doubt the developers would have walked away if they didn’t get their garage, and if they really needed such help, the return on investment was too low for the city to acquiesce. So many more uses cried out for $21.5 million – overpasses, street widenings, paying off arena debt, getting the city budget in balance, or how about a simple lowering of city sales taxes (maybe by creating a fund akin to the destination of riverboat gambling receipts at present where some or all of the interest could supplement city revenues) which probably would do more for stimulating economic development in the city than the Boardwalk will?

Unfortunately, the current crop of city elected officials, which are essentially the same ones which committed to the garage, have shown a marked propensity to be attracted to shiny, big-ticket baubles. It’s a ways until the next city elections although some may run for higher office in the interim, but all need to be asked during their next campaigns about this funding decision in particular. Does ego, naïveté, or something else explain it – because logic and sense sure don’t appear to.

5 comments:

Anonymous said...

A 15% increase in investment also requires a 15% increase in net operating income to justify the investment. Since the garage itself does not generate any rental income directly, it would be hard to question the developer's motive.

With a lower investment by the developer, the project can rent at lower rates and still return a desired return on investment. Lower rents make the long-term prospect of sucess much better.

As to the city's motive, look beyond the sales tax information for Bass Pro Shops. Wait for a realistic history to develop over the next 24 months or so. Also, look at the property taxes which will be generated compared to the taxes which were generated by the older properties which were replaced.

Also, how about the economic impact of the money spent locally to develop the property? There are a number of people who sold their properties down there for much more than they could have otherwise. This allowed many of them to purchase larger properties or to expand businesses.

The developers have brought in a lot of money which would not have been spent in Bossier otherwise. They have a very good reputation and others will look at the market due to their investment.

Jeff Sadow said...

I'm not questioning the rationale of the developers. If they can go out and get this huge bonus, they would be irrational not to take advantage of it.

But let's keep our eye on the ball here -- the question is, would the developer have walked away without the gift, unable to make a profit. Unless the answer is yes, all of the things you mention are irrelevant because they would accrue to the city regardless of whether it had given them a garage (and the other improvements). If yes, then it becomes a benefit-cost decision for the city, and my argument is the benefits truly do not seem to match the cost for the city, even taking into account increased property values, etc.

Let's say the answer was affirmative. Why then wouldn't the city subsidize at a more realistic level? Let's say the developers argued they would lose $1 million a year. The city, to capture the sales and other taxes, could then do something like waive the property taxes. Why go way overboard with such a huge gift?

Anonymous said...

From THE TIMES 5/8/05:

Boardwalk developers told city officials early on that the city could expect to bring in about $400 in sales taxes for every square foot of retail. The project's Web site touts more than 200,000 square feet of shopping and total square footage of 550,000.

The city asked Susan Beal, director of the LSUS Center for Business and Economic Research, to analyze those numbers. The research showed a return of about $397 in sales taxes per square foot, Glover said.

He noted the estimates do not take into account at least one tenant, Cumulus Broadcast Center, will not sell anything.

So far, he said, anchor tenant Bass Pro Shops is bringing in about $320 in sales taxes per square foot since opening in November 2003.

"Depending on which set of numbers you believe, you could get your money back in four to six years," Glover said of the city's investment.

The bulk of the estimated $45 million the city has invested went to building the $21.5 million parking garage. The city is paying for the garage mostly with sales tax bonds to be repaid with a half-cent capital improvements sales tax approved in 1978.

...end of THE TIMES article (sorry, not italics or different fonts available as far as I can tell).

The projection equates to almost $80 million from sales taxes alone. This does not include property taxes, increased employment, etc.

And, yes, the developer probably would have walked without the city's investment. Take the projected net operating income and see what kind of return that will yield on the developer's $150 million investment. Then take the same NOI and see what kind of return it would have generated on a $180 - $190 million investment.

For example, using your 30 year assumption a straight $1.2 million NOI per month will result in a yield of about 9% on a $150 million investment but only 6.5% on $190 million. This is significant. Also, this is an over simplification because it does not recognize the cost of capital and the equity dividend rate. Properly calculated, the difference would be more than 2.5%.

A developer will walk away from a project and take his $150 million to another market for that difference.

Obviously, I am a supporter of this project. I am not a supporter of the Benton Road overpass or many (actually most) of Shreveport's endeavors.

Jeff Sadow said...

If these numbers pan out, I will be most gratified. But, obviously, given the rosy projections about a number of things we've seen in the past, I'm rather skpetical. The first three months, which should be pretty good, do not support these projections. And, don't forget, even if the numbers do end like these, we do not know how much are cannibalized from existing Bossier City businesses or even Shreveport MSA business, which, given the interrelations among the entities, basically works out to be the same thing.

Anonymous said...

The first three months would normally have higher sales. However, in this case Bass Pro Shops had been open for quite a while with stabilized sales and less than half of the other retailers were open. They just recently completed the river side patio for Bass Pro Shops and attached it to the rest of the retail group. Also, the marina will be a nice addition along with the trolley.

More importantly, most retailers experience the bulk of their annual sales during the few months leading up to Christmas. Let's see those numbers before we make too quick of a judgement.