Tuesday, June 02, 2015

Council Approves Appetizers for Downtown Development

San Angelo's City Council passed a motion approving a spate of incentives for developers to invest in downtown restaurants, office space and housing.  City staff came before council to ask for:

1)  Much more substantial monetary incentives for downtown development
2)  The ability to support a larger project with funds that back fill financial gaps to make the project feasible.  
Catalyst Urban Development will bring investors to the city, ones that need subsidies in order to maximize return for their investors.  How many catalytic projects have been undertaken in Downtown San Angelo?

San Angelo Health Foundation Office and Visitors Center
Tom Green County Library
City Hall renovation
New bus/transportation terminal
San Angelo Museum of Fine Arts
Concho River Restoration
The Business Factory
Expected catalytic projects
Roosevelt Hotel
Townhouse Hotel
Twisted Root Burger
Angry Cactus
San Angelo Performing Arts Center
City leaders talked about skin in the game.  Skin usually means an equity stake.  Not once did staff mention the city investing in projects.  All I heard was subsidy, which is expressly not skin in the game.

The other odd thing involved venture capital sponsored projects increasing property values.  The report mentioned 100% tax abatement for 24 years.  That means the city gets no tax proceeds for nearly the project's whole useful life.  Increased taxes would come from owners of nearby buildings, which may be local.

That means out of town venture capitalists and their investment partners get off tax free and are subsidized to their investment return requirement.  I'm not sure local property owners and sales tax payers have a hankering to help rich out of towners. 

As for City Staff and Council, few will be around when the deal becomes problematic, due to poor design, implementation or unanticipated events.  Take MedHab, all promise and very little delivery.  Only a handful of people are left on Council or in City Hall that crafted or approved that deals.  I can see that happening with catalytic downtown development projects.  Also, venture capitalists like to flip their deals for big profits.  That often puts pressure on the next owner, which could end up defaulting on any city obligations.

Council keeps cherry picking individual strategies without an overall strategic plan.  Where does downtown development stand relative to Lake Nasworthy development, currently out for bid?  How does it fit with critical public health services, employee pension funding, street maintenance and water main replacement?  I expected discussion on the plethora of massive budget/capital items facing the city at the strategic planning session.  Many critical items got no mention in local news reports on Council's strategic deliberations.

The other interesting thread involved the Edgewater Inn property, the reason the city hired a Downtown Master Developer in the first place.  City Councilwoman Elizabeth Grindstaff was kind enough to obliquely recall history and the city's commitment to the San Angelo Health Foundation.  The silence from long time council representatives was deafening.

Mayor Morrison recalled earlier promises that developer Catalyst would bring investors if hired:

Catalyst Urban's Paris Rutherford said the key is to match up specific investments with specific users. The local investors and the commission would need to help the group identify those investors. He then brought Andre Nicholas, with partner NE Construction, for further comment.

"We have the ability to bring investors. We feel San Angelo has what it takes and we are ready to put our money there," Nicholas said.
It seems they are only ready if there's a major incentive package that guarantees investment return.

The report is worth the read.  Interesting points made by Catalyst Urban Development, the City's Downtown Master Planner include:

A.  The "townhouse hotel" closed the week of 1/19 with tentative plans for redevelopment into a mixed-use building with retail on the ground floor and condos and hotel uses above. The new owner is a hotelier out of Houston who intends to work with ArchiTexas, a design firm in Austin, to realize the improvement of the historic hotel building.

B.  A potential new owner has Harry's Food Store, located on Twohig, under contract. There are plans to convert the building to office and parking uses.

C.  The Pearl on the Concho is undergoing transformative renovation and improvements that include conference supportive meeting space. The lodging and event space is expected to open in the coming months.

D.  The Angry Cactus (club/restaurant) is expected to submit for permit in the coming months; Twisted Root burger is under construction and expected to open in the coming months.

E.  Recognize one of the City's best assets is the river and believe the highest and best use of land along the river is commercial facilities that support a public waterfront with hotel , dining uses and other nighttime uses in addition to the proposed residential infill.

F.  There is frustration with American Eagle as exclusive airline carrier. Energy sector believes there is a need for more flights, especially since Midland/Odessa has more flights and it gives those cities an economic advantage.

G.  The Energy sector believes it will take roughly 18 months for prices to return, with the $70 range per barrel a healthy range for the production of new wells.

H.  There are players in San Angelo that might facilitate the creation of a City Center Investment Fund designed to provide capital for City Center projects that meet certain criteria. The Fund would provide its group of investors a guaranteed return to be paid by the project, but backed by City sources (like TIF funds).

I.  There is a need for a process champion that facilitates strong communication of City Center development guidelines and expectations.

J.  In conjunction with the Design & Historic Review Board, the City might identify key/target buildings for first phases of concentrated development effort in the City Center.

K.  Commercial uses along the Concho trail system, like hotel and dining, are desired to support the need for improved connectivity and further appeal to tourists and visitors.

L.  The Health Foundation has expressed a significant interest in a resort-style destination hotel on or by the river, particularly on land owned by the Foundation.

M.  The museum wants to be involved with acquiring and transitionally redeveloping/developing the land immediately around the museum (including the depot, river stage and historic fort).

N.  The is belief that spur for development most likely will not come organically, and an effort should be mounted to reach out to local investors to tap on investment from within the community.

O.  The Master Developer effort should include providing precedent and proposed strategy for a City Center Development Fund that raises private funds accessible to applicants who meet certain project requirements. This Fund would support local and out-of-town parties who recognize the potential for new development to capitalize on the City Center's existing assets.

P.  There is general belief that a specific, detailed phased development plan must be created to move the effort from concept to built reality.

Q.  This plan would identify sites, development cost, related economic gap need, and proposed solutions for filling the gap. These sites should be north and south of the river.

R.  This effort must include educating the City Council on public financing mechanisms that can be used to fill the gap. The council should be a player willing to give up a certain amount of future revenue (delayed future revenue) for the realization of the potential of the City Center; failure to capitalize future potential revenue will result in unrealized potential.

S.  Parties requesting City Center Development Incentives will be required to provide the City pro forma cash flow analyses and sources and uses of funds in sufficient detail to demonstrate that reasonably available conventional debt and equity financing sources are not available to fund the entire cost of the project and still provide the developer a reasonable market rate of return on investment.

T.  The rate of return used by the City's Master developer by project type is as follows.  Return on costs threshold -
         Office space - 8.5% w/example financial gap of nearly $674,000
         Restaurant - 8.5 to 9% w/example financial gap of $741,000
         Riverfront housing - 8%  w/example financial gap of $4.6 million

U.  Due to the scale of the need identified in this scenario ($4.6 million), a range of tools are utilized to reduce initial cash outlay by the City.
(1) The City would enter in to a ground lease of its property with Developer
(2) The City would fund infrastructure improvements (presumably through TIRZ
(3) City would waive all municipal fees
(4) City would issue a tax exemption certificate for the materials required for the Public Infrastructure
(5) The City would provide an abatement of all City taxes for the Project over the initial 24 year lease term
(6) The City would assist the Developer in obtaining an abatement of county taxes over a 15 year period
(7) City would assist the Developer in obtaining all required permits and approvals
(8) Project grant
V.  City of San Angelo Development Corporation - In addition to financing of capital improvement projects, financing products would include working capital and loan guarantees for smaller emerging companies, bridge loans, and capital for projects that are positioned to achieve policy goals. For equity, COSADC could work with other community-focused capital groups such as the San Angelo Health Foundation, San Angelo Baptist Foundation and others to fund predevelopment activities associated with approved projects. The COSADC would offer special financing during all stages of approved projects – pre-development, property acquisition, construction, and permanent; with repayment occurring through various loan programs; Federal, State and Local grants; and possibly TIRZ funding augmentation.
I'm sure every citizen would appreciate the city making up the difference between our paltry retirement plan returns to get it to 8 or 9%.  I'm sure that would help the local economy.  How do we apply for that?

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