One of the most contentious issues that has arisen with regard to the new Governor’s budget has been a proposal to eliminate redevelopment agencies in California.
How serious a threat was this? Serious enough that the city has already authorized bonds to encumber as many redevelopment projects as possible.
The other major project is that parking facility the city has been looking for at Third and G, coupled with a mixed-use center with commerce and housing.
These are clearly projects that the council has been wanting to do for some time. However, at this point the question is what will redevelopment look like after this year.
While the governor and legislature passed about $14 million in cuts a week and a half ago, redevelopment was not in that budget package.
Now in an editorial from John Shirey, executive director of the California Redevelopment Association, in this morning’s Sacramento Bee, it seems that there is now a compromise on the table to get everyone what they need.
Writes Mr. Shirey, “This proposal provides the state of California and schools with about $2.7 billion over the next 10 years to help reduce the budget deficit. It also retains redevelopment in California while instituting tough reforms that increase accountability and ensure redevelopment is being used responsibly to maximize job creation, revitalize run-down communities, clean up contaminated properties, finance infrastructure improvements and build affordable housing.”
Mr. Shirey claims that a bipartisan coalition of legislators has come together in support of the alternative package.
Under the plan, redevelopment agencies have the option of contributing 20 percent of their funds to local schools – these funds would come from any redevelopment funding source.
He continues, “In addition, agencies could contribute up to 10 percent of non-housing funds that year and each year thereafter for 10 years. In exchange for these voluntary contributions, redevelopment agencies would be granted extensions of their projects’ life spans.”
The RDA estimates that this plan would raise between $700 million and $1 billion for the first budget year, and an additional $1.7 billion for the next nine years, meaning a total of $2.7 billion over the 10-year life of the proposal. Not a ton of money, but “more than what the governor estimates would be available for deficit reduction from the elimination of redevelopment agencies.”
He adds, “the revenues are far more reliable, because the alternative avoids the costly and contentious litigation that is sure to follow if the governor’s plan is adopted. Because our plan calls for voluntary contributions, it doesn’t violate the state Constitution or the will of the voters who supported Proposition 22 in November.”
There are also reform proposals for the agency, which has come under fire for a variety of reasons including the fact that there is little evidence that redevelopment money actually improves blight. The agency has also had to endure the charge that the money simply goes to line the pockets of developers.
Mr. Shirey, on the other hand, argues, “Redevelopment has been a powerful tool to revitalize downtrodden communities and create jobs and economic activity that otherwise would not have occurred. In fact, redevelopment investments and construction activities are responsible for supporting more than 300,000 jobs each year.”
But there is little evidence to support this claim, and in fact, most studies suggest that redevelopment simply shifts the location of where the development occurs, but does not increase or improve blight overall.
The focus of reform in this compromise is with increasing “the accountability and efficiency of all agencies.” It is far from clear that this is the most basic need, but here are the proposals.
First, enhanced reporting which would require “the state controller to update and toughen audit guidelines for redevelopment agencies and requires agencies to file with the state an annual report on their finances and activities. The availability of consistent, transparent audits will lead to more accountability and will help expose any abuses.”
Next, focus on job creation. He writes, “The reform proposal refines the statutory authority of redevelopment agencies to provide direct assistance to businesses to build new or expand existing manufacturing and industrial facilities to grow jobs. Agencies would also be authorized to assist local businesses with financing for new technologies, machinery and equipment that also expand manufacturing and industrial job-creation.”
They would also move toward infill and away from peripheral or sprawl development, and toward energy efficiency.
He writes, “The reform would expand redevelopment tools to facilitate intensified infill development of urban areas, including assisting with the creation of commercial facilities, jobs and higher-density residential housing in the urban core, close to public transit. Agencies would also be authorized to provide financial and other assistance to remodel commercial and residential buildings to be more energy efficient to reduce pollution and greenhouse gases.”
This sounds good, but is this not what the RDA was supposed to be doing anyway?
Finally, they will promote affordable housing. They argue that the RDA is the second-largest funder of affordable housing in California, behind only the federal government. But the number is only 100,000 units since 1993. That is just over 5000 units a year. That is not exactly a number to be trumpeting.
In conclusion, he argues this is about the art of compromise and “this package is a reasonable solution to deliver on that promise.”
He concludes, “The two-pronged package is constitutional, avoids messy litigation against the state and represents a win-win for our state, local governments and taxpayers. It provides the state with revenues to help bridge the daunting budget gap, while also retaining redevelopment as an important local government tool to create jobs and grow the California economy.”
The key question is whether the governor will accept this.
—David M. Greenwald reporting
If this is accepted how would it affect our position with the bonds, etc??
We already took out our bonds, so it won’t impact us much at all.
Agree. The CDA proposal seems like a restating of what we thought was already happening, with a reduced budget and a “voluntary” pass-through to school districts. I’m not sure a lobby group’s statement would be accurate reporting or simply a way to increase pressure–“Do it our way and maybe we won’t sue the state.”
Wonder what the accounting shows was spent on those 100,000 housing units? I’m coming around to Councilmember Souza’s realization that it’s an outmoded option that’s too expensive in today’s world. I’ve yet to see anyone in these pages point out a Davis success in the affordable housing arena (except one, and he’s busy with the attorneys these days).
Regarding the redevelopment funding question, I thought the council instructed the city manager to hold off on bonds until the state forces the issue with a final decision on redevelopment agencies. Did I misunderstand the council action or did I sneeze and miss them changing their minds?
What will happen to the housewares, etc. part of Ace Hardware if the 3rd+G changes go forward? I would hate to lose that store.
dmg: “Not a ton of money, but “more than what the governor estimates would be available for deficit reduction from the elimination of redevelopment agencies.””
In other words, it seems clear that the totality of the former RDA funds was never going to trickle down to the local level to schools, cities and counties, but would have mostly stayed within the state’s bureaucracy to clean up its own budget mess.
dmg: “But there is little evidence to support this claim, and in fact, most studies suggest that redevelopment simply shifts the location of where the development occurs, but does not increase or improve blight overall.”
“redevelopment studies “suggest” that redevelopment simply shifts the location of where development occurs”? “Suggests”? In other words, on a large scale there is no real proof this has happened either – just supposition on anecdotal evidence is what I get out of this. If there is specific data that this went on on a large scale, please cite. Has that happened in Davis? If it has happened elsewhere but Davis RDA has been responsible, then why should Davis RDA be held accountable for missteps of other RDAs?
dmg: “The focus of reform in this compromise is with increasing “the accountability and efficiency of all agencies.” It is far from clear that this is the most basic need, but here are the proposals.”
If not that, then what reform was needed that was more important? If the argument is that schools need more money, schools will always need more money – they are a bottomless pit of need. Schools take up, what, over 50% of the budget, and it still isn’t enough? How about 75% – will that do? Or how about 90%? If the schools cannot make do with over 50% of the budget, then I say they need financial reform – just my opinion… we have spent more and more time, attention and money on our schools, but they are NOT IMPROVING for all that effort and expense. So why do we keep making the same mistakes, by shoveling more money at them and getting no bang for the buck? Seems to me accountability ought to start with our school system for starters…
dmg: “They would also move toward infill and away from peripheral or sprawl development, and toward energy efficiency.”
At some point infill space will run out, and the only choice for development is sprawl… unless you want skyscrapers in small towns…
dmg: “The key question is whether the governor will accept this.”
Does he realistically have a choice?
VANGUARD: [i]”The other major project is that parking facility the city has been looking for at Third and G, coupled with a mixed-use center with commerce and housing.”[/i]
As I understand this proposal, your report is incorrect. We won’t be getting that “parking facility the city has been looking for” from this proposal; and the new parking will not be at 3rd and G.
The idea here is this:
1) Tear down the Davis Ace home store*. (It will likely no longer exist after this project is done.) Tear down the streamline moderne building at the corner of 3rd and G which now has a Thai restauratn; tear down the building which houses the G Street Pub and Katmandu Restaurant; and remove the G Street Plaza and the parking lot behind it.
What you will now have is an empty block, save the Chen Building.
2) the replacement project will be new storefronts on G Street from 3rd Street to the Chen Building and 2 additional stories of office space above the commercial spaces; and
3) a new parking structure will be built on the H Street side of the new 3-story building. However, that will not be a new parking structure for the downtown itself. As I read the staff report, it will just provide parking for the office users in the new building and enough for customers of the new storefronts on G Street.
As such, this is not a proposal for an alternative location for the proposed new multi-story parking garage between E and F Streets. That project remains short of funds.
*One thing to keep in mind: It is not yet known if the Anderson family which owns Davis Ace, the Davis Ace home store building and the corner restaurant building are on board with this proposal.
I should add one more thing: I think this proposal is a great idea if all of the private property owners are willing to go along with it. It saddens me to lose the historic corner building, but the benefits of having G Street built out are worth it. However, I don’t think it makes sense for the RDA to fund this project. I have no idea why it could not be done entirely with private capital and private debt.
Here is the link to the agenda packet material on the Wiseman proposal for 3rd and G. http://cityofdavis.org/meetings/councilpackets/20110329/07 Wiseman Company G Street ENA.pdf As best as I can tell, it would take out several buildings with viable businesses already in them. Now while Ithe dive at G St. Pub could be viewed as blight that needs redeveloping, the other businesses in the lot are not. They include the ACE Hardware housewares building, the Thai place at 3rd and G and some other small places on the east side of G south of 3rd. Is this an appopriate use of redevelopment funds?
VANGUARD: [i]”This week, the council will consider two major construction projects – an upgrade to the University Park Inn & Suites to build a conference center to help attract major out-of-town conferences to the city.”[/i]
I don’t know why you skipped half of this part of the story. You list the University Park Inn (which is the hotel behind Caffe Italia on Richards), but you entirely neglected to report that [b]the Hallmark Inn[/b], downtown, also has a proposal. Here is what the staff report says:
[i]”The owners of both the Hallmark Inn and the University Park Inn have developed preliminary proposals to add conference space and additional rooms on their properties. Since fall of last year, staff has been working with both owners to refine their proposals and identify opportunities for Redevelopment Agency participation in financing the projects.
“Both proposals have significant merit and would be strong additions to the downtown. A full service hotel and conference center would increase the community’s ability to capture conferences emanating from UC Davis activities, and the corresponding hotel nights and visitor spending. It would also provide a venue for community events that cannot be accommodated in our existing facilities, and an off-site meeting space for local businesses. A further benefit is that the conference facility would be expected to hold events that would result in additional room nights at other local hotels.”[/i]
The idea behind loaning money to these hoteliers is to capture more tax money for the city. The staff report notes that the $5.1 million loan for the University Park Inn would generate a half million a year in new revenues:
[i]”The net annual tax increment is approximately $500,000 in transient occupancy taxes and property taxes, after netting out 25 existing rooms which will remain in operation.”[/i]
Rifkin: “The idea behind loaning money to these hoteliers is to capture more tax money for the city. The staff report notes that the $5.1 million loan for the University Park Inn would generate a half million a year in new revenues: “The net annual tax increment is approximately $500,000 in transient occupancy taxes and property taxes, after netting out 25 existing rooms which will remain in operation.””
And this is why RDA funds are used to help foster such development – bc with responsible stewardship, RDA funds are supposed to bring in more tax revenue/increase property values, which enures to the benefit of all citizens…
It makes little sense to remove one type of downtown retail to replace it with different retail. Sales tax revenues vary by retail category, but I doubt if the increased tax revenue would cover the cost of the city’s bonds. Hotel projects usually pencil out for city revenues, as I understand it.
[quote]But there is little evidence to support this claim, and in fact, most studies suggest that redevelopment simply shifts the location of where the development occurs, but does not increase or improve blight overall.–David Greenwald[/quote]The methodologies for these “studies” employ meaningless indicators. In the case of Davis, South Davis would be isolated from the rest of Davis and our downtown probably would not have the vitality that it has today without the RDA and its backfill.
Everyone agrees that RDAs need more parameters to assure meaningful projects. But RDAs remain the only mechanism that has evolved to give cities some additional funds for infrastructure and for economic development, and if they are abolished they will not be replaced. (Schools, for example, get state matching funds for construction). This is why those who represent cities are saying: reform, don’t abolish. If we don’t set aside some money for local infrastructure and for economic development that generates revenue, quality of life and basic services will ultimately suffer.
If the state wants more money, it should look at the new $175 million county courthouse it is funding in Woodland.
Interestingly, the content of the link that I recorded yesterday has been changed, obscuring the clear description that was given at that link.
Yesterday, the website described the project clearly: The Court is vacating the magnificent old courthouse, leaving the title of that valuable building to the county and building a new $175 million courthouse to place it. The historic courthouse is next door to the massive atrium-style county administrative building (compare this to the Davis converted schoolhouse city hall).
Of course, an annex to the existing historic courthouse could have been built in the parking lot behind it for a fraction of the cost.
Let’s put this huge county in perpspective:
The City is looking at [b]LOANING somewhere between $5 and $15 million[/b] to generate hotel occupancy tax and create synergy for the businesses downtown.
The State is [b]SPENDING $175 million[/b] to replace a beautiful old courthouse in the county with a massive new one.
We have to look across all state expenditures, rather than focus on the RDAs.
(Maybe someone could look up the number of trials per capita in Yolo County? Just about everyone I know in Davis is called for jury duty about once a year or so. I lived in the East Bay for 13 years and was called for jury duty once.)
My god… the uptight attitudes from commenters on this blog are too much to handle. I’m sorry if the G Street pub isn’t your cup of tea, but it’s certainly not blight. And neither were the old houses on B Street and neither is Olive Drive. Just because the people that live/drink/work there are poorer than you, and are not remotely part of your social circle, it doesn’t mean that their facilities should be bulldozed and resold to the more affluent.
This is a big reason I’ll be happy to see Redevelopment Agencies go. They’re far too often used screw over people who aren’t associated with the political/gadfly/rich crowd. There are tons of second/third generation Davis locals who drink at G street pub, and just aren’t involved in the Davis process. It would be a shame to see their bar get torn down and social circle damaged because they lack power. Especially after it re-opens.
I’d love to stay a silent reader, but it’s becoming difficult. The relaxed and accepting attitude I remember from people while growing up in Davis is clearly not evident in the people on this blog or the policy coming out of the city government.
Berryessa-Wilcox: I have been trying to explain over the course of the last few months that the RDA has undergone an important and desirable mission creep. Its scope has expanded from strict “blight” mitigation to helping provide for infrastructure (much of it required by new growth that the state mandates but doesn’t allow the city to fully charge the developers for) and economic development investment. I believe this expansion of mission should be codified into the RDA mission when and if it is reformed.
I have never been in favor of tearing down affordable housing or existing historic housing, or affordable commercial rental space which can be used by local downtown retailers. My focus has always been on redeveloping other underused industrial sites and commercial sites.
I could see making limited exceptions for increased downtown parking to help generate business for our local merchants.
Rich: “*[i]One thing to keep in mind: It is not yet known if the Anderson family which owns Davis Ace, the Davis Ace home store building and the corner restaurant building are on board with this proposal.”[/i]
If you read the staff report, the developer indicates he has approval from the property owners to seek the exclusive negotiating rights for this project (“both owners have expressed a willingness to work through the possibilities” and “the neighboring landowners support an exclusive negotiation agreement.”).
Thus begins the dismantling of Davis Ace Hardware.
Don Shor,
Rather than speculate, why don’t you call up the owner of the property? This project might be quite speculative, and there is no commitment of RDA funds.
I should emphasize that the bulk of the RDA money is going to the courts, so we should seriously consider which is a better use of the money: [b]A $175 million dollar new courthouse[/b] to replace the beautiful historic County courthouse in Woodland, or maybe $10 or 15 million of RDA funds to lend to new businesses which will be repaid and which will bring new revenue to the City, and some backfill to hire two policemen downtown and improve some needed municipal infrastructure?
Sue: [i]”Rather than speculate, why don’t you call up the owner of the property? This project might be quite speculative, and there is no commitment of RDA funds.”
[/i]
I have no reason to doubt that the owner of Davis Ace has agreed to the simple proposal that an exclusive negotiator be contracted. Whether she has a strong interest in the specific proposal, or was just willing to consider it, is immaterial at this stage.
The questions I have are:
–to whose advantage, other than the developer, is it that there be an exclusive negotiator? Is it in the city’s best interest?
–are all property owners on board for this proposal?
–why does a sound development proposal even need any RDA consideration? If it pencils out and is within current zoning, they can finance it on their own. Why is this even on your agenda?
Thank you David for bringing this John Shirey Editorial on RDA’s to the attention of your readers. I think many good people put in a lot of work to create a structure for redevelopment that can make a valuable contribution to local economic development. Given the over $200,000 of RDA funds that City staff funnelled to DACHA (so they could defend themslves against breaking the law)I am certainly interested in the emphasis on abuse in the proposed legislation.
Shirey writes: “Our package contains 14 reforms to ensure agencies are spending housing funds responsibly.” I doubt what city staff did in Davis with RDA funds will be an approved use under this new legislation.
With a business like approach, competent management and a focus on efficiency and leveraging RDA funds could emerge as our best tool to create the City we aspire to. Change is drastically needed here in Davis to restore people’s faith in a government that manages public funds wisely.
David Thompson
Twin Pines Cooperative Foundation
PS: And yes there have been effective uses of RDA funds in housing although Dos Pinos has achieved the most without one dollar of public money.
Since we, the citizens of Davis floated these bonds and are assuming large financial risks, what is the return on the publics money? Are these loans 10 year or 5 year notes? Did all these business owners investigate other loan sources or are they simply going after funding from the city simply because it’s cheap money? Could it be because they can’t qualify for a loan in the real world? If that’s the case, I think we need to know why.
What is the loan to value (LTV)? Heaven forbid the Banana Republic of Davis would have to repossess one of these properties. However, we the people need to know we can get our money back. So I think this LTV needs to be somewhere around 70%.
The days of throwing money around willy-nilly has to STOP!
[i]” I’m sorry if the G Street pub isn’t your cup of tea, but it’s certainly not blight. And [b]neither were the old houses on B Street[/b] and neither is Olive Drive.”[/i]
For the record, the two B Street Aiken houses, 305 and 311, which were moved to J Street and are now under the management of the Davis Solar Co-op Housing, have absolutely nothing to do with blight or with the Davis RDA or any issuance of public bonds. I’m not sure why you would include them in your list of complaints on this particular topic.
To toot my own horn a moment, it was my idea to move traditional neighborhood houses to that J Street site in the wake of the 3rd and B Visioning Process. Before I suggested that site as good for relocations, the City had in mind to build new, low-income housing there, which I thought was a bad fit and would have been a lost opportunity as a traditional neighborhood relocation site.
However, my hope was to just move the historically important house (formerly 311 B Street) to J Street, and wait for a corner house which was historically important and needed to be moved. Danielle Foster surveyed owners in the 3rd and B area and found no takers, so the City made the mistake of moving 305 B Street to the corner lot at 3rd and J.
Lo and behold, we now have the Peña House, which is on the corner of 4th and D, in need of relocation. (Four couples have proposed a very large, very green project for that site. I think the new project looks very nice.) The Peña House is a much more significant house (from a historical perspective) than 305 B. It could be rehabbed and relocated to a corner lot in a traditional neighborhood. But that rare corner lot where the former 305 B Street now is was taken. There are no other such lots available.
In all likelihood, the Peña House will either be demolished or it will be moved to a much less appropriate location.
For those who don’t know anything about 337 D Street, it was owned and occupied by people in the Peña family (mostly Narcissa Peña, who was for a long time the house mother at the frat next door at 4th and C next to Central Park). The Peña and Vaca families were the owners of a very large Mexican land grant going back to about 1840, covering everything from what is now Davis to what is now Vacaville. Vacaville was named for Manuel Cabeza Vaca.
The import of Narcissa’s house, however, is not so much that she was a Peña or that she was such an important Davisite. It’s really that her tiny Victorian house dates back to 1890-95. With only a few other exceptions–all the others being large stately homes–we have lost all of our pre-1907 houses in Davis. (I should add that 1907 was when UC Davis essentially started, marking the end of the 1868-1907 period when Davisville was mostly just a railroad stop between Sacramento and Vallejo.)
So when the Peña House is destroyed, we will have not one single working-class house in Davis from the 19th C. There were at one time hundreds of them, making up most of today’s core area between A and I and 1st and 5th.
[i]”Since we, the citizens of Davis floated these bonds and are assuming large financial risks, what is the return on the publics money?”[/i]
That is not yet known. No deals have been struck.
[i]”Are these loans 10 year or 5 year notes?”[/i]
Also not yet known. However, it’s worth noting that the Davis RDA got its money in two bond issuances. One is a 25 year tax-free note which pays 7.25%. It will mature in 2036. The other is an 11-year taxable bond which expires in 2022. It pays 8.65%. Both bonds are rated as A+, which is not really a sign of confidence in our RDA. The highest rating is AAA, followed by AA. I think A+ is in between A and AA.
[i]”Did all these business owners investigate other loan sources or are they simply going after funding from the city simply because it’s cheap money?”[/i]
That is the right question to ask. I don’t know the answer, but according to Hanlee’s, which borrowed $1 million last year from the DRDA, they claimed that no banks were making such commercial loans.
That is entirely possible, here, and it suggests: If the banks think this is bad business, it probably is.
Default risks aside, the Hanlee’s project did provide a good tax return for the DRDA. I would imagine that the hotel/conference center projects will as well, due to our stiff transient occupancy tax.
I recognize that this creates a dubious precedent. On the other hand, it should be understood that not making these loans and not getting these hotel projects done comes with an opportunity cost–that the City will lose out on a lot of tax revenues, if local hotel space is built on campus or elsewhere nearby but out of our fair city.
If the citizens of Davis are going to be the lenders of last resort shouldn’t they be demanding a high but yet reasonable interest rate? The type of lending the city gave Hanlee’s is really scary. I wonder what the interest rate would be if they found funding in the private sector compared to the interest rate they secured through the RDA?
This sounds like a train wreck waiting to happen. I am beginning to think the lending practices by the City of Davis could be considered to be border line criminal. The City of Davis is putting at risk public funds that any reputable lending institution would NEVER consider doing.
Hmmm. I wonder if the Yolo County District Attorney reads this blog?
An article in Sunday’s Enterprise stated
[quote]Hallmark Inn at First and F streets downtown requested a $10 million loan to add 48 rooms, [b]six to [b]eight luxury apartments[/b][/b] and 50 parking spaces in addition to a 16,000-square-foot conference center[/quote]
It looks likes there might finally be some decent affordable luxury housing in Davis. What will the income requirements be? Must be making no more than $500,000/yr to qualify?
Don is absolutely correct. If these are all projects that will pencil out, they should easily be able to find financing without resorting to sticking their nose in the RDA trough.
[i]” I wonder what the interest rate would be if they found funding in the private sector compared to the interest rate they secured through the RDA?”[/i]
Another good question. Before I wrote my column on the Hanlee’s deal, I posed it to Jeff Adamski of First Northern Bank. (I asked some others, as well, but didn’t use their similar replies in my column.) Here is what I found and wrote: [quote] The interest rate on the note is just 3.5 percent, and we are in second position. The property collateralizing the loan already has an outstanding mortgage lien of $1.1 million.
Jeff Adamski, Senior Vice President of First Northern Bank, told me in an email that is half the rate a private lender would charge.
“A loan of this size in a second position for a special purpose property would likely carry a rate of close to 7 percent in today’s market,” Mr. Adamski said. [/quote] For the purposes of our public coffers, it’s important to understand that the DRDA and the City of Davis have future added tax revenue considerations which makes their calculation very different from a private bank.
Perhaps you are convinced that without the government involvement, the investments (in the hotels or in the VW dealership) would take place regardless. That’s a defensible position. Or perhaps you think the net tax revenue assumptions are overly optimistic*. That’s another possibly valid concern. And further, you might think that it’s beyond the scope of why we have our local government to have it playing banker. (That is my view in general.)
But just finding that a private lender like First Northern would charge a lot more in interest than a public lender like the DRDA does not demonstrate that the taxpayers are being taken for a ride.
*In the Hanlee’s deal, I found, based on what I learned about regional car sales, that the city’s consultant was wildly optimistic about how many VW’s Hanlee’s is going to sell in the next 10 years. Oddly though, the fewer cars sold (assuming no default) the better off the DRDA’s ROI would be, based on the way the repayment schedule is structured and based on the way the car sales tax is directed to the city’s coffers.
[quote]Perhaps you are convinced that without the government involvement, the investments (in the hotels or in the VW dealership) would take place regardless. That’s a defensible position. Or perhaps you think the net tax revenue assumptions are overly optimistic*. That’s another possibly valid concern. And further, you might think that it’s beyond the scope of why we have our local government to have it playing banker. (That is my view in general.)[/quote]
If the general public deems it OK to give loans to business owners, great, BUT it should come with not only a very high interest rate but also with security. This way the profits could be reinvested in other similar ventures. We should always be in first position on all notes. The city should never loan money by pulling out their Ouija board to determine how much money the city might conceivably receive through some tax revenue. When the City of Davis assumes, the only thing they do is make an ass out of YOU and ME. Then, WE are left holding the bag, not them.
[quote]”Since we, the citizens of Davis floated these bonds and are assuming large financial risks, what is the return on the publics money?”
— Craised[/quote]The city is going to make huge net revenue from the RDA for the hotel. It is an incredibly good deal for the public.
Correction: from the RDA loan for the hotel
Sue,
When you say net revenue, I ASSUME you are talking about estimated tax revenue.
In my opinion, this translates into profits for the owner of the hotel. My question is, if this is such a great win-win proposition, why don’t they secure a loan with a cheaper interest rate somewhere else?
After you combine the amount of money that is currently owed on the building with millions the city wants to loan these business owners, could the property be resold to recoup the publics investment?
[quote]”When you say net revenue, I ASSUME you are talking about estimated tax revenue. In my opinion, this translates into profits for the owner of the hotel. My question is, if this is such a great win-win proposition, why don’t they secure a loan with a cheaper interest rate somewhere else?”[/quote]Good luck on getting a straight answer, [b]craised[/b]. I [u]think[/u] Sue actually was more accurate in her original response to you –that “the city is going to make huge net revenue [u]from the RDA[/u] for the hotel.”
Her conclusion–“It is an incredibly good deal for the public.”–depends, again I think, on which “public” she means. These are extremely complicated transactions (at least to my mind). I’ve wondered ever since council members Sue and Rochelle raised excellent questions when city staff brought the Hanlees scheme to them:[quote]”The terms of the subsidy were twofold, as Council member Greenwald described it: 1) a below-market rate, and 2) forgiveness of the loan, depending on the amount of sales tax revenue generated. However, the parameters of the loan forgiveness were not clear to Ms. Greenwald….”
“…Ken Hiatt elucidated further, ‘So the way the loan repayment is structured is performance-based. So, if the dealer meets certain performance criteria in terms of sales tax generation to the city, then the loan in that threshold is $100,000. If they made $100,000 annually in sales tax payment to the city, every dollar over that $100,000 gets taken off of the principle and interest payments owed to the RDA. So depending on how much sales tax is generated over that $100,000 the equivalent is reduced in their loan repayment to the RDA….If the dealer does extremely well, then the entire loan amount would be forgiven.”*[/quote]It appears to me that such “loans” are structured in a way that looks like a money-laundering operation to move more than $1-million from the RDA willynilly pot into our city’s general fund, at least in the Hanlees case.
[u]Questions for Sue and Rich[/u]:
1. Is the RDA or the city the source of the $1-million-plus-interest that will end up in Hanlees pockets if their loan is forgiven via “sales tax performance” into the city’s general fund?
2. Is “loan forgiveness” an element of any of the new, proposed projects?
3. How did the RDA “important and desirable mission creep” happen? If it isn’t “codified,” it sounds as though it’s been an overlooked and/or happily tolerated fraud by local RDA’s. What kind of city infrastructure, Olive Drive, downtown parking, etc. (and, not to ignore, schools) might we have had today if the RDA/Council had been more true to the legislation’s purpose?
4. Has anyone approached the [u]Enterprise[/u] about de-blighting its operations. Many newspapers have donated or sold off their downtown properties and set up new operations near the edges of towns.
5. One of the most successful recent, intersection-blight improvements has been the 5th & G area. Was RDA funding used in these projects?
6. Which of Davis’s “affordable housing” attempts would you hold up as success, or at least ones that have been successful for longer than the time it takes first owners to reap their bonanzas through selling or pulling money out of some cooperative-type fund? Should we pursue successful models in the future with RDA funds?
Thank you.
P.S.–I basically cannot see how it makes much sense to spend tax money to lure companies from other California cities and encourage businesses expand in a manner that doesn’t make business sense to do on their own. How can it be worth the risk, time, money and other resources we devote to these projects?
The losing cities lose completely; the state doesn’t gain in such zero-sum games; the gaining cities gain businesses with proven histories of moving wherever there’s a better deal offered and/or businesses that we may have helped expand beyond their capabilities (and possibly would take down our “investment” with them).
____________________
*from Elaine’s August 3, 2010, [u]Vanguard[/u] report.
Craised: It is reasonable to ask why we can’t achieve desirable development without RDA help. In some cases we can. The hope behind redevelopment is that, with some help, areas will develop enough value and synergy that people will start investing investing on their own.
Hotels are frequent recipients of RDA support because the tax revenue to cities is an order of magnitude higher than any other use of the land and because the initial investment is huge and there is likely to be a period before the demand catches up enough to cover payments on the loan.
Also, sometimes off-site improvements have to be made in order to make the site viable. In the case of the entrance to downtown, we have not yet made the improvements required to attract development that will bring significant tax revenue.
Last night, we discussed another redevelopment proposal that would intensify the site around Ace Hardware and the associated city-owned parking lot. I made it clear that I was not interested in significant RDA subsidy to that project unless it brought major public benefits, such as a much larger downtown parking facility. I said I was not interested in spending RDA dollars just to build a larger privately owned business.
[quote]”The interest rate on the (Hanlees) note is just 3.5 percent, and we are in second position.”
“….it’s worth noting that the Davis RDA got its (new) money in two bond issuances. One is a 25 year tax-free note which pays 7.25%. It will mature in 2036. The other is an 11-year taxable bond which expires in 2022. It pays 8.65%.”[/quote]Rich, what is the connection between these types of transactions? Realizing that the Hanlees cash came from, possibly, another note/bond, does this mean that we loan money for 10 years at, say, 3.5% that we’ve borrowed ourselves for a longer period at, say, 8%?
If so, are these arbitrage-like profits for the benefitting businesses–and the interest-difference costs for the city–taken into account.
Finally, how important are the city’s projections in making a proposal acceptable to the council? And, what’s our record on these estimates?
craised: “If the general public deems it OK to give loans to business owners, great, BUT it should come with not only a very high interest rate but also with security. This way the profits could be reinvested in other similar ventures. We should always be in first position on all notes. The city should never loan money by pulling out their Ouija board to determine how much money the city might conceivably receive through some tax revenue. When the City of Davis assumes, the only thing they do is make an ass out of YOU and ME. Then, WE are left holding the bag, not them.”
In the Hanlee’s deal, Hanlee’s is obligated to pay back the RDA loan w interest – until they generate sales tax revenue over approximately $130,000. For every dollar that goes into the city’s general fund in sales tax revenue generated by Hanlee’s over $130,000, Hanlee’s is granted $1 in loan forgiveness. In essence, if I understand this mechanism correctly, the RDA money will essentially be turned into general fund money once the approx $130,000 sales tax revenue threshold has been met. So explain to me how the city has “lost” any money on this deal?
In the hotel/conference center being proposed, it will generate not only sales tax revenue itself (an estimated $400,000 or $200,000 – it was not clear from the CC discussion which figure is correct), but spin off sales tax revenue from businesses that benefit from the added customer traffic that will come to town bc of the hotel/conference center.
Rifkin: “*In the Hanlee’s deal, I found, based on what I learned about regional car sales, that the city’s consultant was wildly optimistic about how many VW’s Hanlee’s is going to sell in the next 10 years. Oddly though, the fewer cars sold (assuming no default) the better off the DRDA’s ROI would be, based on the way the repayment schedule is structured and based on the way the car sales tax is directed to the city’s coffers.”
That is how I understand it works too…
BW: “There are tons of second/third generation Davis locals who drink at G street pub, and just aren’t involved in the Davis process. It would be a shame to see their bar get torn down and social circle damaged because they lack power. Especially after it re-opens.”
The project to redo the parcel upon which G Street Pub and Ace Hardware sits is by no means a done deal. If you listened to Tuesday night’s CC meeting, it was clear the owners of Ace and G St. Pub would have to agree to this project. There is great concern out there about any use of RDA funding ruining already existing businesses. In fact that very issue came up in regard to the proposed hotel/conference center which would displace Cafe Italia. Always, as Sue pointed out at the CC meeting, when using RDA dollars it should be remembered that the RDA funding is to be used for projects that will provide for the PUBLIC GOOD. This could be more parking; increases sales tax revenue for the city; increased property values and the like. But always into consideration must be taken existing businesses.
Just as a reminder, when all the flap about Trader Joes occurred, a strictly private enterprise in which the city IMHO had no business interfering, there was no hesitation on the mall owner Centro Watt’s part to displace an existing medical imaging business nor destroying the business of a small chinese food restaurant. At least with RDA funding, more consideration can be taken by the city to ensure existing businesses have a better shot at surviving by being incorporated into the existing project (as in the case of G St. Pub/Ace Hardware) or successfully relocated (which is the suggestion for Cafe Italia).
[quote][b]David sez:[/b] “…in fact, most studies suggest that redevelopment simply shifts the location of where the development occurs, but does not increase or improve blight overall.”
[b]Sue sez:[/b] “The methodologies for these ‘studies’ employ meaningless indicators. In the case of Davis, South Davis would be isolated from the rest of Davis….:”[/quote]Exactly which studies are you two arguing about here?
And, with respect to South Davis, what RDA projects have brought it out of isolation? The only one that comes to mind is the Pole Line overpass.
Although I kinda’ like the I-80 bike overpass, its limited use and capability keeps it from having much impact in un-isolating South Davis from the rest of our city. The ZipCars also could help, but to such a limited extent. The Hanlees South Davis expansion involved a lot of RDA money, but improved the quality of the auto-row wall separating us.
Don Shor: “I have no reason to doubt that the owner of Davis Ace has agreed to the simple proposal that an exclusive negotiator be contracted. Whether she has a strong interest in the specific proposal, or was just willing to consider it, is immaterial at this stage.
The questions I have are:
–to whose advantage, other than the developer, is it that there be an exclusive negotiator? Is it in the city’s best interest?
–are all property owners on board for this proposal?
–why does a sound development proposal even need any RDA consideration? If it pencils out and is within current zoning, they can finance it on their own. Why is this even on your agenda?”
If you listened to the CC mtg on this issue, it is being rushed through bc of the chance that RDA funding will go away. However, refurbishing of this block has been on the city’s radar screen for a number of years. The owner of Ace and G St. Pub have not yet really weighed in on the issue as of yet. Sue Greenwald made the point that should be the first step rather than the second one. But bc the parking lot in between these properties is public and owned by the city, the developer had to obtain city permission to even start the negotiations with adjoining property owners for this project. Steve Souza raised the question of why this project had to be exclusively negotiated with only one developer, but voted for the project despite his pointed objection. So I think there were many questions about the viability/desirability/acceptability of this project – but there is a push to approve as many projects in the city’s pipeline of ideas before July 1 – the magic date when RDAs as we know them may disappear…
DT: “Given the over $200,000 of RDA funds that City staff funnelled to DACHA (so they could defend themslves against breaking the law)I am certainly interested in the emphasis on abuse in the proposed legislation.”
First, there is a lot of controversy swirling around the failed affordable housing cooperative DACHA, and whether it was ever a viable model for affordable housing as it was structured. There is no proof as of yet the city was guilty of any malfeasance in regard to its involvement, only allegations not yet proved. Second, one could argue the city funding funneled to make Rancho Yolo a cooperative when the owner has clearly stated no interest in selling is a questionable use of city monies (don’t know if this was RDA funding – but the principle still applies).
However, in other cities/communities, it is my understanding there have been RDA abuses. So I think most would agree w your point that some reform in the state RDA methodology is long past due…
[quote]”…Hanlee’s is obligated to pay back the RDA loan w interest – until they generate sales tax revenue over approximately $130,000. For every dollar that goes into the city’s general fund in sales tax revenue generated by Hanlee’s over $130,000, Hanlee’s is granted $1 in loan forgiveness. In essence, if I understand this mechanism correctly, the RDA money will essentially be turned into general fund money once the approx $130,000 sales tax revenue threshold has been met. So explain to me how the city has “lost” any money on this deal?”[/quote] Let’s say, in a wildly optimistic way, that Hanlees has an exceptionally good decade. Every dollar in loan forgiveness has to from somewhere. [u]Every dollar in loan forgiveness means one dollar in reduced tax income to the city, unless the money is coming from somewhere else.[/u]
My guess is that, somehow, the RDA doesn’t get paid back in this situation and, therefore, won’t have the $1-million+ to support the next project. If so, this is a situation that only could be dreamed up where the city council and local RDA board are one in the same.
I very well could be wrong on who is “losing”; I’ve never been able to get this issue clarified. [u] Some entity has to be losing money in order provide the cash for Hanlees to be forgiven repaying its loan.[/u] Either someone is saying “we’ll pay it off for you” or the city is giving up (or returning) legally collected sales taxes to pay off the loan.
[b]Elaine,[/b] if the city hasn’t lost, has the Davis RDA? If so, what’s the difference? The business gets a huge gain; the taxpayer pays off the loan, courtesy of the Davis city council/RDA board. (Or, maybe the Mondavi Foundation is picking up the costs of moving the business to Davis.)
JS: “Elaine, if the city hasn’t lost, has the Davis RDA? If so, what’s the difference? The business gets a huge gain; the taxpayer pays off the loan, courtesy of the Davis city council/RDA board. (Or, maybe the Mondavi Foundation is picking up the costs of moving the business to Davis.)”
From what I can tell on the Hanlee’s deal, for every $1 the city loses from the RDA, it gains for the general fund. So I am not seeing your contention that the city is “losing money”. And Hanlee’s is being given a huge incentive to do well, so it will generate the maximum sales tax revenue possible for the city. I’m just not seeing a downside here for taxpayers… unless Hanlee’s did so poorly it defaulted on its loan, which is not very likely.
[b]Elaine[/b], sorry I’m having difficulty explaining my point/question. Maybe that’s why I haven’t been able to get an answer in all these months. Let me try again:
1. What would happen to the sales tax from Hanlees if the company didn’t get $1-to-$1 loan forgiveness for every dollar of tax over $130,000? Answer: If they paid $230,000 in tax, the city general fund would keep $130,000 plus $100,000 (the entire $230,000 paid in), and Hanlees would be happy about a great sales year.
2. On the other hand, under the current loan-forgivness plan, does the city keep the entire $230,000? Or has the city agreed give up $100,000 to pay off the loan on Hanlees’ behalf?
3. On the other-other hand, has the Davis RDA itself agreed to forgive Hanlees loan if the company gives the city enough taxes, thereby allowing the city to keep the entire $230,000? In which case, wouldn’t the RDA end up short by $100,000 each year this happens?
4. Is there some other source of funding I haven’t considered here that’s agreed to provide $1-million+ to subsidize Hanlees via loan forgiveness?
As I’ve said, it seems that the money has to be coming from somewhere. If this scheme is partly designed to take RDA money and channel it to projects not authorized by the RDA legislation (i.e., Davis general fund purposes), I can understand–but not approve of–the practice. To suggest that Hanlees hasn’t been given the potential for a million-dollar tax giveaway seems strange. To claim that no government body (city or RDA) is losing a like amount of money seems unbelievable. I just can’t figure out which pocket is being picked!
JUST: You posed 6 questions to me. I will give each a stab, but I probably don’t have all the answers (and due to a deadline project I am working on for my job, I apologize for my lack of depth):
[b]1.[b] [i]”Is the RDA or the city the source of the $1-million-plus-interest that will end up in Hanlees pockets if their loan is forgiven via “sales tax performance” into the city’s general fund?”[/i]
It’s the Davis RDA.
For the loan to be completely forgiven, Hanlees will have to sell approximately 872 new VWs each year from 2012-2023. I don’t believe that number of sales is realistic. I think a much more reasonable assumption is 349 new vehicles sold per year on average over the period. In the latter scenario, we will be forgiving just $1,451 in interest + principle repayments; and that amount will be recouped in marginal sales taxes.
[b]2.[/b] [i]”Is “loan forgiveness” an element of any of the new, proposed projects?”[/i]
I don’t know, but I would guess not. I don’t think any of these proposals is that detailed, yet.
It appears to me that the idea behind playing the banker role with the hotel project(s) is threefold:
1. That they City (or DRDA) believes private lenders won’t fund such projects; and
2. That the hotelier’s payments back to the DRDA (or successor) will cover the principal + interest payments which the DRDA now owes on its new bonds; and
3. That, once the project is built, the higher net revenues from property tax to the city (about $100,000 per year) plus the higher net revenues from the transient occupancy tax (T.o.T.) to the city ($280,000) will essentially represent “found money.”
I don’t know if any of these assumptions is justified. However, I think this approach by the city raises an important point: due mostly to labor costs, our City as a corporation is either going to have to make some serious cuts or it will have to generate greater city revenues. The hotel approach is ultimately a stab at the latter. That does not mean it’s necessarily the best idea or the right idea. But it should be seen largely as an effort at generating more public revenues.
[b]3.[/b] [i]”How did the RDA “important and desirable mission creep” happen? If it isn’t “codified,” it sounds as though it’s been an overlooked and/or happily tolerated fraud by local RDA’s. What kind of city infrastructure, Olive Drive, downtown parking, etc. (and, not to ignore, schools) might we have had today if the RDA/Council had been more true to the legislation’s purpose?”[/i]
I don’t have good answers to these questions. I would just note that many of the largest projects funded by RDA dollars in our state have funded private stadium and arena projects ([url]http://www.highbeam.com/doc/1G1-248841044.html[/url]) for pro sports teams. Even AT&T Park in San Francisco, which was advertised as “privately funded,” benefitted from more than $100 million in public infrastructure upgrades around that stadium from the SFRDA.
[b]4.[/b] [i]”Has anyone approached the Enterprise about de-blighting its operations. Many newspapers have donated or sold off their downtown properties and set up new operations near the edges of towns.”[/i]
I have no idea. In my opinion, the Enterprise printing building at the northeast corner of 3rd & G is a turd. … Speaking of that intersection, I think the old Yolo Bank building (which used to house Noodle Express) looks great with its new awning and paint job.
[b]5.[/b] [i]”One of the most successful recent, intersection-blight improvements has been the 5th & G area. Was RDA funding used in these projects?”[/i]
I don’t know. However, I am not a fan of the vanilla, uninspired bleh architecture of the USDA building. It’s a shame the city council approved that bad design. The building does not engage with the street; and it’s disconnected from all of the other designs in its neighborhood. … By contrast, the Roe Building is very nice looking and works very well with the street. I also think the design for the new Yolo Federal Credit Union (or at least the version of it we saw come through the HRMC) looks good.
[b]6.[/b] [i]”Which of Davis’s “affordable housing” attempts would you hold up as success, or at least ones that have been successful for longer than the time it takes first owners to reap their bonanzas through selling or pulling money out of some cooperative-type fund? Should we pursue successful models in the future with RDA funds?”[/i]
I can’t think of any I would call a success in terms of helping poor people as a class. I would say, though, from what I know about the people who run the Solar Community Housing Association ([url]http://schadavis.org/[/url]), they appear to be less interested in ripping off the taxpayers and less interested in enriching themselves and less interested in screwing their tenants and less interested in solving their disputes with lawsuits than some other middlemen in Davis who run low-income housing scams*.
*In the interest of not being sued for slander, I should say I am not thinking of any one group or neighborhood partnership when I say this.
Don Saylor: if you can, please fix my [b]BOLD[/b] problem above and then junk this post. Thanks, Rich.
[quote]And, with respect to South Davis, what RDA projects have brought it out of isolation? The only one that comes to mind is the Pole Line[/quote]The RDA helped fund the Richards interchange expansion, the Pole Line overpass, the Mace interchange expansion and the South Davis bike underpass near Borders Books.
Concerning large sports stadiums and other abuses of RDA: That is why reform is needed. Sports stadiums should be disallowed.
Now let’s focus on areas of needed reform.
The governor’s proposal is to take next year’s RDA funds and spend it on the courts.
What are the spending plans for this money? Well, Yolo county is getting a [b]$175 MILLION DOLLAR [/b] new county courthouse to replace the lovely old existing courthouse. Then, they are not requiring that the existing courthouse be sold to help pay for this, but rather are just handing the title over to the county.
They could have built a completely adequate expansion to the existing courthouse in the parking lot behind the historic courthouse for a small fraction of this cost.
[s]Don Saylor:[/s] Don Shor: if you can, please fix my BOLD problem above and then junk this post. Thanks, Rich.
Sue or Elaine,
In my quest for knowledge, I have always been curious to know the following:
Is it true, that if a private developer or owner who seeks RDA assistance, or property owners who wish to develop their property pursuant to an owner participation agreement, no matter how much RDA money is vested into the project, should not be permitted to pay, or to allow their contractors or subcontractors to pay less than the prevailing rate of wages for work performed pursuant to an agreement with the Agency?
[b]Rich[/b], thanks for taking the time to respond in such a bold manner. Seems like you’re always working.
Perhaps the architect’s vanilla-ness was because of the limited purpose of the building–not to attract customers, but to house people who have to be there at a cost USDA could afford for the next 25 years or so. (I’ve heard that the biggest USDA building, in Washington, DC, uses a typical prison configuration.)
I certainly agree that the other buildings at 5th & G offer more architecturally. But, the USDA building promises 250 or more new downtown jobs for the long term. I also see USDA folks having lunch at various downtown eateries, celebrating at our bars and holding state-wide meetings/trainings that help fill up our hotels.
I don’t know if RDA money was involved, but the area reflects a big improvement over the car-repair shops, cleaners, service stations and other “blight” and pollution sources that graced the neighborhood 20 years ago.
Would you be so bold as to provide an opinion about giving Hanlees $1-million+ of RDA tax funds (or [u]any[/u] loan forgiveness). Seems to me that a 10-year, well-below market rate loan should be adequate to expand a car dealership.
Why should we also give them anything if they have the best business in years, let alone up to $1-million, assuming they qualify by having great sales for 10 years? Should this be the highest priority for use of RDA funds?
Just, I certainly agree with you that the downtown benefits by the presence of the USDA. I also think the rest of that project from the movie theaters to the corner Mariachi Restaurant to the 5-story garage is all beneficial.
I didn’t give too much thought to the USDA building when it was proposed or even constructed. But one day some 6-7 years ago I was walking around downtown with Maria Ogrydziak, the architect, and she gave me a number of good pointers on urban design and what connects and what doesn’t. She pointed out to me what could have been done there, and since then I have adopted her opinion as my own.
Maybe it never was possible, as you suggest is the case with similar USDA projects, to get better architecture on that site. I don’t know. I just think with a few tweaks and no real added expense, it could have been more engaging and more attractive at the street level.
Think of the style of Chuck Roe’s 3-story building across from the Farmers’ Market at 3rd & C or the 4-story Chen building at 2nd & G as examples of what I would prefer at 5th & G. (FWIW, there are far worse, older buildings in the core to complain about their looks, so I don’t sweat the USDA situation too much.)
Rifkin wrote:
“For the record, the two B Street Aiken houses, 305 and 311, which were moved to J Street and are now under the management of the Davis Solar Co-op Housing, have absolutely nothing to do with blight or with the Davis RDA or any issuance of public bonds. I’m not sure why you would include them in your list of complaints on this particular topic.”
How exactly do they have “absolutely nothing” to do with the Davis RDA? It says right here that they do:
http://cityofdavis.org/housing/affordable/3rd-and-j.cfm
And I even thought the RDA purchased the lot? Oh wait, they did, lower down on the same city webpage, it says:
“In August 2005, the Davis Redevelopment Agency purchased the two 6,000 square foot lots located at 233 and 239 J Street,”
Rifkin, please clarify.
[i]”Would you be so bold as to provide an opinion about giving Hanlees $1-million+ of RDA tax funds (or any loan forgiveness).”[/i]
I am not all one way or the other on the Hanlees loan.
I agree that it does not fit the mold of “blight” removal.
I think it also might set a bad precedent. The risk is not that small Davis companies will come to the City for financing at favorable rates. But rather that every business in Davis which generates substantial and positive tax revenues to the City will have us over a barrel, saying they will close up shop or not invest lest we give them a sweetheart deal like Hanlees got. Not only does that put us in a bind, but it really screws our mom and pop shops which will never get such loans.
An open question about Hanlees VW is whether the sales it generates will represent a switch for buyers who would have purchased a VW in Elk Grove or Sacramento or will those sales be simply a switch from a different brand which Davis already has. If it is the latter, then it’s hard to justify this sort of deal.
Assuming that most of the VW sales in Davis represent buyers who would have bought at another VW dealership, then I think–no matter the questions of precedent and fairness–the deal is not bad for the City of Davis dba the DRDA.
You have to realize that the City’s rate of return, unlike a bank’s, is not just measured by its interest and principle paid back. The city measures its return on investment with those and with increased tax revenues that it otherwise would not have had.
So strictly from an ROI calculation, my judgment is that the Hanlees loan was not a bad deal for Davis and it is, of course, a sweetheart deal for Hanlees. I assume Hanlees VW will not go belly up*. I don’t think they will sell so many cars that much of the loan will be forgiven. But if all of the loan payments are foregiven, it will still be a good deal for the taxpayers, based on the net property and sales tax revenues.
*I was told a few days ago by a city leader that the owners, Mr. Han and Mr. Lee, personally signed for our loan. This leader told me that means that if the dealership goes bust, the owners will legally be forced to pay us back with their other assets.
[i]”Seems to me that a 10-year, well-below market rate loan should be adequate to expand a car dealership.”[/i]
Right. They are using the money to build their new VW dealership facilities–a showroom and a service garage and so on.
[i]”Why should we also give them anything if they have the best business in years, let alone up to $1-million, assuming they qualify by having great sales for 10 years?”[/i]
I don’t know about ‘the best business in years.’ My understanding is that the car business, like all business in our region, is not doing so well. But it’s a long-term project, so you have to take the bad with the good times.
But that does not answer you ‘why’ question. I think this gets back to a couple of things in Davis:
1. Because we have no big shopping malls and rather limited retail business, we are highly dependent on auto sales for our sales tax revenues. I am told Hanlees is by far our largest generator of sales tax revenues. So given that, Hanlees operates from a position of power. We need them more than they need us;
2. Many other cities in California compete for auto dealerships for the same reason–they want the sales tax money;
3. The VW dealership which Hanlees bought was in Napa. They did not have to move it to Davis. They could have kept it there or moved to another town willing to give them a sweetheart deal.
So our council (aka RDA) decided:
1. The loan will give us a good payback in sales tax;
2. We want to stay on good terms with Hanlees because we depend on them for sales tax revenues; and
3. If we don’t give them this deal some other town will and then we will have an unhappy Hanlees and we will be s.o.l.
[i]”Should this be the highest priority for use of RDA funds?”[/i]
That’s a judgment call. I think our policymakers should be trying to do what they can to help generate new revenues for the city. I think projects like this are far better than the low-income housing scams we have used RDA money to fund in the past. I don’t think Davis has (within the boundaries of the RDA) too much true “blight.” So I guess all of that adds up to a …. maybe?
If these projects net more money into the City’s coffers and to that extent help the City deal with its serious labor cost problems which has us in the hole $147 million, then it’s hard to see the Hanlees loan as all bad.
[quote]I even thought the RDA purchased the lot? Oh wait, they did, lower down on the same city webpage, it says: “In August 2005, the Davis Redevelopment Agency purchased the two 6,000 square foot lots located at 233 and 239 J Street.
Rifkin, please clarify. [/quote]
Thanks for bringing that city web page to my attention.
Let me first clarify by saying this: the Aikens donated both of those B Street houses to the city. I don’t know if the Aikens paid all of the moving expenses or just part of it, but I know they had offered to pay to move those houses so they could begin their B Street project which is now under construction.
Second, I think the city’s website is altering the facts when it says this:
[i]”The Agency originally purchased these lots with affordable housing funds and with the following objectives:
[b]Consideration of the relocation of historic and contributing historic homes to these lots[/b], based on rehabilitation costs, moving costs, and the availability of appropriate homes.”[/i]
The truth of the matter was that the Davis RDA bought the J Street lots with the express purpose of providing low-income housing units there. That is one of the objectives of our RDA–to provdie low-income housing.
But until I pushed the issue with our council and the staff, there was no one on the city staff or in public office or elsewhere outside calling for any B Street historic homes or other tradtional Davis homes to be relocated on those J Street lots. I was told many times during the process that the J Street lots could not be used as relocation sites [i]because[/i] the J Street property was bought for the express purpose of low-income housing.
The change in policy not come until late 2007, early 2008. Up to that point, the only consideration of the City was to build new, low-income housing on the J Street sites.
So when I say the B Street homes had nothing to do with the DRDA, I am saying that those relocated houses did not move there with RDA funding and no DRDA money was spent on B Street at all.
The decision to change our city policy for the J Street site came in the wake of the Third and B Visioning Process, which again had nothing to do with the DRDA. The decision was made to combine my idea–use J Street for historic homes–with the original purpose of providing low-income housing on that site.
One more note on my previous post on the Pena House. I stated that Davis once had hundreds of such workingman Victorian-era homes in the 19th C. I was told by a Davis historian after writing that that my “hundreds” assumption was wrong. I was told that at the end of the 19th C. there were less than 200 houses in Davis, and that there is no evidence that there were other homes quite as simple as the Pena House. The historian called it more of a shack than a house, as it was at the end of the 19th C. So all the more reason, I believe, to know that it was and is a unique part of Davis history; and that if it is demolished or moved to an inappropriate site, that aspect of Davis history will be lost forever.
[quote]I was told a few days ago by a city leader that the owners, Mr. Han and Mr. Lee, personally signed for our loan. This leader told me that means that if the dealership goes bust, the owners will legally be forced to pay us back with their other assets. [/quote]So, if they walk away and file for bnkruptcy, is the City/RDA protected?
[quote]”Assuming that most of the VW sales in Davis represent buyers who would have bought at another VW dealership, then I think–no matter the questions of precedent and fairness–the deal is not bad for the City of Davis dba the DRDA.
You have to realize that the City’s rate of return, unlike a bank’s, is not just measured by its interest and principle paid back. The city measures its return on investment with those and with increased tax revenues that it otherwise would not have had.”[/quote] I’m sorry to belabor this matter, but I’d appreciate you explaining why you figure this is not a bad deal for the city/DRDA. It seems to be a financial loser for anyone than Hanlees (which could reap a huge bonanza) and, possibly, city employees (who might keep jobs depending on how the council spends the anticipated general fund increases).
Let’s look at the way the deal was structured rather than speculate whether the economy will hinder Hanlees efforts to cash in. The way I pencil it out, the DRDA has agreed to donate up to the full loan and interest amount to Hanlees over a decade (more than $1-million) will be lost and unavailable forever for future DRDA projects, while the arrangement could end up as a net cost for the city for many years after that.
My handy-dandy amortization schedule shows a 10-year $1-million loan at 3.5% interest requires a total of $1,202,413.70 if calculated on a annual basis. This figure reflects a total interest paid of $202,413.70, which is 20.241% as a percentage of principal.
Assuming Ken Hiatt’s elucidation to Sue was accurate, Hanlees could do “extremely well” and pay $220,241.37 a year in sales taxes in order to earn forgiveness of the entire loan. So, at the end of the repayment period, we (the City of Davis dba the DRDA) will have put out more than $1.2-million in “forgiveness gifts” to a private business.
Add to that another $250,000 we’ll be paying during the loan decade–the difference in what it costs us, say 8%, to borrow the money in order to give it out at 3.5%. Now, we’re pushing costs approaching $2.5-million that we hope will [u]start[/u] generating a return on investment sometime after the initial 10 years is up.
If Hanlees continues to do “extremely well” ($90,000 over the $130,000 threshold) in the out years, we (the City of Davis dba the DRDA) should break even about the year 2045, not considering inflation. Any “above threshold” Hanlees tax payments after 35 years will be pure gravy.
In the meantime, we will have been able to transform $1-million of RDA money into $900,000 general fund cash short-term (over the next 10 years). I think that’s what really what drove this from the city’s viewpoint, not the blight reduction claimed by the staff: [quote]”It would also (in addition to bring in 30 new jobs) benefit the entire auto mall by bringing in new customers, eliminating blight by upgrading an existing building and occupying a vacant building.”*[/quote]____________________
*from Elaine’s August 3, 2010, Vanguard report.
Note: Upon rereading Elaine’s story, I notice references to a 12-year term loan with city staff already having negotiated “not to require payments the first two years of the loan while Hanlees was trying to get the VW dealership off the ground.” However, the council approved the deal if Hanlees agreed to start “repaying” the loan immediately. Depending on how this all shook out, the term could be more than the 10 years I’ve used here. Rather than calculate the increases that would be involved in a 12-year term, I’ll leave it as is.
To JustSaying: As I said before, after the threshold is met, every dollar that Hanlee’s generates in sales tax revenue, is a dollar forgiven on RDA loan repayment. So in effect, RDA money that comes from the state and sits in a city fund/pot that can only be spent on “blight”, will become general fund money the city can spend to give citizens needed services.
You are absolutely correct that will mean RDA money that will be unavailable for other RDA projects. But let’s suppose instead the RDA builds affordable housing with that same RDA money. No sales tax revenue will be generated by affordable housing. I think that is the real key here. By doing the Hanlee’s deal, it is an RDA project that has the potential for generating sales tax revenue for the general fund – which the city desperately needs right now to provide for the city’s road maintenance, among other things. Affordable housing provides housing to a limited number of low income residents, whereas sales tax revenue can be used to provide services for everyone.
I think this is what the city is really looking at – how can we select RDA projects that will generate the maximum sales tax revenue that we so desperately need right now bc of the rotten economy. Had Hanlee’s not been given the sweetheart deal, they most likely would not have relocated here.
It is certainly a matter of opinion which is more important, affordable housing for a few persons, or sales tax revenue for street repairs. The city chose the latter. But the main point is that RDA funds are sitting there to be used, and the city has to pick and choose which projects it approves. I think it seems reasonable to pick projects that will generate maximum sales tax returns – like the Hanlee’s deal and the hotel/conference center.
As Rich Rifkin has pointed out repeatedly, the affordable housing programs have been somewhat disastrous in Davis – the DACHA experiment being a good example. These projects have been nothing but a boondoggle for some developers, and have not delivered on their promises of truly affordable housing. Hope that clarifies my point and answers your thoughtful questions. This is a complicated and controverial issue. And I would agree some reform of RDAs is absolutely necessary, e.g. stadiums built w RDA funds.
[i]”I’m sorry to belabor this matter, but I’d appreciate you explaining why you figure this is not a bad deal for the city/DRDA.”[/i]
It sounds like you understand finance, so I will approach this question using Net Present Value. Obviously at the time of the loan, the amount loaned by the City/RDA had a Present Value of $1 million. That is without question.
The real question is what is the NPV of the net cash flow back into the City/RDA coffers. If that number is greater than $1 million then it’s a good deal, right? (Unless of course you compare it to all other possible uses of that money at a similar risk assessment. There perhaps could have been even better uses of the money.)
I calculated (a long time ago for my column) what the NPV of the net cash flow would be under various sales forecasts by Hanlees VW. (I also am presuming, here, that the VW car sales will be marginal, as opposed to taking away sales from other Davis dealerships. You could certainly argue against that assumption.)
In determining NPV, you have to assume a market interest rate. In each calculation, I used 3.5% and 7.0%.
You next have to figure (under the various scenarios) what the Annual Net Revenues to Davis will be. I determined that by adding the marginal sales tax + the marginal property tax + the loan repayment.
So, for example, under the lowest sales figure assumption in 2023 (with Hanlees VW selling 388 new cars), the City/RDA will take in $95,734 in marginal sales tax + $1,368 in marginal property tax + $133,156 in interest + principal repayment from Hanlees. The total Annual Net Revenues to the City/RDA that year is the sum of those or $230,257.
Here then is my estimate of the net cash flow back to the City over the period of the loan under the lowest sales assumption:
2012–$78,034
2013–$79,626
2014–$214,432
2015–$216,054
2016–$217,709
2017–$219,397
2018–$221,119
2019–$222,875
2020–$224,666
2021–$226,493
2022–$228,357
2023–$230,257
What is the NPV of that?
NPV, 3.5% = $1,870,448
NPV, 7.0% = $1,499,247
In other words, the City/RDA is better off by somewhere between $500,000 and $870,000 in Net Present Value than it would have been had it not made the loan.
If you instead look at that same calculation but use the consultant’s rosiest scenario for VW unit sales (averaging 872 cars per year), you get these NPV results:
NPV, 3.5% = $2,023,517
NPV, 7.0% = $1,650,347
In that last scenario Hanlees pays nothing back in principal or interest, but the City is still better off. Here is what the City/RDA would make under that rosiest scenario in 2023 (with Hanlees VW selling 970 new cars): $233,506 in marginal sales tax + $1,368 in marginal property tax + $0 in interest + principal repayment from Hanlees. The total Annual Net Revenues to the City/RDA that year is the sum of those or $234,874.
2012–$188,750
2013–$192,601
2014–$196,532
2015–$200,462
2016–$204,472
2017–$208,561
2018–$212,732
2019–$216,987
2020–$221,327
2021–$225,753
2022–$230,268
2023–$234,874
[quote]”I think that is the real key here. By doing the Hanlee’s deal, it is an RDA project that has the potential for generating sales tax revenue for the general fund – which the city desperately needs right now to provide for the city’s road maintenance, among other things.”[/quote]Couldn’t we use the funds directly for some priority city infrastructure needs without the trouble of the creative accounting to transform RDA funds into general fund money by giving it away to a business? We already have taken the first difficult step: redefining what what “blight” is (pretty much anything we decide to spend the money on) and what “blight” is not (blight).
I understand the RDA money eventually comes from the state, apparently after the “the City of Davis dba the DRDA,” or vise versa, issues bonds at high interest rates to fund the projects. But, we should consider it as “real money” when doing calculations about the wisdom and cost-effectiveness of some private-business proposal for a below-market-rate loan or forgiveness of such a loan and interest (more like a grant).
Much of that DRDA “state money” must come from Davis in the first place. We’d probably be outraged if other communities around the state were spending [u]our[/u] money on schemes to steal our businesses, to repeatedly undertake disastrous “affordable housing” ventures, to unnecessarily subsidize unnecessary business services like ZipCar, to build large or small sports facilities or to spend anything on any venture that communities wouldn’t undertake if it required general fund money instead of free, state money.
The RDA mechanism seems designed to encourage wasteful spending followed by little or no accountability. We want to keep our pet projects ($1-million every year to Yolo Co. in an attempt to protect our borders from land use decisions we don’t want, million-dollar giveaways and sweetheart deals to businesses in an attempt to launder RDA money and use it for city salaries, schemes to bolster our reputation as a “green place”). But, we want to “reform” others’ projects out of business.
The problem for the state is that Davis isn’t the only RDA player. The experts in the field are fighting to keep their pet projects as well (multi-million-dollar sports parks, new courthouses, etc.). Now, we’re thinking about solving the state’s financial problems by voting to tax ourselves more. Will it be to help finance even more RDA boondoggles for which every community is madly rushing to issue high-interest bonds (that our kids will be paying off in the years ahead)?
The supposed “compromise on redevelopment” would perpetuate a system that now finds Davis and every other local government agreeing to spend local money to go after the free money with proposals that are even more poorly planned (even unplanned, with vague placeholder descriptions) than in the past. We should start over.
[i]”I understand the RDA money eventually comes from the state, apparently after the “the City of Davis dba the DRDA,” or vise versa, issues bonds at high interest rates to fund the projects.”[/i]
The Davis RDA money does not really come from the state. It comes from mariginal property tax payments in the DRDA district (south Davis and the core area).
What that means is that when the RDA was formed in 1987, all of the properties in the district paid X-total amount in property tax. Since 1987, property values have gone up substantially and all of the properties in the district now pay Z-total amount in property tax. The revenues to the RDA start with Z-amount minus X-amount.
But not all of that marginal money stays with the DRDA. Per the terms of the Pass Through Agreement, Yolo County gets a 100% pass through. That means the county takes its same share, as if there were no RDA.
Also, the school district receives from the RDA most of the money it would get if the RDA did not exist. I think the state then backfills any amount to the schools it loses per the existence of the RDA.
After the schools and the county are paid off, what is left is the RDA money. And as we know from current circumstances, RDA’s can borrow by floating bonds. However, the revenues to repay those bonds can only come from one of two sources: the future marginal property taxes or business deals like the one the DRDA struck with Hanlees.
Redevelopment was started in 1945 as a means to upgrade decrepit urban areas, but in the ensuing years the state’s now-nearly 400 active redevelopment agencies have become horrific abusers of eminent domain. They routinely take private property from homeowners and small business owners and give it to developers on the cheap. Redevelopment has become a “tool” by which government agencies grab more tax revenues. They subsidize big-box stores and auto malls — it’s about luring sales taxes, not about upgrading blighted areas. Government officials don’t care whose rights they erode in the process of gaining more money for government.
Gov. Jerry Brown has targeted the agencies because they divert 12 percent of the state’s property taxes from traditional public services (schools, police, parks and firefighting) to corporate welfare. He figures the state can save about $1.7 billion annually as he seeks to close a gaping $26.6 billion budget hole. This should have been a no-brainer with any Republican with a brain. They proved themselves to be the party of numbskulls.
Redevelopment is about everything Republicans claim to loath: bureaucracy, debt, abuses of property rights, big government, excessive land-use rules, subsidized housing and fiscal irresponsibility. In California cities, redevelopment bureaucrats rule the roost and they leave a path of destruction wherever they go. They bully people and impose enormous burdens on taxpayers. The diversion of tax dollars to welfare queens mandates higher taxes, but the GOP sided with the redevelopment industry. They sided with agencies that run up hundreds of millions of dollars in taxpayer-backed indebtedness. They sided with government-directed stimulus programs, albeit local ones rather than federal ones
I believe that CA needs redevelopment. Well, it’s not all about loosing money because if we are going to make more development, a lot of opportunities may possible come. Say for instance jobs and investment. Don’t you think it’s about time to loose some installment loans ([url]http://personalmoneystore.com/installment-loans/[/url]) for a more worthy outcome?