North of South - Details of Proposed Deal

The North of South development is the next big thing to be promoted by City officials. Presumably their timetable had been predicated upon the completion of the parking meter deal by now.

North of South is anywhere from 10 to 14 acre development proposed for land owned by Lilly and just north of their main campus. A rezoning petition is in process, and is scheduled to be considered by the Metropolitan Development Commission on November 17.

Just yesterday, the economic development committee of the MDC heard for the first time, details about the proposed deal between the City of Indianapolis (who would finance the lion's share of the project), Buckingham Companies (who would develop and own the project), and Eli Lilly (who developed the plan and who will continue to own the land upon which the development would occur). The Commissioners requested that their vote on this proposed deal also be postponed to November 17. At the moment it is scheduled for November 3. Should the MDC approve the proposed deal, it would move to the Council for its verdict. The City hopes to be floating the bonds before the end of the year.

I made an open records request for the proposed deal, and received a document titled "Memorandum of Understanding As of September 27, 2010 With Respect to North of South - Mixed Use Development". I have posted that document. (you will need to sign in with a google account to access it -- if you just want me to email it to you, please send me a note to hadenoughindy@gmail.com) This document alludes to two attachments, neither of which did I get. I have requested those, and when I get them, I will post those as well.

Between the presentation at yesterday's MDC committee meeting and the MOU, here are the details of the proposed deal.

Two years ago, Lilly began planning for the undeveloped ground it owns north of its main campus. It currently serves as parking lots, primarily. One year ago, the City entered the picture, and has been working with Lilly and Lilly's chosen developer, Buckingham Companies. Lilly sees development of the area as a means of creating a link from downtown to the southeast quadrant and as a way to create a sense of place that is 'interesting and energizing', which would help them attract and retain talent. The Lilly representative at yesterday's meeting said they had chosen Buckingham because of their commitment to Indianapolis, and their 'strength both financially and in developing this kind of thing'.

The exact square footage, like the acreage of the project, shifted slightly, depending upon who was talking. Therefore, I will stick with the MOU and the presentation yesterday of Deron Kintner, Executive Director of the Bond Bank, and evidently the City's spokesman on the deal. He relied upon a PowerPoint presentation, which I have also uploaded.

The project includes:
320 apartments
150-152 room hotel
15,000-18,000 square feet conference center
30,000-40,000 square foot retail & restaurants
10,000 office/lab space
a new YMCA
sustainability garden/city park with significant public art
the MOU mentions 'parking garages' as well.

The total cost would be about $163 million. ($155 million for project costs and $8 million for capitalized interest)

The City would float a bond large enough to generate $86 million in cash for the project, plus $8 million to cover the first three year's payment on the bond - those three years being interest-only payments. More on how the bonds would be paid off later.

The City proposes spending $9 million from the consolidated downtown TIF on infrastructure improvements - roads, sewers, sidewalks, and the like.

The City would also pay $14 million back to Lilly for a loan Lilly made on the Harding Street TIF in 1991. This money would become Lilly's cash contribution to the project. It also will be allowing the development to occur on its land, valued at $14 million - but would retain ownership of the land.

The YMCA is expected to cost $18 m, most of which was said to be coming from a 'significant donation' from the Lilly Foundation.

Buckingham has to come up with its own cash investment of $7.5 million, plus about $6.25 million to be set aside as insurance of one year's bond debt payment. The latter could, instead, be guaranteed by a letter of credit or similar instrument, instead of with cash.

The City considers the total contributed by the Developer and Lilly to amount to $41.75 million - but it could be argued that the $14 million for the land isn't really a cash investment, the $6.25 million to be set aside for one year's debt payment isn't cash if its just a line of credit, and the City is providing the $14 million cash to Lilly - which would drop the actual developer/Lilly investment to $7.5 million. In addition, there is the $18 million for the YMCA, evidently to be supported by a Lilly Endowment grant to the Y.

More investment money is expected from the State. Indiana Economic Development, Inc., is supposed to give $6 million to the development. The 10,000 square foot office portion of the development, is anticipated to contain within it, a wetlab, which is evidently being used as the hook to get the State to designate the entire project a 'Certified Technology Park'. CTP designation allows income, sales, and use taxes that usually go to the State, to go to the City instead. This could add up to at least $5 million for the City, who through the MOU, has agreed to send it to the developer for either project development funds or repayment of the bonds.

The bonds are to be repaid by the developer within 10 years, unless the agreement is extended at that time. Except, significantly, ALL property tax money generated by the project will be used to pay down the amount of money that the developer has to come up with. The first three years payments are interest only, and will come from the $8 million portion of the bond mentioned earlier. In year 4, the developer's payments begin. The City, in its presentation yesterday to the Commissioners, and in its statements to the press, have downplayed the contribution of the property taxes to the repayment of the bond. These funds should definitely be included in the cost to the City, just as Kintner included the abated taxes as costs to the City in other developments he used for comparison. Kintner estimated the property taxes to amount to $1.7 million per year, which over 7 years, amounts to just under $12 million.

Under the proposed agreement, the City would get the first mortgage. The Lilly representative said yesterday, that Lilly would get the second mortgage on the project.

While Kintner is trying to present the proposed development as a $155 million deal that costs the City only $9 million, I would beg to differ. This proposal would cost the $9 million for infrastructure improvements, the $12 million in property taxes that would be applied to the bond payments, the $5 million for the Certified Technology Park designation, and the $14 million cash to repay Lilly for the loan back in 1991. That comes to $45 million. And, that is only if the project is a success. If it is not, then the City and its taxpayers will be on the hook for the bond payments and own a partially completed project that will undoubtedly need another infusion of cash. The risk is all on the City here.

In addition, the City will use Buckingham Construction as its construction manager for the City's infrastructure projects, with City paying Buckingham an undefined amount of fees for those services.

Of interest is one item in the MOU and another mentioned yesterday, regarding Wellpoint, which leases a building abutting this area. Kintner mentioned that their lease is up in 2015, and the City is already talking with them. The MOU mentions that the City is 'obligated' to build Wellpoint a parking garage.

It never stops, does it?

Indy Deserves Better

Last night I attended the City-County Council Rules committee for the budget presentation portion. I thought I'd stay to hear the latest information regarding the proposed parking meter deal. Bad idea. Deputy Mayor Michael Huber and Bond Bank Executive Director Deron Kintner were spinning so hard, its a wonder they didn't drill a hole in the floor and fall through.

Let me back up a bit, run through some of the more frustrating spins, then offer some common sense.

You can view this performance for yourself by visiting the Channel 16 archives for the Rules Committee (click here) and clicking on the "Video" link for Sep 28, 2010. They have a quick link to that portion - Prop 229. Urbanophile blogger, Aaron Renn, was up first, at time stamp 20:00. Huber and Kintner first appear at time stamp 58:00.

The proposed 50 year lease of our parking meters to ACS (prop 229; proposed lease agreement) calls for an investment by ACS to update the meters, a $35 million up front payment to the City, and shared revenue stream for the 50 years. The cost of replacing some, if not all, of the current meters with new technology has been estimated at $8-10 million. The IBJ estimates that the City would receive $400 million over the course of the lease, but ACS would collect as much as $1.2 billion (yes billion). Simple math translates that to $8 million per year to the city and up to $24 million a year to ACS. The City would double parking rates immediately, and tie future increases to the cost of living. In addition, the City intends to increase the number of meters immediately by 100-130.

Renn made his points clearly, with an easy to follow flow of logic. There was a quality back and forth with the Councillors. All was well for the viewing public who hoped to gather concrete information with which to assess the proposed plan.

Huber's presentation was difficult in so many aspects. I got the impression that he had certain phrases, certain 'winning' points, toward which he felt compelled to steer his statements. Such phrases and 'winning' points would include "be flexible and adapt to change", never agree that there is a 'penalty' of any kind in the agreement, "we haven't raised parking rates in 35 years", "many of our parking meters are occupied by folks from out of town", "we become less reliant on property taxes", the only alternative to the ACS deal is nothing at all, and only compare the revenue stream from the ACS deal to what we currently get. All of these are debatable points, to say the least. But, Huber seemed drawn to them as his exclusive library for last night's discussion.

The 'penalty' point got quite a bit of time, so let's follow that one in a bit of depth. In his amazing blog entry on this proposed deal ("Indy's 'Son of Chicago' Parking Meter Lease to Be a Disaster for City"), Renn made this point:

7. The vendor automatically gets the right to any new meters, but the city has to pay to remove any meters. In the Chicago deal, the city has to negotiate with the existing vendor for new meters outside the existing concession area, but is free to take its business elsewhere if the vendor won’t match what a competitor would offer. In Indy, any new meters are automatically enrolled in the new deal. (Section 7.7) I didn’t see where this was limited to the four specified zones, so it might in fact apply to any meter in the city.

However, if the city removes a meter, they have to pay a meter removal fee. In the first year, this is $15,400 per meter in Zone 1. I didn’t see any provision for offsetting adds and removes, meaning if the city adds three meters and removes one, the vendor gets the three new ones automatically and the city is still on the hook to pay for the one they removed. What’s more, the city is also on the hook for any lost parking ticket revenue the vendor would have gotten off that space too.

Looking at schedule 4,"Methodology for Calculating Certain Concessionaire Compensation" (page 132 of the pdf), one finds a complex looking formula for calculating the compensation due ACS if a parking meter is permanently removed. But it boils down to adding the expected future revenue from the meter over the remainder of the lease to the expected future revenue from parking tickets at that meter over the remainder of the lease. The cost of that meter and its installation by ACS is not included in the calculation. The fraction of the $35 million up front fee to be paid by ACS to the City which can be attributed to that meter, is not included in the calculation. It is all based upon future revenues expected for that meter. This is what Councillor Joanne Sanders and others are calling a 'penalty' for the removal. This is money that the City would owe to ACS to compensate them for the removal of the meter.

But, Huber could not say that out loud. Instead he claimed over and over that it wasn't a penalty. According to Huber, the compensation is reimbursing ACS for the purchase and installation of that meter -- besides, the city would not hand ACS a check, they would deduct it from the City's portion of the revenue -- therefore it is not a penalty. What gibberish. The compensation formula is NOT derived from reimbursement for funds already spent. And despite the tortured logic, it is still a loss to the City. Then he takes things further and says we would be giving up that revenue anyway, if the City didn't do the deal with ACS, covered the costs itself, and then pulled a meter off the streets. NO. There is a difference between not getting future revenue, and paying somebody else the amount of that future revenue. And if Michael Huber really doesn't know that, then maybe he shouldn't be the Deputy Mayor for Economic Development.

Perhaps worse, was the handling of an alternative approach to this deal with ACS. The only alternatives offered were to do nothing at all, or to float a bond to cover the upgrade and installation of the meters. Bond Bank Executive Director, Deron Kintner, took the bonding issue on. He mentioned a number of reasons why this would not be a good idea. He said that the city now employs 6 people to tend the meters, but we'd have to increase that number 10 fold if we undertook the meter expansion and upgrade ourselves.

But what really got me were the numbers he popped on the screen to demonstrate that the City would take in more money through the ACS deal than if the City made all the improvements itself. (see slide 8 of the presentation).

The cost of the meters is $8-10 million to ACS, but the City would, for reasons inconceivable to me, have to float a bond for $25 million. Kintner compared this figure with the proposed $35 million up front fee.

Then he looked at the net present value of the ongoing cash flow. He never described what was considered in deriving that figure. The number is too low to account for a full 50 years of revenues to the city, unless a high rate inflation were assumed. He said that the net present value of the cash flow in the ACS agreement is $32 million, but only $29.8 million if the City goes it alone.

But, lets look at the revenue stream itself. The IBJ estimates that the deal could give the City as much as $400 million over 50 years. That comes to $8 million a year. Their estimate of up to $1.2 billion in revenue to ACS is $24 million a year. If you add those two numbers, you come up with $32 million a year, on average, for the entire cash flow. But, ACS is keeping the lion's share of that money.

If instead, all the money came to the City, even after you subtract $3 million a year for the bond payment and $4 million a year for operations, the City would net $25 million per year, or $1.25 billion over the 50 years. Subtract a $10 million technology upgrade every 10 years, doubled if you floated 10 year bonds to be paid back with interest, the City would still net $1.1 billion over the 50 years. That is equivalent to $22 million per year. Again, better than the average $8 million per year the City would get through the ACS deal.

And while Kintner explains on his slide that it does not include the benefit of ACS moving 200 jobs to Indy, he ignores the fact that just moments before, he estimated the City would generate 600 jobs if it bonded the cost of meter upgrades and ran the system itself.

All of this adds up to a dizzying amount of spin - just to get this deal signed. Indy deserves better than what it got last night from Huber and Kintner.

As for the meter issue itself. Why doesn't the Council review and deny the MDC-CIB interlocal agreement that will send $8 million of property tax revenues from the consolidated downtown TIF to the Pacers, and make it clear to the Mayor and the MDC that it would support $8 million from that TIF being spent on parking meter upgrades. They could then double the parking fees, provide for annual increases to the fees based on the cost of living, and add the 100-130 additional meters contemplated with the ACS deal. The City would then stand to pull in an average of $32 million a year in revenue that it does not have to share with ACS. It can then afford the added $4 million a year in operating costs for a net of $28 million a year on average, for a total of $1.4 billion over 50 years. This is the most flexible and adaptable approach to the issue of how to generate more money from the parking meters. Not the ACS deal.