Lowertown Watch

THE LOWERTOWN BOND:
WHAT IS THE RISK TO TAXPAYERS?

City would give $40 million to developer
The city will sell bonds to raise $40 million to give to the developer to build the project. It will cost the city $80 to $100 million to repay principal and interest. The additional taxes from the project are used to make the bond payments. If the taxes are less than the bond payments, the city must make up the difference from the general fund.

How likely are taxpayers to get stuck with the bill?
Initial projections assumed the building was worth $76 million and would increase 3.5% per year. Under those assumptions, tax revenues would be $96 million. Recent projections assume a value of $82 million increasing at 2.5%. Those assumptions produce $87 million in revenue.

However, an independent appraisal valued the property at $65.2 million. The assumption that value will never decline is also problematic. Real property tax revenues captured by the DDA actually declined between 1992 and 1996 and did not recover until 2002. Projections using the lower appraised value and assuming a temporary decline in value show tax revenues $10 to $20 million short of repaying the bonds.

There are many other things that could go wrong and leave taxpayers holding the bag. The developer may be unable to rent apartments at projected monthly rents of $1,050 to $2,200. Interest rates could be higher than predicted. Space could take longer to lease than predicted. The construction could cost more and take longer than expected. A notable real estate failure was the city subsidized Tally Hall/Liberty Square project, which is currently empty.

Council goes against advice
Some council members claim that they will not approve the project unless the financing is secure. However, on August 2, 2004 Council rejected 6-2 a Johnson/Groome amendment that required the city administrator to certify tax revenues would be adequate to repay the bond. On June 5, 2006 Council also voted 8-2 to go forward with the project, even though the city's chief financial officer said tax revenues were not enough to repay the bonds.

If the project succeeds, the developer gets the profits. If it fails, the taxpayers get the bill.